Brocade adds virtual routing capabilities with Vyatta buy

Ben Kolada

Contact: Ben Kolada

To add virtual networking to its storage portfolio, Brocade announced on Monday the all-cash acquisition of software-based virtual routing vendor Vyatta. The deal announcement reads as a tech and talent tuck-in, though it does also provide access to several Vyatta customers that are already implementing virtual networking.

Vyatta provides network routing, load balancing, address management, quality assurance, monitoring, administration and debugging software and hardware for businesses globally. Its software is used to manage both physical and virtual networks. The company started out with a virtual networking product with not only open APIs, but also open source software (Vyatta means ‘open’ in Sanskrit).

Brocade explained that the rationale for the deal was to complement its R&D investments in Ethernet fabrics and software-defined networking. But the enterprise networking and storage provider could also use Vyatta’s foothold in the virtual world to anchor its next steps. With the Vyatta buy, Brocade gains access to a set of customers that are already well along in their virtual networking implementations.

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Tech M&A spending doubles in October

Brenon Daly

Contact: Brenon Daly

Boosted by the largest technology deal in more than a half-decade, spending on tech M&A around the globe more than doubled in October from the previous year.

The whopper deal, of course, was Softbank’s $20bn purchase of a majority stake in Sprint Nextel, which accounted for nearly two-thirds of last month’s spending. Without that one transaction – the largest tech deal since Alltel went private in a $27.5bn buyout in mid-2007 – the total spending would have come in basically where it has in October in each of the past three years.

Overall, acquirers spent $32.6bn on 285 transactions in October, compared with $14.5bn spent on 342 deals in October 2011. The 125% spike in aggregate deal value in October marks only the third month in 2012 where spending has increased, year over year.

In addition to the blockbuster telco transaction, noteworthy deals last month included ASML Holding’s $2.5bn purchase of Cymer, a transaction that featured a 70% premium; the $1.6bn take-private of Ancestry.com; and Riverbed Technology’s $1bn acquisition of OPNET Technologies, a gamble on portfolio expansion that Wall Street didn’t particularly like.

Even with those big-ticket deals in October, however, M&A spending in the first 10 months of 2012 is running one-quarter lower than where it was in 2011.

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RedPrairie makes a land grab, spends $2bn on SCM rival JDA Software

Brenon Daly

Contact: Brenon Daly

Not only did RedPrairie not make it public, but now the supply chain management vendor is erasing a fairly big name off the market. The private equity-backed consolidator, which filed for an IPO three years ago, said Thursday that it is paying roughly $2bn for rival JDA Software. It would be about the third-largest software deal of 2012, according to The 451 M&A KnowledgeBase.

RedPrairie had the misfortune to put in its IPO paperwork right as the world’s economy slid into the worst recession in a generation. That showed up in the company’s financials, with overall revenue declining 12% in the first three quarters of 2009, according to its SEC filing. On the other side, RedPrairie put up roughly $15m in ‘adjusted’ EBITDA each quarter, so it wasn’t too surprising when it got flipped from buyout shop Francisco Partners to fellow buyout shop New Mountain Capital rather than go public.

Since New Mountain picked up RedPrairie two-and-a-half years ago, it has rolled up a half-dozen other companies. JDA Software is, by far, the largest acquisition. Under terms, New Mountain will hand over $45 for each share of JDA Software. That’s the highest-ever price for the company and about five times the split-adjusted price it first sold shares to the public, back in 1996.

The transaction, which is expected to close before the end of the year, values JDA Software at nearly 3 times sales and roughly 16x trailing EBITDA. (At least according to JDA Software’s calculation of $122m in EBITDA, on an unadjusted basis for Q3 2011-Q3 2012.) For comparison, we understand that RedPrairie traded at closer to 2x sales and about 9x EBITDA back in February 2010, although terms weren’t officially released.

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A quickly to Z

Ben Kolada

Contact: Ben Kolada

Rather than go for the quick exit, Andreessen Horowitz’s investing thesis focuses on the long haul, investing in companies that have the potential to become tech giants. Its investment in anti-fraud startup Silver Tail Systems counters that thesis, but that’s what happens when the money comes knocking early.

Andreessen Horowitz first disclosed that it invested in Silver Tail in June 2011. The thought was that, like the malware wave, sophisticated fraud attacks would first hit the largest enterprises and eventually move downwind to SMBs. However, the market has greatly expanded, as a variety of fraud attacks are now hitting businesses of all sizes.

Noticing the market’s potential, EMC moved to take Silver Tail’s capabilities in-house. Terms were not officially disclosed on EMC’s acquisition of Silver Tail, although the price was reported to be in the $300-400m range.

