Category: unsolicited deals

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.

Open Text crashes LBO party (again)

Brenon Daly1 Comment

For the second time in as many years, Open Text has topped a buyout shop to take home a struggling enterprise content management (ECM) vendor. In mid-2006, Open Text crashed a planned take-private of rival Hummingbird by Symphony Technology Group, along with financial backer Tennenbaum Capital Partners. To land Hummingbird, Open Text ended up paying about $18m more than the buyout firm had offered.

Open Text won’t have to reach nearly as far into its pockets this time around. On Thursday, the company bid $4.80 per share of Captaris, valuing the document capture technology vendor at $131m. That’s only a $1.4m – or less than 1% of deal value – bump over an existing offer from buyout firm Vector Capital. Vector made the offer of $4.75 per share of Captaris in March, six months after it began pushing the company to sell.

By the time Vector met with Captaris, it had snapped up about 2.7 million shares, or about 10% of the company. However, according to an SEC filing on its purchases, Vector paid around $5 per share. It’s hard to see how the buyout firm is going to be too far above water on its Captaris holdings, given the $4.80 per share offer from Open Text. As a final note, we close with the fact that if Vector had just bought a slug of Open Text stock when it started buying Captaris shares, it would be up nearly 40% on that holding. We know Vector isn’t a money management firm, but in this case, it would have been better to buy the buyer, rather than the seller.

Signing off on a deal

Brenon Daly

The bear just keeps grumbling – and we don’t mean the bear market. Instead, we’re talking about the all-the-rage bear hugs that companies are giving each other. The latest: Nuance Communications’ $40m unsolicited offer for Zi Corp. (Incidentally, the new hostilities come as a pair of previous unsolicited deals – Cadence Design Systems’ run at Mentor Graphics and Electronic Arts’ move on Take-Two Interactive – head toward largely civil conclusions.)

Nuance’s offer is a classic opportunistic squeeze play, right down to the timing. The acquisition-hungry company launched the bid just hours after Zi reported second-quarter results that did nothing to shore up its already weak standing on Wall Street. (Among the lowlights for Zi: Sales in the second quarter fell by one-third, and it burned through half its cash, which fell to just $2.6m from $5m at the beginning of the year.)

Still, Nuance sees some value in Zi, and Chris Hazelton, who heads up The 451 Group’s Mobile Practice, agrees. He notes that Zi’s handwriting-recognition technology would complement Nuance’s existing mobile offering. Handwriting recognition is particularly important in Asia, where symbols rather than letters are used in many writing systems. Of course, Asia is also a booming market for mobile products.

Nuance has already shown that it’s ready to go shopping in the mobile market. About a year ago, it spent $265m for Tegic Communications to get a keypad technology platform. And make no mistake, mobile is becoming an increasingly important slice of business for Nuance, which was formerly known for basic speech recognition on PCs. In Nuance’s most-recent quarter, revenue in its mobile business grew more than twice as fast as overall revenue, and the company projected that the division would account for 20% of total sales in the current fiscal year, up from just 13% last year.

We wouldn’t be surprised in the least if Nuance ended up ahead of its projection for its mobile business. The reason: We fully expect it to acquire Zi, which would add about $15m to the top line. Zi doesn’t want to sell – and told Nuance as much in an SEC filing – but we wonder how long the money-burning company can fend off Nuance. We’re guessing most Zi shareholders, who saw the stock sink to just 30 cents earlier this month, would like Zi to use its handwriting technology product to sign off on Nuance’s bid of 80 cents per share.

Selected unsolicited tech deals

Date launched Bidder Target Status
Aug. 2008 Nuance Zi Corp Zi has declined to negotiate
June 2008 Cadence Design Mentor Graphics Cadence dropped bid last week
May 2008 Barracuda Networks Sourcefire Sourcefire has declined to negotiate
March 2008 EMC Iomega EMC closed acquisition a month later
Feb. 2008 Electronic Arts Take-Two Interactive EA dropped tender offer, but talks continue
Feb. 2008 Microsoft Yahoo Microsoft dropped bid after three months

Source: The 451 M&A KnowledgeBase

eBay places bid

EBay officially acknowledged rumors this week that it is in talks with Interpark to acquire its roughly 37% stake in Korean auction competitor Gmarket. Gmarket shares rallied 15% on the news. Should this transaction go through, we believe eBay would quickly hit the ‘buy it now’ button for Gmarket to establish control of the Korean auction market.

Amid a slowing U.S. auction business, eBay has been relying on its international operations for growth. For its recent second quarter ended June 30, eBay’s international revenue accounted for about 54% of total revenue. International revenue grew close to 30% year over year, while US revenue was up just 12%. Most of the international success, however, stemmed from eBay’s European operations, with German and UK operations accounting for more than half of international revenue.

