Category: technology stocks

Battle set for Aladdin’s lamp

Brenon Daly1 Comment

In contrast to the LBO of data encryption vendor SafeNet a year-and-a-half ago, Vector Capital’s latest effort to take an IT security company private has been a more contentious process. After a series of public and private exchanges with Aladdin Knowledge Systems, Vector, through a subsidiary, called for a special meeting of shareholders to vote on the buyout firm’s plan to replace three of the company’s five board members. On Thursday, Aladdin agreed to the vote, setting October 23 as the date for the proxy showdown.

Vector is currently Aladdin’s largest shareholder, with a 14% stake (Aladdin insiders hold about 20%). The buyout firm began picking up shares earlier this summer at about $9 per share. It quickly piled up a 9% stake, and has since bumped it up to 14%. Along the way, we understand it made numerous private offers to buy the company and then disclosed in late August a public offer to buy the rest of the company at $13 per share. While Vector’s offer represented a 40-50% premium from when the firm started buying, Aladdin shares have ticked above the offer, changing hands at $13.80 in mid-Friday trading.

The unsolicited bid from Vector didn’t go over well with Aladdin. The company has dismissed it as ‘opportunistic’ but hasn’t said much more than that. Behind the scenes, Aladdin has carped that the only party that stands to gain from Vector’s bid is Vector, either by picking up Aladdin on the cheap or disrupting Aladdin’s business enough that it would benefit rival SafeNet, a Vector portfolio company. Investors, who have seen Aladdin shares shed as much as two-thirds of their value since last October, may not be so dismissive of the floor price set by Vector. (They are also mindful of what might happen to their holdings if Vector – stymied in its efforts to ink a deal – gets rid of its 14% stake of Aladdin. Look out below.)

In the month remaining before the vote, we suspect the jabbing and jockeying between Aladdin and Vector will increase. Israel-based Aladdin recently retained the PR firm Joele Frank, Wilkinson Brimmer Katcher, which is basically the go-to shop for companies caught in a bear hug, to get its side of the story out. But the company, along with all of its flaks, faces an experienced bidder. Not only has Vector pushed through unsolicited bids in the past, one of the partners working on the firm’s efforts, David Fishman, has worked on the other side of the table. Before joining Vector, Fishman was a banker at Goldman Sachs, where he worked on a number of defensive deals, including PeopleSoft’s attempted stiff-arm of Oracle. We’re pretty confident that no one involved in this transaction wants to repeat the nastiness of Oracle’s hostile run at PeopleSoft.

A flash-y, low-ball bid

Brenon Daly

SanDisk shot down a $5.85bn all-cash unsolicited bid from Samsung Electronics, saying the bid by the South Korean electronics giant doesn’t reflect the full value of flash memory provider. Despite the rejection, SanDisk shares surged 39%, closing at $20.92. Samsung bid $26 for each share. Last October, SanDisk shares changed hands above $50. Samsung made its offer public after saying four months of talks had come to nothing. SanDisk posted a loss and a sales decline last quarter. The company projects revenue for the current quarter will drop about one-quarter from last year. Included in SanDisk’s revenue is several hundred million dollars that Samsung pays SanDisk each year for patent royalties.

Not ‘Finnish’ with M&A

Finnish cell phone giant Nokia launched its mobile file-sharing Ovi application last week, coming quickly on the heels of the rollout of Nokia Music and other high-profile offerings. Much like Google and its Android and Chrome products, Nokia used technology that it acquired to form the core of its recently launched products. Specifically, its file-sharing technology came when it picked up Avvenu late last year.

And more M&A may be in the cards. Nokia recently told us that it is bullish on making further acquisitions to boost its service offerings. The company is aiming to evolve from strictly a mobile handset maker to a service-oriented handset maker – and strategic acquisitions are expected to play a big role in this transformation. (Of course, Nokia isn’t the only hardware company looking to do deals to get out of its core commodity market and into a more profitable – and defensible – service offering. PC maker Dell has spent some $2bn over the past two years increasing its service portfolio, buying companies offering everything from storage to email archiving to remote services.) What services could Nokia look to add and what companies might it acquire to do so?

With its music, games and mapping services well established, Nokia’s lack of a video service is strikingly curious. We suspect the company will quickly move to fill this gap. Two potential targets come to mind. Startups kyte and Qik both specialize in mobile video, and have already gotten a lot of interest from big mobile companies. In fact, kyte has drawn money not only from large telcos such as TeliaSonera, but also from Nokia’s own investment arm, Nokia Growth. Another venture that was recently brought to our attention is a startup called ZoneTag. It’s a Yahoo Labs startup that does location-based photo tagging. The software was developed for Nokia phones with the support of Nokia research and we hear the two divisions have a very good relationship.