As we understand it, though, Silver Tail was initially looking for the opposite of an exit. The story we’re hearing is that Silver Tail was out on the fundraising circuit, looking for upward of $30m, but EMC made a table-clearing offer. That reported price, if true, would have been about twice the post-money valuation Silver Tail was seeking in its round. As it is, the midpoint of the reported price is actually about five times the post-money valuation it took in its last round, according to our understanding.

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Is Backflip next for Nexon?

Ben Kolada

Contact: Ben Kolada

If the rumors are true, Japanese gaming giant Nexon will have spent nearly $1bn on gaming acquisitions in just one month. We’re hearing the company has acquired three-year-old gaming startup Backflip Studios for about $385m, and that’s not including a significant earnout. That would be on top of the $470m it dropped on fellow Japanese gaming company gloops at the start of the month.

Rumors of Nexon acquiring Backflip Studios first started circulating in September. We were recently told that Nexon is shelling out $385m, excluding a significant earnout, for Backflip. The Boulder, Colorado-based startup had grown considerably on its own. Published reports claim its revenue grew 200% in 2011, with 350% growth projected for this year. According to our sources, Backflip is set to generate roughly $40m in EBITDA this year.

The sale – provided it comes – would give a rather rich return to the entrepreneurs running Backflip, which has taken very little funding. In a lone SEC filing, Backflip disclosed it had secured just $140,000 in equity financing, but did not state who its investors were. Nexon may well provide more detail about the rumored transaction on or before its next earnings call, scheduled for November 8.

Riverbed looks to extend to application management with OPNET acquisition

Brenon Daly1 Comment

Contact: Brenon Daly

Looking to extend its network performance optimization business into application management, Riverbed Technology said Monday, October 29, that it will spend $1bn in cash and stock for OPNET. Riverbed will roll OPNET into its nascent Cascade business line, offering deeper application monitoring and end-user experience to its existing network-focused product portfolio.

While there certainly is a logical extension between the network and the applications that run on it, the transaction brings a number of risks to Riverbed. For starters, it is by far Riverbed’s largest acquisition – almost ten times bigger than its second-largest deal. While Riverbed said the OPNET transaction is expected to close this year, it indicated the financial ‘synergies’ probably wouldn’t show up until 2014.

Further, the formerly debt-free company will take on debt and issue new equity to cover its purchase of OPNET. According to terms, Riverbed will pay $43 for each OPNET share, composed of $36.55 in cash, and the rest in Riverbed equity. That means Riverbed will have to issue seven million shares and take out a $500m term loan.

Beyond the financial impact, there are also questions about the business it is acquiring. Riverbed is focused on the application performance management (APM) portion of OPNET, but that business only accounts for about half of the company’s overall sales. The other half is network performance management (NPM), which is what Riverbed already sells.

Riverbed highlighted the fact that OPNET’s APM business is growing at more than 30%. However, because of the sluggish growth in the company’s legacy NPM business, OPNET’s overall revenue is only increasing in the mid-teens. (In the first two quarters of its current fiscal year, OPNET has bumped up the top line only 11%.) That’s an acute concern for Riverbed, which will only grow in the mid-teens in 2012 – half the level it expanded at in 2011.

‘Dual track’ an empty threat as IPO window closes

Brenon Daly

Contact: Brenon Daly

If not shut, the tech IPO window is too narrow for most would-be debutants to get through right now. It’s been two full weeks since Workday soared onto the market in one of the hottest offerings in recent times. But since that IPO, there’s been nothing but crickets in the tech sector.

Perhaps that shouldn’t be surprising, given that the equity market has ticked lower while volatility has ticked higher over the past two weeks. In any case, the IPO drought certainly isn’t surprising to any of the respondents of the semiannual M&A Leaders’ Survey, which we sent out earlier this month and wrote up earlier this week.

Of the dozen reasons why deals aren’t getting done, survey respondents ranked ‘competition from IPOs’ dead last. (Not only that, the response also showed the single biggest decline since our earlier survey in April.) Fully seven out of 10 respondents said the IPO market isn’t really having an impact on M&A activity, up from 51% who said that back in April.

Competitive impact of IPO market on M&A

Survey period Strong Neutral Weak
April 2012 24% 25% 49%
October 2012 12% 18% 70%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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Will TeleNav be a buyer or a seller?

Ben Kolada

Contact: Ben Kolada

TeleNav’s revenue is expected to decline significantly in 2013, but the company is making attempts to expand into growth markets, as evidenced by its recent acquisition of local mobile advertising startup ThinkNear. With its shares continuously battered on the public market, could TeleNav spurn public scrutiny and seek a private equity buyer? Its mountain of cash could enable the company to go in either direction – buyer or seller.