Interpark announced that it was shopping its shares earlier this year, putting a $1.4bn price tag on Gmarket. This is a 15% premium over Gmarket’s current market cap of $1.23bn, and means eBay would have to shell out slightly more than $500m for the shares. That works out to 5.5x Gmarket’s trailing twelve-month (TTM) revenue of $254.34m and 31.4x TTM EBITDA of $44.56m. That’s a premium compared to eBay’s own valuation of 4x TTM revenue and 24x TTM EBITDA.

By acquiring Gmarket, eBay would get a company that understands the local market. Its failure to adapt to economic and cultural realities burned eBay with its first attempt to crack the Korean market. Former CEO Meg Whitman simply applied a template that had worked in the West and put the operation on cruise control. It seems that new CEO John Donahoe has learned from that mistake. Rather than continue the failed strategy of going it alone, we expect Donahoe to try to succeed in Asia through joint ventures and acquisitions of local competitors. Given the huge potential upside for further international growth by capturing that elusive Asian market share, this deal is likely the first of many.

Significant eBay acquisitions, 2005 – present

Date Target Deal value
January 28, 2008 Fraud Sciences $169m
May 30, 2007 StumbleUpon $75m
January 10, 2007 StubHub $310m
April 24, 2006 Tradera AB $48m
October 10, 2005 Verisign (payment gateway business) $370m
September 12, 2005 Skype $2.57bn
June 1, 2005 Shopping.com $678m

Source: The 451 M&A KnowledgeBase

Cadence ends hostilities

Brenon Daly

Cadence Design Systems unexpectedly yanked its two-month-old unsolicited bid for rival Mentor Graphics Friday, scrapping a deal that would have given the chip design industry some much-needed consolidation. In pulling the $1.6bn all-cash offer, Cadence blasted Mentor for refusing to open its books. According to Cadence, that prevented it from lining up lenders to cover the $1.1bn it was planning to borrow for the deal. Mentor disputed that. It added regulatory review would have likely dragged out the process. Whatever the case, Mentor investors didn’t stick around. Mentor stock plummeted 26% to close at $10.33, compared to Cadence’s offer of $16 per share. For its part, Cadence stock rose 7%. Still both stocks are below the level they were when the dance began.

Will Earthlink acquire AOL’s ISP business?

In April we speculated that AOL (TWC) might be close to shedding its legacy ISP access business. We pegged the most likely acquirer as Earthlink (ELNK). In an earnings conference call this week, Earthlink CEO Rolla Huff echoed that sentiment, stating that he was bullish about combining its business with the AOL division.

Of course, interest from one party does not a deal make. But, given AOL’s burning desire to shed this dinosaur and completely rid itself of its ancient and tumultuous past, it is safe to assume that if the two parties can agree on terms, a deal might just materialize. The real question is how struggling Earthlink can come up with the estimated $1.5bn-$2.5bn it would take to acquire the AOL unit and its roughly nine million subscribers. Since Earthlink is one of few companies able and willing to make that acquisition, AOL does not exactly hold a lot of bargaining power. We think Earthlink might just get this at a bargain basement valuation closer to $1.5bn, just two times AOL’s cash flow from its ISP division.

National (in)security

Brenon Daly

With Sourcefire likely to get gobbled up shortly by a hungry Barracuda Networks, we couldn’t help but flashback to the earlier attempt by Check Point Software Technologies to acquire the Snort vendor. (For those of you keeping score at home: Yes, Check Point’s offer more than two years ago valued Sourcefire higher than Barracuda’s current bid.) We mention the stillborn deal because there are echoes of Check Point-Sourcefire in a current proposed pairing.

Recall that the deal got snagged because of US regulators’ concern about ‘sensitive’ technology (Sourcefire’s Snort intrusion prevention technology) falling into the hands of foreign companies (Check Point’s Israeli ownership). That concern – an overblown bit of nutty protectionism that doesn’t exist anywhere outside of Washington DC – is back at issue in the proposed pairing of Oregon-based identification card maker Digimarc and a French defense firm called Safran.

Earlier this week, Safran offered $300m in cash for Digimarc, hoping to trump a three-month-old agreement Digimarc had with US company L-1 Identity Solutions. (We looked at the deal, which represented a five-bagger for Digimarc, back in March.) L-1’s offer, which is half in stock and half in cash, is roughly worth $260m.

On word that Safran is now in the running, L-1 played the national security card, warning about the sinister threat posed by a French firm owning Digimarc’s ID card business. Safran’s bid would face scrutiny from the same regulatory agency that spiked Check Point’s planned purchase of Sourcefire, the Committee on Foreign Investment in the US. We think such regulatory meddling is misguided. But we certainly understand L-1’s move to wrap themselves in the flag to secure this deal. It’s a lot cheaper for them to hire a few well-connected lobbyists than actually raise their bid.

