Feast or famine for tech M&A

Brenon Daly

Contact: Brenon Daly

It was feast or famine for tech dealmakers in the first three months of the year. In the first half of the just-completed Q1, M&A spending surged to record levels, driven primarily by the two blockbuster deals announced so far this year: the proposed $24.4bn leveraged buyout of Dell and Liberty Global’s $16bn reach for UK communications provider Virgin Media Group. (Collectively, those two transactions basically equal the typical spending level for a full quarter in 2012.)

But after those early February acquisitions hit the tape, deal flow dried up dramatically. That was particularly true at the top end of the market. In the back half of Q1, we tallied only two transactions valued at more than $1bn, compared with eight 10-digit deals in the first half of Q1.

Overall, the mixed market saw the buyers spend $63bn on 768 deals in the January-March period. That essentially matched the spending from the final quarter of last year, as well as the two summer quarters in 2011. But unlike those earlier periods, Q1 deal value was dominated by the two transactions, which accounted for nearly two-thirds of the total quarterly spending.

In addition to the spending concentration, we would note another sign of weakness during the period. The 768 deals announced in Q1 represents a 16% decline from the same quarter in both 2012 and 2011. In fact, Q1 deal volume slumped to its lowest total since Q3 2009.

2013 activity, month by month

Period Deal volume Deal value % change in spending vs. same month, 2012
March 2013 219 $4.4bn Down 76%
February 2013 246 $47.6bn Up 296%
January 2013 303 $10.7bn Up 155%

Source: The 451 M&A KnowledgeBase

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Rackspace adds error monitoring with Exceptional buy

Ben Kolada

Contact: Ben Kolada, Agatha Poon

Rackspace has acquired developer-focused Web application error-monitoring and hosting startup Exceptional Cloud Services. The acquisition is meant to drive further adoption of Open Cloud. With Exceptional’s offerings, Rackspace is positioned to be a one-stop shop for developers with its cloud platform, network management and application performance monitoring.

Terms weren’t disclosed. Exceptional was founded in 2010 and had 10 employees at the time of its sale (the transaction closed last Friday). The company hadn’t taken outside funding. We’d note that Exceptional’s founder, Jonathan Siegel, already had experience with a company that sold to Rackspace. Siegel was an adviser to Cloudkick, which Rackspace bought in December 2010 for about $30m.

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Cashing in on CDW

Contact: Tejas Venkatesh, Ben Kolada

Although CDW was taken private at the height of the prerecession bubble, when valuations were on the rise, its private equity (PE) owners, led by Madison Dearborn Partners and including Providence Equity Partners, may still profit handsomely from their investment. Based on our assumptions, the PE pair could record a profit of nearly $4bn on their investment. CDW filed its IPO paperwork last week.

Madison Dearborn announced that it was taking CDW off the Nasdaq in May 2007, at a valuation of about 1x trailing sales. At that time, the company was debt-free and generated $7bn in revenue in the preceding 12 months.

At the time of the take-private, CDW indicated that it expected $4.6bn of debt to be outstanding after the $7.3bn deal. Assuming all of that debt was used to finance the deal would mean that Madison Dearborn and Providence Equity would have invested just $2.7bn in equity.

If CDW reenters the public arena at the same valuation it was taken off (1x sales), then Madison Dearborn and Providence Equity’s investment will more than double. If CDW goes public at an enterprise value of $10.1bn (1x sales), backing out its $3.7bn of net debt would mean that the PE shops’ equity would have grown from $2.7bn at the time of the take-private to $6.4bn today.

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Checkpoint’s deeply discounted divestiture

Brenon Daly

Contact: Brenon Daly

In one of the more financially lopsided divestitures we’ve seen in some time, Checkpoint Systems says it will be pocketing just $5.4m for its North American CheckView business, which is being picked up by buyout shop Platinum Equity. The electronic security unit generated roughly $77m of revenue in 2012, although it did run slightly in the red.

