Category: unsolicited deals

Going it alone can be expensive

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

Wall Street hasn’t been particularly supportive of tech companies that turn down unsolicited offers and opt to go it alone. Shares in a number of the targeted firms are currently changing hands at less than half the level that the would-be suitors were willing to pay for them. To wit: Microsoft was reportedly set to pay in the mid-$30s for each share of Yahoo, which is now trading in the mid-teens. And having spurned a $16-per-share unsolicited bid from Cadence Design Systems last summer, Mentor Graphics stock is now trading at about $7.

We mention that bit of cautionary history because there’s another showdown brewing. Broadcom, advised by Banc of America Securities, recently offered $9.25 for each share of Emulex, giving the unsolicited bid a total equity value of $764m. (As it often does, Goldman Sachs is advising the target.)

Broadcom’s bid values Emulex where it was trading last October. On an enterprise value basis, the proposed transaction values the maker of storage networking gear at just 1.2x its trailing 12-month (TTM) sales and 5.5x TTM EBITDA. Emulex investors want a richer valuation and have pushed the stock above $10 since the offer was unveiled. Broadcom has vowed to take the unsolicited bid directly to shareholders if the Emulex board rebuffs it. On its conference call Monday discussing fiscal third-quarter results, Emulex said only that it was ‘thoroughly’ reviewing Broadcom’s offer.

From Broadcom’s point of view, it’s understandable why it would want its fellow southern California-based company. If the deal goes through, Broadcom would get a foothold in a few interesting storage markets such as host bus adapters (for both standard servers and blade servers) and embedded storage processors for disk arrays. Broadcom sells Gigabit Ethernet and 10-Gigabit Ethernet products, but is not a player in the SAN market. With network convergence growing in popularity, Broadcom would also benefit from Emulex’s fiber channel technology and its new Fiber Channel over Ethernet adapters.

A bid and a raise for SumTotal

Brenon Daly

Contact: Brenon Daly

The sum total of all interested parties in SumTotal Systems may well be greater than the two that have already disclosed themselves. At least that’s the thinking among investors – or rather, speculators – in the learning management software vendor. Recall that earlier this month, Vista Equity Partners tossed the struggling company an unsolicited offer of $3.25 for each share. (Vista is being advised by Union Square Advisors.) As we noted, the bid included a ‘go-shop’ provision.

SumTotal never got back to Vista on its offer, but it did throw its arms around a slightly richer one from Accel-KKR on Friday. The white knight bid $3.80 for each SumTotal share, valuing the company at about $124m, or $20m more than Vista’s offer. However, we would note that SumTotal shares have traded slightly above Accel-KKR’s offer price since the bid was unveiled. (On Monday afternoon, SumTotal stock was changing hands at $3.85.) Like Vista’s initial offer, Accel-KKR’s included a go-shop provision. On that front, it seems like the shopping may not be done for SumTotal.

PE firm calculates SumTotal

Brenon Daly

Contact: Brenon Daly

A half-decade ago, a pair of struggling public companies joined together in an effort to capitalize on the fragmented e-learning market. Click2Learn.com and Docent, which had beat up on each other for years, merged into a single company under the name SumTotal Systems. (Shareholders of Click2Learn held 52% of the combined entity, with Docent shareholders owning the rest.) The merger did little to help SumTotal’s performance on the Nasdaq. Since the pairing, which closed in mid-March 2004, the stock had dropped from above $8 to a low of $1.33 last month.

Earlier this week, Vista Equity Partners floated a bid of $3.25 for each of the 31.8 million shares of SumTotal outstanding. The buyout firm owns about four million SumTotal shares, or about 12.6% of the total. Vista started to accumulate its position in September, when the stock was just under $5, according to US Securities and Exchange Commission filings. Vista is the company’s largest shareholder. In addition, the second-largest holder, Discovery Group, has indicated that it wants SumTotal to sell the business. For its part, SumTotal (advised by RBC Capital Markets) has said only that it is reviewing the offer.

