Category: technology stocks

Banking deals

With the current credit crisis rocking the big banks, online consumer banking portal Bankrate has sidestepped most of the damage and even plans to do a bit of shopping. In the last month alone, it acquired banking blog Bankaholic and consumer credit resource portal Creditcardguide.com for $12.4m and $34m, respectively. That brought its total shopping tab over the past year to $150m on six acquisitions. (We would note that most of the companies that Bankrate picked up were existing partners.) The company recently told us that it will continue its acquisition spree, and it has the means to do so. Bankrate will have an estimated $35m in cash after its latest acquisitions, and has generated some $25m in cash flow over the past year. So who might the portal bank next?

Bankrate is decidedly a so-called ‘Web 1.0′ company. It lacks the customization and social networking features that many of its newer Web 2.0 competitors tout. This lack of new technology, along with a softening online advertising market, could land the portal in trouble. Bankrate could help shore itself up against those technology shortcomings by focusing its acquisition efforts on personal finance startups like Rudder and Mint.com. However, we don’t think it will do that. Instead, we expect Bankrate to focus strictly on the space that it knows, expanding partly by targeting its legacy competitors.

Given this, we think a likely target might be Creditcards.com, which is both a rival and a partner. Creditcards.com, majority owned by Austin Ventures since 2006, tapped Credit Suisse and Citigroup to bring it public in December, but the economic environment forced it to delay its offering in May. The company is profitable, with $60m in sales, but is laden with debt. Besides having very similar businesses, the two companies are hardly strangers. In fact, current Creditcards.com CEO Elisabeth DeMarse was the CEO of Bankrate prior to becoming Austin Ventures’ CEO-in-residence.

Given Creditcards.com’s likely valuation of several hundred million dollars, however, it is unlikely that Bankrate could afford the acquisition. (Bankrate currently sports a market capitalization of about $700m.) Instead, we suspect that Bankrate will continue to ink tuck-in acquisitions. We wouldn’t be surprised if smaller competitors like Credit.com or Credit-Land.com caught its eye.

Recent Bankrate acquisitions

Date Target Deal Value
September 23, 2008 Bankaholic $12.4m
September 11, 2008 LinkSpectrum (dba CreditCardGuide.com) $34m
February 5, 2008 InsureMe $65m
February 5, 2008 Lower Fees (dba Fee Disclosure) $2.9m
December 10, 2007 Nationwide Card Services $27.4m
December 10, 2007 Savingforcollege.com $2.3m

Source: The 451 M&A KnowledgeBase

Elliott elbows Epicor

Brenon Daly

Well, that didn’t take long. Just two days after we noted who won’t be bidding for Epicor, Elliott Associates tossed an offer of $9.50 per share for Epicor. The bid comes just two months after the hedge fund disclosed a large stake and began stirring for a sale of the old-line ERP vendor. With about 59m shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. Additionally, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Epicor, which has seen substantial executive turnover this year, has struggled to record growth recently. However, the business has two attractive assets: a healthy maintenance revenue stream and solid cash-flow generation. Epicor shares closed Wednesday at $8.93, their highest level since mid-April.

Big buyers sit out Q3 uncertainty

Brenon Daly

With the third quarter in the books, we get our first glimpse of the impact that the unprecedented upheaval on Wall Street is having on tech M&A. Over the past three months, the value of tech deals dropped about one-third from year-ago levels, sinking from $58bn to $37bn.

The falloff was even more pronounced at the high end of the market: only six deals worth more than $1bn were announced during the July-September period, down from 11 deals worth more than $1bn during the same period last year and 22 deals worth more than $1bn during the third quarter of 2006. (Along those lines, IBM has acquired just one public company so far this year, down from three last year.)

There are a number of reasons for the muted deal flow, starting with the barren conditions in the credit market. That knocked the number of leveraged buyouts from 36 in the third quarter of last year to just 12 this year.

Strategic acquirers, too, faced their own difficulties in striking deals as they got clubbed on the Nasdaq. Consider Google, which saw its shares bottom out at the end of the quarter at a three-year low. So far this year, the online ad giant has inked just four deals, down from 14 during the same period last year. Or Citrix, which recently saw its shares reach their lowest level since mid-2005. The enterprise software company has scaled back its acquisitions, picking up a product line and a tiny German company so far this year, after closing five deals during the first three quarters of 2007. See full report.