Following a review of its businesses last year, Checkpoint set aside CheckView as a discontinued operation and broke out some of the division’s financials. (We confirmed that Platinum will be acquiring the whole CheckView unit.) At the time of the sale, CheckView employed some 225 people.

Checkpoint’s divestiture comes as the latest bit of portfolio pruning by tech companies so far this year. Similar moves include Oracle shedding the Lustre business it obtained with its acquisition of Sun Microsystems to Xyratex in mid-February and Microsoft, which had already written down much of its aQuantive acquisition, flipping the Atlas Advertiser Suite to Facebook a month ago.

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The gains — and declines — in the tech IPO market

Brenon Daly

Contact: Brenon Daly

After a four-month drought, the enterprise tech IPO market saw its first new debutants warmly welcomed onto Wall Street this week. Both Model N and Marin Software priced above their expected ranges and traded higher in the aftermarket. Collectively, the two offerings created almost $1bn in market value.

While the strong debuts by Model N and Marin Software may help draw other companies – and their underwriters – to the public market, the IPO market is still running behind where it was at this time last year. In the first three months of 2012, we saw five enterprise tech vendors go public, including ExactTarget, Demandware and last year’s unexpected top-performing offering, Guidewire Software. Altogether, the class of early 2012 is now valued at about $5.5bn on the public markets.

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Yahoo back in the market

Contact:  Brian Satterfield

For the past two years, Yahoo has been mostly quiet on the M&A front. But with the appointment of CEO Marissa Mayer in July 2012, the company has headed back into the market with what appears to be a refocused strategy.

In the first three months of 2013, Yahoo has already made four acquisitions, twice as many as it inked in 2012 and equal to its entire 2011 total. (We’d note that both of its 2012 purchases came after Mayer took the CEO job.) The company’s 2013 transactions, including yesterday’s pickup of mobile recommendation application Jybe, have all been small and focused solely on the online services and mobile applications sectors.

This strategy is a distinct departure from Yahoo’s activity during its M&A heyday. Between 2005 and 2009, the company made 36 acquisitions valued at $2.4bn, representing almost 60% of all the deals it’s inked and more than 40% of all the money it has spent on M&A. In that four-year period, the company announced a half-dozen transactions valued at more than $100m, buying into sectors outside of its core online activities such as enterprise and consumer software, IT services and networking.

Since the beginning of 2010, Yahoo has inked just 15 deals valued at $400m, only one of which has been larger than $100m. In that same period, Yahoo has also been forced to divest some of its more well-known, stand-alone businesses, including HotJobs, Zimbra and del.icio.us. Yahoo’s $350m purchase of Zimbra in 2007 seems a particularly egregious misstep for the company, which eventually sold the collaboration vendor to VMware less than three years later for only $100m.

Rumors are also swirling that Yahoo is in negotiations to buy a majority interest in video-sharing website Dailymotion. Just last month, France Telecom bought the remaining 51% stake in Dailymotion, valuing the entire company at $156m.

Microsoft gives Dynamics a social boost with Netbreeze acquisition

Contact: Brian Satterfield

As more customers flock to social networks to deliver their feedback, Microsoft follows on the heels of several of its CRM rivals by buying its way into the social media monitoring software sector. The software giant, which established itself in the CRM market a decade ago with two significant acquisitions, has reached for 14-year-old Swiss software provider Netbreeze.

Announced in conjunction with Microsoft’s Dynamics Convergence 2013 conference, Netbreeze adds social media monitoring and text analytic features to the company’s CRM offering. A blog post on the Microsoft Dynamics website indicated that Netbreeze’s native support for 28 different languages was a key driver in the transaction.

Microsoft made inroads into adding social functionality to Dynamics with last September’s $1.2bn acquisition of enterprise social networking software firm Yammer. The company’s moves come after two of its major CRM competitors had already been active in the social media monitoring sector.