Vista’s unsolicited offer for SumTotal has more than a few echoes of Vector Capital’s recent grab of Aladdin Knowledge Systems. Both unsolicited bids came from San Francisco-based PE shops that had amassed a large stake in each company. Both valued the targeted company at less than 1x trailing sales, on enterprise value. (And somewhat unusually, both offers included ‘go-shop’ provisions.) There is one crucial difference, however, between the two targets: SumTotal isn’t profitable, and in fact has never turned a profit. Altogether, it has rung up an eye-popping $353m in accumulated deficit.

The saga of Certicom’s sale

Brenon Daly

Contact:  Brenon Daly

After more than two months of bid and counterbid, the saga of the sale of Certicom appears to be nearing its close. In early December, fellow Canadian tech company Research in Motion tossed out a low-ball bid of $1.21 for each of the 43.7 million shares of Certicom. Overall, that valued the cryptography vendor at some $53m. We should hasten to add that RIM’s offer was unsolicited.

Certicom, along with adviser TD Securities, mulled over the offer for about three weeks before saying ‘thanks but no thanks’ to RIM. Undeterred, RIM kept its bid alive for the next month, before officially pulling it January 20. Three days after that, VeriSign stepped in with an offer of $1.67 for each Certicom share, or a total of $73m.

Just last week, RIM reentered the picture with a bid of $2.44 per share, or about $106m. (Viewed another way, RIM’s new offer values Certicom at exactly twice the level as its initial bid.) As part of the terms, VeriSign now has until Wednesday to up its offer or see Certicom go to RIM. (The deal carries a $4m breakup fee.)

Of course, there could always be a third suitor in the picture. If we had to pick one likely candidate, we might tap IBM. Last April, Big Blue inked a ‘multiyear, multimillion-dollar’ license agreement with Certicom, and has already handed over a $2m upfront payment.

How do you say ‘please come back’ in Korean?

-Contact Thomas Rasmussen

When SanDisk released its dismal earnings this week, dismayed shareholders hastily headed for the hills. The exodus caused SanDisk’s stock to plunge 25%. In the fourth quarter of 2008, the flash memory giant lost $1.6bn, pushing its total loss for the year to $2bn. This red ink from operations was exacerbated by the company’s $1bn of acquisition-related write-downs stemming from its $1.5bn acquisition of msystems in July 2006. In the days following the dire news, SanDisk has been trading at a valuation of around $2.2bn. That’s a far cry from the $5.6bn that Samsung offered for SanDisk in September.

To put the decline in perspective, SanDisk’s three largest outside shareholders – Clearbridge Advisors, Capital International Asset Management and Capital Guardian Trust, which collectively own more than 15% of SanDisk (as of September 30) – suffered a paper loss of more than $700m since the day Samsung walked away from the proposed deal. Given this, we wouldn’t be surprised if shareholder ire forced SanDisk to reconsider its strategic options this year. On its earnings call this past Monday, the company reiterated that its board is indeed open to deal with any interested parties, which begs the inevitable question: Who might be willing buyers?

With private equity largely stymied and longtime partner Toshiba repeatedly stating that it’s not interested in a deal, Samsung is still the most logical fit. It has the cash, has shown a willingness to pay a solid premium, and would integrate well with SanDisk’s overall portfolio of products. In addition to its valuable intellectual property assets (which would eliminate those ugly royalty fees) and flash and solid-state drive lineup, SanDisk would instantly give Samsung the second-largest share of the music player market, behind only Apple. Perhaps it’s time for SanDisk CEO Eli Harari to brush up on his Korean, or at least learn how to say ‘please come back’ in that language.

Polishing off Aladdin

Brenon Daly

Contact: Brenon Daly

After almost five months of sometimes-heated negotiations, buyout shop Vector Capital and Aladdin Knowledge Systems have agreed to take the authentication vendor private. The accord comes after two formal price adjustments (one up, one down) that left the final deal valued at $160m. Vector plans to slot Aladdin into SafeNet, which it acquired in March 2007 for $634m.

Vector’s two security purchases stand in sharp contrast to each other, since the SafeNet transaction went through with a minimum of histrionics. Consider that SafeNet took just five weeks to close, compared to the drawn-out battle for Aladdin, which included the threat of a proxy fight. Part of that may be explained by the relative valuation of the two deals. Vector paid about 2x trailing 12-month sales for SafeNet, twice the multiple it is paying for Aladdin. That discount compares to a roughly 40% slump in the Nasdaq during the time between the two acquisitions.