A chippy deal

Brenon Daly

After more than two months of discussions, Cadence Design Systems put a bear hug on Mentor Graphics on Tuesday, June 17, offering roughly $1.6bn in cash for the smaller chip-design vendor. Under terms of the unsolicited offer, Cadence would pay $16 for each of the roughly 91 million Cadence shares. Cadence said it would cover roughly one-third of the purchase with its available cash, while borrowing an additional $1.1bn. Deutsche Bank Securities is advising Cadence.

The deal – if it gets approved by Mentor shareholders and survives regulatory review – would combine two of the three largest electronic design automation (EDA) companies. Cadence and rival Synopsys are roughly the same size at about $1.6bn in sales last year, which is twice as big as Mentor. (Various pairings of these three players have been discussed over the years.) However, Mentor said later Tuesday that it was not interested in a pairing with Cadence.

Cadence’s approach, which we would characterize as ‘opportunistic consolidation,’ continues a recent trend toward unsolicited offers for underperforming rivals made in a very public way. (Although Mentor has recently trimmed its rather bloated cost structure, the company’s operating margins are less than half the level at Cadence.) The outcome of these ‘bear hugs’ has spanned the possibilities: Iomega recently accepted a raised offer from EMC; Microsoft walked away from its unsolicited bid for Yahoo; and Electronic Arts took its bid for Take-Two Interactive hostile.

EDA deal flow, by year

Year Deal volume Deal value
2005 5 $298m
2006 6 $888m
2007 13 $225m
YTD 2008* 11 $2.7bn

*includes announced Cadence-Mentor transaction. Source: The 451 M&A KnowledgeBase

Barracuda bares its teeth

Brenon Daly

Never known as a shy or retiring competitor, Barracuda Networks has lobbed an unsolicited bid to acquire Sourcefire for $7.50 per share in cash. (Full report.) That works out to a slight 13% premium on Sourcefire’s closing price ahead of the bid, and essentially where the shares began 2008.

We look at Barracuda’s bid as setting a ‘floor price’ for Sourcefire. It is certainly an opportunistic offer, as Sourcefire has been burned on Wall Street. (The company didn’t help itself when it came up short of investors’ expectations in its first quarter as a public company a year ago.) To get this deal closed, however, we suspect Barracuda will have to raise its bid. Investors have already pushed Sourcefire shares above the offer price.

To push this deal along, Barracuda can draw on the experience of one of its two outside backers, Francisco Partners. The buyout shop took IT security appliance vendor WatchGuard Technologies private in July 2006 after a protracted and bitter campaign.

Crisis averted

Brenon Daly

After three months of nonsense, Ballmer’s folly is over. Microsoft’s CEO said over the weekend he will not pursue Yahoo, a move that shareholders applauded right from the opening bell on Monday. (Microsoft stock never traded below Friday’s close, while shares of Yahoo, which had been abandoned to trade on the company’s fundamentals, were slashed 15% in early Monday afternoon trading.) In our view, the ‘relief rally’ in Microsoft stock solidifies our view that the company was wrong-headed — both in decision and execution — to go after Yahoo.

We need only look back in Microsoft’s own M&A history to see how unlikely it was to get the kind of returns it was hoping from Yahoo. In early part of this decade, Microsoft inked a pair of deals for business software companies that was supposed to narrow the gap to the long-dominant vendors. In quick order, Microsoft shelled out a combined $2.4bn for Great Plains Software and Navision Software and set about knocking off SAP and Oracle. Executives talked about Microsoft’s division, which sold ERP and CRM software, growing into a $10bn business. That hasn’t happened – not even close. More than a half-decade later, it barely scratches out $1bn in annual sales and increasingly appears technologically and competitively irrelevant. The acquisitions did nothing to make up ground on SAP or Oracle, much less the new breed of rivals including Salesforce.com and SugarCRM. (We recently made the case that Microsoft should divest this unit, called Dynamics.)
Adding Yahoo to Microsoft’s online division would have simply repeated the mistakes of Dynamics. The protracted and messy acquisition of Yahoo would not have gotten Microsoft any closer to knocking off Google from its top spot in online search advertising. To their credit, the folks in Redmond, Wash. saw the past as prelude. And if the cautionary tale served up by Dynamics was a little too close to home, Ballmer could always pick up the phone and call Jerry Levin to ask how Time Warner’s ‘transformative’ $185bn purchase of AOL worked out. Of course, Ballmer tabling the Yahoo bid does leave one question unanswered: Which transaction destroys more shareholder value? Trying to graft a sprawling Internet property onto a media company or trying to graft a sprawling Internet property onto a software company? Even though Ballmer left the door open for a future bid for Yahoo, his shareholders have already indicated they don’t want to pay to find out the answer to that question.    

Short and sour

Date Event Yahoo stock price
Feb. 1, 2008 Microsoft unveils $31 per share unsolicited offer for Yahoo $28.38 (up 48%)
May 5, 2008 Microsoft pulls offer $24.24 in afternoon trading (down 16%)