Salesforce.com’s activity in social software dates back to 2009 and includes the $326m purchase of Radian6, still the largest deal we’ve seen in the space. Meanwhile, Oracle followed suit last summer when it picked up both Netbreeze’s US-based rival Collective Intellect and similar social marketing automation software vendor Involver.

Packet Design picked up by PE shop with networking know-how

Brenon Daly

Contact: Brenon Daly, Peter Christy

Adding a second company to its portfolio, private equity (PE) firm Lone Rock Technology Group has picked up network analytics firm Packet Design. The acquisition of Packet Design brings the Austin, Texas-based PE shop much closer to its roots in networking than its other investment, business process automation vendor iGrafx.

Lone Rock was cofounded by Joel Trammel, who spent a decade as head of network flow monitor NetQoS before selling that business to CA Technologies for $200m in September 2009. A number of former NetQoS executives are now working at Packet Design, including the company’s newly appointed CEO Scott Sherwood, who ran sales at NetQoS. Packet Design was advised in the process by Mooreland Partners, while Northside Advisors worked the buyside. (Subscribers to The 451 M&A KnowledgeBase can click here for the full record on the transaction, including our proprietary estimate on the terms of the deal.)

In its decade in business, Packet Design pulled in about $65m in equity and debt backing. Like many other startups, however, it was heavy on technical expertise but light on business acumen. Packet Design sold elegant technical tools to a few of the most complex network operators but never truly expanded into much larger markets. The company has about 200 customers and, according to our understanding, roughly $10m in sales.

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DataBank expands to the Twin Cities

Ben Kolada

Contact: Ben Kolada

Dallas-based DataBank has expanded beyond its Texan roots, acquiring Minneapolis-based VeriSpace. The deal is part of a growth strategy aimed at entering new markets in part through M&A. With VeriSpace, DataBank now operates eight datacenters with more than 180,000 square feet of datacenter space. DataBank was acquired by Avista Capital Partners in June 2011.

VeriSpace provides server colocation, managed hosting and disaster recovery services to enterprises. The company operates a 10,000-square-foot facility in Minneapolis suburb Eden Prairie. VeriSpace was founded in 2002 by Minnesota commercial real estate developer Dave Frauenshuh, and sits in a commercial office complex located about 12 miles south of downtown Minneapolis.

The greater Minneapolis-St. Paul metro area has seen a little bit of moving and shaking in the past few years. In May last year, Cologix picked up Minnesota Gateway and in March 2010, TDS bought VISI for $18m. In Minneapolis, competitors in the colocation market include XO Communications, VISI, Atomic Data, Cologix and Implex. Competition in the interconnection services area will most likely come from SunGard, Velocity Telephone and zColo.

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Target’s double-barreled e-commerce deals

Contact: Brian Satterfield

In a move that underscores the continuing importance of e-commerce sales to brick-and-mortar retail chains, Target Brands has made its first foray into tech M&A by buying two online retailers.

Target announced on Thursday that it will acquire CHEFS Catalog and Cooking.com, two companies that sell kitchenware and cookware online. In its most recent earnings call, Target – which is slightly larger than Amazon, but garners only about one-third the valuation of the Web retailer – indicated that its online revenue growth was above the industry average.

Clearly, the 110-year-old retailer bought the two Internet properties to continue that progress. (We estimate that CHEFS Catalog and Cooking.com collectively generated about $150m in sales.) However, we might note that Target’s purchases come after a number of fellow brick-and-mortar retailers have already consolidated online retailers. In the past two years alone, we’ve seen similar purchases by retail heavyweights such as Wal-Mart, Lowe’s, Barnes & Noble and Walgreen.

CHEFS Catalog, which was founded in 1979 as a mail-order retailer, was previously owned by private equity firm JH Partners and brings 100 employees to Target. Meanwhile, southern California-based Cooking.com has a headcount of 50 and has collected a whopping $115m in venture funding over its 15-year lifespan, most of it during the bubble era.