TeleNav stumbled onto the Nasdaq in May 2010. After repeatedly issuing guidance below analysts’ estimates, the company’s shares are currently trading nearly one-third below their IPO price. Revenue for its fiscal 2013, which ends in June, is expected to decline 13% to $190m. The company’s revenue primarily comes from providing GPS navigation software to wireless carriers, though it also serves the automotive vertical and enterprises, and recently began targeting the local advertising market.

Although TeleNav is rarely an acquirer, its $22.5m ThinkNear pickup could be the beginning of a buying spree meant to propel growth in its local mobile advertising business. The mobile advertising market is in hyper-growth mode, and TeleNav has an audience of 34 million users accessing its services that it hasn’t yet materially targeted for advertising purposes.

Meanwhile, the debt-free company is sitting on nearly $200m of cash and short-term investments that it could use to fuel its M&A machine and inorganically grow this business segment, which represents less than 10% of its fiscal 2012 revenue.

Conversely, though, TeleNav’s treasury could attract buyout bidders. Its market value is currently about $260m, but its cash and short-term investments reduce its enterprise value to just about $60m. A lofty 30% per-share premium would give the company an enterprise value of less than half projected fiscal 2013 revenue. However, we expect that if the company is taken private, its newfound parent would continue to invest in its mobile advertising business because of that market’s growth potential. TeleNav reports fiscal 2013 first-quarter results after the bell tomorrow.

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Survey indicates economic concerns clouding deals

Brenon Daly

Contact: Brenon Daly

Even more than pricing, the uncertain economic outlook is getting in the way of closing deals, according to a survey by 451 Research and Morrison & Foerster of more than 300 executives, corporate development officials, lawyers/bankers and other M&A figures. More than seven out of 10 respondents indicated the uncertainty is the primary reason that M&A spending is running essentially where it was in the recession-plagued year of 2009, snapping two straight years of higher spending on deals. See our full report on the survey.

In the survey – which was sent out in early October, after the close of the third quarter – fully seven out of 10 (71%) respondents said the questionable outlook for growth in the US was a ‘strong’ contributor to the sluggish M&A market. Another way to look at it: Six times as many people (71% vs. 12%) said the precariousness of the US economy is crimping deal flow compared with those that saw no impact. Market forecasters predict third-quarter revenue for S&P 500 companies will actually come in lower than Q3 2011 levels, which would be the first year-on-year sales decline in three years.

Those concerns about growth appear justified, since many of the bellwether tech vendors reported results for the third quarter. For instance, a slump in third-quarter sales at Intel is almost certain to leave revenue for 2012 below the level from last year.

The chip giant followed up a 5.5% decline in sales during the July-September period with a forecast for a scant 1% revenue increase in the final quarter of this year. Against that backdrop of anemic sales, Intel has scaled back its M&A program. In the first half of 2012, Intel announced a half-dozen transactions, including four of them with disclosed values of more than $100m. Since midyear, it has done just three small purchases.

Similarly, Citrix – which has lost nearly one-quarter of its market value since mid-2012 – has done just one small purchase since then. In the first half of 2012, Citrix announced four acquisitions valued, collectively, at more than $500m. For more on activity and forecasts for the M&A market, see our full report on the survey.

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Marketo in the market?

Brenon Daly

Contact: Brenon Daly

Although a couple of marketing automation vendors have, collectively, generated $2bn of market value in two recent richly priced IPOs, the next significant exit in the sector may be a trade sale. Marketo is rumored to be checking the market to gauge interest from buyers. High on that list of interested suitors, according to several sources, is Oracle.

A sale of Marketo, if it happens, would reverse the expected path of the six-year-old company. It doubled sales in 2011 and, we understand, will roughly double sales again this year to about $55m. That rapid growth helped push the company’s valuation in a round of funding in 2011 to about $500m, according to sources.

Obviously, a buyer would have to top that level to take home Marketo. In addition to Oracle, other companies that may have taken a look include salesforce.com and Intuit, market participants say. Some of the interest may have been spurred by ExactTarget’s recent purchase of Pardot.

Still, price may prove a snag for any acquisition of Marketo. Wall Street has given a warm embrace to two of Marketo’s rivals that have come public in the past six months or so. ExactTarget currently trades at about $1.5bn, or 5.3 times 2012 projected sales, while Eloqua garners a market capitalization of $650m, or 7.1 times this year’s sales. Of course, Marketo is growing much faster than either of its larger rivals.