Third-quarter deal flow

Period Deal volume Deal value
Q3 2005 811 $87bn
Q3 2006 1,030 $102bn
Q3 2007 822 $58bn
Q3 2008 691 $37bn

Source: The 451 M&A KnowledgeBase

JDA: No really, we can pay for it

Brenon Daly

In a sign of how rocky the credit market has become, JDA Software Group took the highly unusual step Tuesday afternoon of issuing a press release to confirm that it has the financing to pull off its planned $461m acquisition of supply chain management vendor i2 Technologies. Among other moves, JDA added Wells Fargo to the loan syndicate. According to terms of the early August deal, JDA was planning to borrow up to $450m from Credit Suisse and Wachovia. As Wachovia reeled due to its own risky loan portfolio, market participants began questioning Wachovia’s ability to help finance JDA’s purchase. That uncertainty knocked i2 shares, which were trading near JDA’s bid of $14.86 earlier this month, to as low as $11.50 on Wednesday. The stock snapped back after JDA’s release hit the wire, rebounding to about $13.50 on Tuesday afternoon. (As an aside, we wonder how many arbs got crushed in that swing.) i2 shareholders are slated to vote on JDA proposed deal on Nov. 6.

Who’s not shopping for Epicor

Brenon Daly1 Comment

In virtually any other credit market, we’d be tempted to hold out old-line ERP vendor Epicor Software as an exemplary buyout candidate. The company will do about $530m in revenue this year, with $200m of that coming in the easily bankable form of software maintenance fees. (And the company is hardly expensive, with an enterprise value that’s just 3.7x this year’s maintenance revenue.) Moreover, it’ll throw off some $65m in cash flow in 2008 to help cover a hypothetical leveraged buyout.

But as we said, these are not normal days for debt. So in our report last week on an activist hedge fund pushing the company to pursue ‘strategic alternatives,’ we focused on the strategic buyers that might be interested in – and could afford – Epicor. They are, in order of likelihood: Microsoft, Oracle and SAP. Truth be told, though, none of those acquirers seems likely. And while we’re scratching potential suitors for Epicor, we can go ahead and erase M2 Technology Partners.

The buyout firm, which launched in mid-June with backing from Accel-KKR, is headed by Mark Duffell and Michael Piraino, who served as Epicor’s COO and CFO, respectively, until earlier this year. We understand that M2 is exploring other opportunities in the business applications market, and may well have its inaugural investment signed, sealed and delivered by the end of the year. It won’t be Duffell and Piraino’s old shop Epicor, but just think how much time they’d save on due diligence if it were.

Significant ERP deals

Date Acquirer Target Price
December 2000 Microsoft Great Plains Software $1.1bn
May 2002 Microsoft Navision $1.3bn
June 2003 PeopleSoft JD Edwards $1.75bn
December 2004 Oracle PeopleSoft $10.46bn
June 2005 Lawson Intentia International $449m
November 2005 Golden Gate Capital Geac Computer $1bn
January 2008 Unit 4 Agresso Group Coda $314m

Source: The 451 M&A KnowledgeBase

Standstill around the lamp

Brenon Daly

After a few months of pointed exchanges, Aladdin Knowledge Systems and its would-be buyer, Vector Capital, have agreed to a standstill in an attempt to negotiation a deal. Vector, the encryption vendor’s largest shareholder, had been pushing for a shareholder vote on Oct. 23 on its plan to replace three of Aladdin’s five board members. The buyout firm has set aside that demand, as well as agreeing not to unload any of its 14% holding. For its part, Aladdin agreed to sign a confidentiality agreement with Vector, and will not to seek another buyer for part or all of its business. Last month, Vector offered $13 for each share of Aladdin; the stock currently trades above that. The standstill gives the two sides at least a month to work out a deal, as Vector can’t call for another shareholder meeting until Oct. 30 at the earliest.

Transmeta: No money? No credit? No problem

Brenon Daly

Just how desperate is Transmeta to get sold? Well, the pitch from the former high-flying semiconductor IP vendor now sounds like something we usually hear on late-night TV: easy financing. (‘No money? No credit? No problem. At Transmeta, we’re ready to do a deal with you.’) And honestly, that’s one of the only selling points left at the company, which retained Piper Jaffray six months ago to advise it on a possible sale. On Wednesday, Transmeta removed the word ‘possible’ and said it was starting the sale of the company. Shares jumped 20%, giving Transmeta a market capitalization of about $200m.

The financing comes into play because Intel, which had been slated to pay $100m to Transmeta in equal installments over the next five years, is writing a lump-sum check for $92m in the next few days. That’s on top of the $150m Intel has already paid to settle a patent lawsuit with Transmeta. As the company has noted, the settlement ‘strengthens’ its balance sheet, which effectively greases a deal by having the cash on hand to finance a transaction. Given the frozen credit markets, that’s not insignificant.

As to who might buy Transmeta, a year ago my colleague, Greg Quick, tapped Advanced Micro Devices as the most-obvious buyer. AMD, which licenses Transmeta technology, also owns a stake in Transmeta through its purchase of a block of preferred shares last year. Other companies that license Transmeta technology, including Sony, Toshiba and Fujitsu, also might be interested but are probably long shots. Whoever does end up buying Transmeta will get a bargain on the company, which never lived up to its hype. Transmeta’s sale price is likely to be in the neighborhood of one-tenth of the company’s valuation at its IPO eight years ago.