Nokia’s recent mobile software acquisitions

Date Target Deal value
June 24, 2008 Symbian $410.8m
June 23, 2008 Plazes $30m*
January 28, 2008 Trolltech $153.5m
December 4, 2007 Avvenu Not disclosed
October 1, 2007 Navteq $8.1bn

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Vector’s velocity

Brenon Daly

With all the bidding and buying, it’s hard to keep straight what’s going on with Vector Capital. Already this year, the tech buyout shop has made several offers for down-and-out companies. It even got one through last week, as portfolio company Tripos announced a $57m purchase of drug development software maker Pharsight. The deal is expected to close by year-end.

However, Vector’s other recent M&A moves, most of them coming as unsolicited offers, haven’t been as straight-forward. It made an on-again, off-again run this summer at Corel, a half-decade after taking it private and two years after spinning it back onto the public market. (We would note that Corel shares have never traded as high as they did at the IPO in spring 2006.) Vector also bid for troubled content management vendor Captaris, but lost out to the acquisition-hungry Open Text. The $131m deal is expected to close before year-end, and Captaris shares are trading as if the transaction will go through.

In addition to those mixed efforts, Vector has made an unusual two-pronged approach at Israeli security company Aladdin Knowledge Systems. First, it offered to buy Aladdin outright, offering $13 for each share it doesn’t already own. (Vector is Aladdin’s largest shareholder, holding some 14% of the company.) Then, Vector offered to pick up just Aladdin’s digital rights management (DRM) business. The DRM business is the most-attractive unit at Aladdin, and would fit nicely with SafeNet, which Vector took private last year. Perhaps not surprisingly, Aladdin has said ‘thanks, but no thanks’ to both unsolicited options, and has retained Credit Suisse to advise it.

Selected Vector transactions

Year Company Price Market
2008 Precise Software (Symantec) Not disclosed Application performance management
2007 SafeNet $634m Encryption security
2006 Tripos $26m Pharmaceutical industry software
2003 Corel $122m Desktop productivity software

Source: The 451 M&A KnowledgeBase

EA plays hardball

-by Thomas Rasmussen

Electronic Arts (EA) officially walked away from its drawn-out $2bn takeover bid of Take-Two Interactive. The move knocked Take-Two’s shares back to the level they were before EA floated its interest. The stock drop evaporated more than $500m in shareholder value overnight. Take-Two has repeatedly said that EA is not the only company with a strategic interest in them. Given the haircut shareholders just underwent, we think they would be interested in more than cryptic statements at this point. Though Activision-Blizzard, UBISoft, Microsoft, and a few other companies could pull off the acquisition, the fact that none have stepped forward yet is most likely not a good sign for shareholders. Strauss Zelnick and Take-Two management might have overplayed its hand on this one.

BestBuy music goes digital

Just a few days after we speculated on a Napster sale, BestBuy said it will pay $121m, or $2.65 a share, for the digital music service. This is an 80% premium from where the company was trading before the offer. After factoring in Napster’s cash and short-term investments, BestBuy paid just $54m, or 0.45 times Napster’s trailing twelve month revenue. A bargain by all means, but it remains to be seen whether BestBuy can do what Napster has failed to do for the past four years: Turn a profit.

Citrix sits out

Brenon Daly

Since announcing its landmark acquisition of XenSource a little more than a year ago, Citrix has largely taken itself out of the M&A market. And don’t expect that to change anytime soon. CFO David Henshall told the Deutsche Bank Technology Conference earlier this week that the company ‘has its hands full’ with working out its virtualization strategy, which it grandly refers to as a datacenter-to-desktop offering. (That strategy largely reflects the fact that VMware, with an estimated 85% of the server virtualization market, isn’t as vulnerable as Citrix initially thought, at least around ESX.)

While Citrix has inked three deals since XenSource, the acquisitions have been quiet technology purchases. For instance, in January Citrix snagged a product line from FullArmor, a self-funded business process orchestration tool vendor, and in May it added Sepago, a 30-person company that only launched a product a year ago after a few years as a consulting shop.

Instead of spending on M&A, Citrix’s Henshall indicated that the company will continue to put much of the cash it generates ($75-100m each quarter) toward buybacks. If nothing else, Citrix has been getting a relative bargain in the buyback. After two straight earnings warnings earlier this summer, shares sank to their lowest level in almost three years. Around that same time, perhaps not coincidentally, rumors began to surface that Cisco or IBM might be shopping Citrix. If Citrix does get acquired, we still think the deal will flow through Redmond, with Microsoft to reach for its longtime partner to shore up its own virtualization offering.

Citrix deal flow

Year Deal volume Deal value
2008 2 Not disclosed
2007 5 $500m
2006 3 $117m
2005 2 $338m

Source: The 451 M&A KnowledgeBase

Napster sings the blues

Napster, once hailed as the king of digital music, has fallen on hard times. Its stock is down 35% this year alone, and 55% from its 52-week high set in October 2007. Resulting shareholder ire forced the company to announce last week that it is seeking strategic alternatives to boost value, and it has hired UBS Investment Bank to lead the effort. Who might acquire the house that Shawn Fanning built?