North of the border disorder

Brenon Daly

Contact: Brenon Daly

The ‘storm’ caused by Research in Motion’s ‘bold’ play for Certicom looks likely to linger a bit longer. The Blackberry maker originally launched its unsolicited offer for Certicom a month ago, but the cryptography vendor has nixed it. (Certicom also lined up TD Securities to help it fend off the unwanted attention from the fellow Canadian company.) RIM’s bid, which values Certicom at some $52m, was originally slated to expire next week but has been extended through the end of the month.

With this unsolicited offer, RIM joins a growing list of big-name tech firms that have used this once-taboo M&A strategy. Over the past year, firms using unsolicited offers include Microsoft, EMC, Electronic Arts and Cadence Design Systems, among others. If RIM does manage to secure Certicom, it will mark the company’s second recent deal, after some two years out of the market.

Recent Research in Motion deals

Date Target Deal value Rationale
December 2008 Chalk Media $18.4m Mobile content
December 2008 (announced) Certicom $53.2m Encryption
November 2006 Epoch Integration Not disclosed Network management
March 2006 Ascendent Systems $14m* VoIP networking

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

Actuate: A bit or the whole thing?

Brenon Daly

Contact: Brenon Daly

It turns out that Actuate may have some competition for its own stock. A month ago, the enterprise reporting veteran announced plans to buy back some $60m worth of its own equity, at $3.15-3.40 per share (Jefferies & Co. is running the process). Under those terms, the buyback would have removed up to 19 million shares from a base of about 65.5 million.

However, since Actuate revealed the tender offer on November 5, the markets have continued to plummet, with the Nasdaq slumping almost 20%. Accordingly, Actuate trimmed the price it was willing to pay for its own shares to $2.20-2.60 each. On Thursday, it bumped up the range to $3.00-3.50. What prompted the boost? Was it a holiday gift from the company to its shareholders, who have seen their stock drop nearly 70% over the past year?

As it happens, Actuate raised the price of the planned buyback because an unnamed party offered $3.50 per share for the whole company. Actuate’s board said the unsolicited proposal, which would value the company at nearly $230m, is not in shareholders’ ‘best interests.’ While it’s uncertain how the mysterious unsolicited offer and the tender offer will play out, it seems pretty clear that one way or another, some Actuate shares are going to come off the board.

A Freudian deal?

Brenon Daly

We’ve run a lot of different analyses on transactions, but AccessData’s proposed acquisition of Guidance Software is the first one we’ve ever subjected to Freudian analysis. What do we mean? Well, almost all of the executives at AccessData, a private data forensics software vendor, used to work at publicly traded Guidance. (AccessData’s CEO, COO and two VPs are former employees of the company they are now bidding on.)

After its initial bid a month ago was rebuffed, AccessData took public on Tuesday its offer of $4.50 for each share of Guidance. With about 23 million shares outstanding, the proposed transaction values Guidance at about $105m. However, debt-free Guidance holds $28m in cash, lowering the enterprise value of the bid to about $77m. Guidance is expected to record about $90m in sales this year. In comparison, AccessData is about one-third that size, primarily because it doesn’t have any services revenue.

We understand AccessData, which has never taken outside funding, plans to finance the deal internally, if it goes through. Guidance has rejected the bid. And, although AccessData has threatened to take its unsolicited proposal directly to shareholders, a tender offer is unlikely to go through unless it gets the blessing of one Guidance executive: Chairman and CTO Shawn McCreight, who founded the company and owns some 44% of its stock. If nothing else, AccessData’s bid will make Guidance’s third-quarter conference call on Thursday more interesting.

Google and Yahoo break up

-by Thomas Rasmussen

The Department of Justice announced this morning that it would file suit to block the planned advertising pact between Google and Yahoo. Google followed quickly by axing the deal. YHOO is up 8% in mid-day trading while the overall market is down sharply. The Google/Yahoo breakup has sparked renewed hope among shareholders that Microsoft could return to the table. It also opens up the possibility of a long rumored partnership between Time Warner’s AOL and Yahoo.