Microsoft’s ‘paper’ trail leads to Citrix?

Brenon Daly

Shares of Citrix jumped 5% Wednesday on reheated rumors that Microsoft may be bidding for its longtime partner. Volume in Citrix shares was about 50% heavier than average. One source indicated that Microsoft would be paying $36 for each Citrix share, which is essentially where Citrix started the year.

This rumor, of course, has made the rounds before. We noted in April that although both IBM and Cisco were rumored suitors for Citrix, our top pick for the acquirer would be Microsoft. (The two companies have been close for years, with Citrix being one of just two companies with access to the Windows source code.) All that said, however, we don’t see Microsoft buying Citrix. (How would Microsoft handle the fact that XenSource, which is arguably Citrix’s most-coveted asset, is built on open source software?)

As to why the rumor resurfaced Wednesday, we might trace that back to a misread of Microsoft’s announcement the day before that it was planning to sell some $2bn of commercial paper. The thinking is that Redmond might be prepping an even larger offering. But looking at Microsoft’s current balance sheet, it could buy Citrix four times over with the cash and short-term investments it already holds.

Uptake in travel deals

1 Comment

-by Thomas Rasmussen

The past year has seen a surge in online travel deals as well as venture funding of travel startups. In fact, we wonder if the industry hasn’t gotten a little too crowded. A number of startups have received funding, including Uptake, which was founded by ex-Yahoo Travel execs. Uptake brings the social aspect to the online travel world by aggregating user-generated reviews from various portals. It fetched $10m in venture funding from Trinity Ventures and Shasta Ventures last week, bringing its total raised to $14m. The company says the funds are to be used for internal expansion and acquisitions. Indeed, the current competitive landscape has presented startups like Uptake as well as established players like Expedia with one choice: grow or risk becoming irrelevant.

Against this backdrop, online travel companies have taken different approaches to M&A. Relative newcomer Kayak.com is one company that recently took a major step to buy growth. Hoping to go public eventually, the company doubled its size overnight by acquiring competitor SideStep Inc for an estimated $180m in December. Meanwhile, fellow startup Farecast worked on the other side of a transaction, opting for a sale to Microsoft in April for an estimated $115m to help Redmond shore up its ailing MSN Travel division. Meanwhile, the giant of the industry, Expedia, has been ratcheting up the M&A pace. Of the 15 acquisitions it has done, 11 were inked in the last 18 months. In a recent filing with the US Securities and Exchange Commission, Expedia said it spent $180m on five acquisitions in the first two quarters alone.

As for Uptake, we expect the small company to consider a few tuck-in acquisitions of smaller rivals to add more voices to its reviews. Potential targets include companies such as TravelMuse and TripSay, which also offer user reviews. However, while Uptake is eyeing targets, we have a feeling it may be a target itself. We suspect the social aggregation aspect of Uptake is very appealing to larger players that are trying to bring the social Web 2.0 experience to online travel. Likely acquirers include Kayak and Microsoft, which both lack a social rating system. Expedia and Yahoo Travel, an outfit Uptake’s founders know well, might also want the technology to improve on their own systems.

Number of known strategic online travel deals

Period Deal volume
September 2007-2008 14
September 2006-2007 11
September 2005-2006 6
September 2002-2005 19

Source: The 451 M&A KnowledgeBase

Preferred gets preference

Brenon Daly

Even with McAfee’s offer of $5.75 in cash for each share of Secure Computing representing a premium of about 27% over the previous close, many Secure shareholders are underwater. In June, Secure sank to its lowest level in six years, part of a slide that has seen some 40% of its market value erased this year. The decline left the company trading at just 1x revenue. (When it shed its authentication business at the end of July, we noted that the divested unit sold for twice the valuation of the remaining Secure business, a highly unusual situation in corporate castoffs. We also asked if the move wasn’t a prelude to an outright sale of the company.)

It turns out, however, that the stock’s decline didn’t really affect Secure’s largest shareholder, Warburg Pincus. The private equity firm took a $70m stake in Secure in January 2006. (Secure took the money to help it pay for its mid-2005 purchase of CyberGuard.) Yet, because of the way Warburg structured its purchase, the shop ended up making money on its holding. That’s true even though Secure stock, even with McAfee’s offer, is some 60% below where it was when Warburg took its stake. (Shares changed hands at $14.40 each when Warburg picked up its holding, although the conversion price was adjusted slightly six months later to offset the potential dilution caused by Secure’s cash-and-stock purchase of CipherTrust.)

In the end, Warburg pocketed $84m from McAfee for its Secure holdings, which were largely made up of series A preferred shares. Having put $70m into Secure, and then seen the shares sink, we guess Warburg is probably content to book even a slight gain on its investment.