Since relaunching as a legal music service in late 2003, Napster has been unable to turn a profit. The company pulled in $125m in revenue for the trailing 12 months ended June 30 from about 708,000 paid subscribers. Despite increasing revenue 15% year-over-year, the company had a negative EBITDA of $12.3m and subscriber count decreased from last quarter’s total of 761,000. The switch from stagnation to a drop in subscribers for the first time means that Napster will be unable to keep growing revenue. Consequently, that makes it doubtful that it will be able to achieve profitability. Nevertheless, with $36.9m in cash and $30.7m in short-term investments, Napster is an attractive target at its current valuation of $62.25m.

We previously speculated that SanDisk would attempt to acquire a proprietary music service of its own. But given its financial woes, as well as reported takeover negotiations with Samsung, we do not think it will bite. We believe Napster’s fierce competitor RealNetworks, the majority owner of the Rhapsody music service, is the most likely acquirer. Amid growing competition from Apple, which unveiled its iTunes 8 and a new line of iPods this week, and with digital music newcomers Amazon, Nokia and a few promising startups making waves, this is a much more plausible proposition. Last year Rhapsody picked up Viacom’s Urge, which had been struggling despite its high-profile association with MTV and Microsoft. RealNetworks has the cash, and has repeatedly told us it is bullish on acquisitions that spur growth. Given Napster’s current valuation and similar deals, we estimate that it will fetch around $80-100m in a sale.

CA: Ghosts of deals past

Brenon Daly1 Comment

When CA Inc opens the doors for its annual meeting today, we expect there will be more than a few ghosts floating around the hallways at the company’s Long Island headquarters. CA, which has been under one form of investigation or another for much of this decade, can’t seem to leave the past behind. Just last week, in a sort of Shakespearian development, the former chief executive, currently in jail, lobbed the charge that the company’s board and other executives knew all about the book-cooking. Sanjay Kumar may have initially taken the fall for the company’s ’35-day months,’ among other shady accounting practices. But now he’s looking to drag others down.

We mention the latest courtroom contretemps because we have the sense that it has taken CA out of the M&A market. CA, which typically buys a handful of companies each year, hasn’t inked a deal since July 2006. (One of those acquisitions, in the late 1980s, actually brought Kumar to CA.) While we have heard rumors that CA may be on the verge of ending the two-year drought, nothing has been closed. (One set of rumors had CA looking at acquiring a systems management vendor.) Further, a few conversations with bankers indicate that not many of them are bothering with a trip out to Long Island to pitch possible deals. That’s understandable, since the company’s lawyers are probably too busy with other matters to look at a deal book.

CA deal flow

Year Deal volume
YTD 2008 0
2007 0
2006 6
2005 6
2004 3
2003 4

Source: The 451 M&A KnowledgeBase

A battlefield Exchange

Brenon Daly

As the world’s largest and richest software company, Microsoft gets a lot of targets hung on it. Companies of all sizes are drawing a bead on Microsoft, whether it’s a startup looking to undercut or outperform one product or a fellow tech giant deciding Microsoft is making too damn much money on some particular line of business and buying a competing offering. (There are a lot of those cash-rich products at Microsoft, which hums along at an astounding mid-30% operating margin overall.)

Consider who’s been targeting Microsoft Exchange Server lately. In the last year, tech heavyweights Yahoo and, most recently, Cisco have both inked multimillion-dollar deals that allow them to offer a way around Exchange. The goal: siphon off some of the more than $1bn in high-margin revenue that flows to Microsoft from its email and collaboration server product line.

The first shot was fired almost exactly a year ago, when Yahoo spent $350m for Zimbra. (As a side note, it would have been interesting to watch how Microsoft – if its planned $44.5bn purchase of Yahoo had gone through – would have killed off Zimbra. We’re guessing it would have immediately and forcefully ‘cut off the air supply,’ to borrow a time-honored strategy in Redmond.)

In a direct echo of that deal, Cisco went shopping two weeks ago and found its own Linux-based replacement for Exchange, paying $215m for PostPath. Cisco says it picked up the five-year-old company, which had pocketed about $30m in venture backing, to enhance the email and collaboration tools available in WebEx.

Whatever the motivation, we’re guessing that at least one of PostPath’s board members may be relishing the chance to stick it to Microsoft. Bob Lisbonne, who led Matrix Partners’ investment in PostPath, spent a half-decade at Netscape, including the time in which Microsoft was trying to ‘cut off the air supply’ of the browser pioneer. Not that business is ever personal, of course.

Going after Exchange

Date Acquirer Target Price
September 17, 2007 Yahoo Zimbra $350m
August 28, 2008 Cisco PostPath $215m

Source: The 451 M&A KnowledgeBase