M&A fireworks to start July

Brenon Daly

-Contact: Brenon Daly

Although total tech M&A spending in the first half of 2012 is down one-third from the previous year, the third quarter has started with a bang. Even with the midweek holiday, the opening week of the new quarter has seen unusually strong deal flow, with several big-name buyers sealing gigantic deals. For instance, Dell’s (apparent) winning bid for Quest Software would be the company’s largest transaction in almost three years while Micron Technology’s move to consolidate bankrupt DRAM provider Elpida Memory is twice as big as any deal the chip vendor has done in the past.

Boosted by this pair of multibillion-dollar transactions, the aggregate value of acquisitions announced so far in July has topped $8.7bn. To put that into perspective, that compares to just $13.8bn for the entire month of July in 2011. So although it is early, spending this month is well on its way to exceeding the level from last July. Provided M&A activity continues tracking that way for the month, July would mark only the second time in 2012 that individual monthly totals have topped the level from the same month of 2011. (See our full Q2 report for more on the state of the M&A market.)

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 292 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%

Source: The 451 M&A KnowledgeBase

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Micron acquires bankrupt Elpida to consolidate DRAM market

Contact: Thejeswi Venkatesh, John Abbott

Micron Technology on Monday announced its largest acquisition – the $2.5bn purchase of Japanese rival Elpida Memory. The announcement comes five months after Elpida filed for bankruptcy, with a whopping $5.6bn of debt on its balance sheet. Under terms of the agreement, Micron will pay $750m for all of Elpida’s equity and $1.75bn over seven years in interest-free installments to the firm’s creditors.

Micron hopes that its consolidation move will help stabilize DRAM supply, while also strengthening its product reach into new areas. In particular, it will be targeting mobile DRAM for smartphones and tablets, which command higher market prices. Elpida has a strong product portfolio in this area and is a key supplier for Apple.

The industry-wide decline in prices due to oversupply has troubled all DRAM players, including Elpida. But Micron’s DRAM unit has fared better than most. While Elpida suffered a $1.2bn loss on $4bn in sales in 2011, Micron’s DRAM unit generated a profit of $290m on $3.2bn in sales.

The combined company will create the second-largest DRAM player, behind only Samsung, but ahead of number three player SK Hynix. By Micron’s calculations, these three vendors will control up to 90% of the $30bn memory chip market. Most of the remaining 10% is held by three smaller Taiwanese players: Nanya Technology (owned by Formosa Plastics), ProMOS Technology and Winbond Electronics. All of these smaller companies are currently losing money. Micron already holds a 40% stake in another struggling player, Inotera Memories, in which Nanya also holds a 26% stake.

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Tech M&A stuck in low gear

Brenon Daly

Contact: Brenon Daly

Tech dealmakers continued to stay on the sidelines in the just-completed Q2 as worries about the slowing US economy and a financial collapse in parts of Europe had them rethinking their acquisitions. Spending on deals across the globe in the April-June period plummeted to $43bn, a 40% slide from the same quarter in 2011. Further, the number of transactions slid 9% year-over-year to 878 – the lowest quarterly total in a year and a half.

On a year-over-year basis, tech M&A spending declined in every month of Q2. Viewed more broadly, that means that buyers have spent less money on deals in five of the six months so far in 2012 compared with 2011. The waning activity has left the total value of acquisitions announced in the first half of 2012 at its lowest level in three years. Somewhat ominously, the spending rate so far in 2012 puts the full-year level at almost exactly the same level as the recession-wracked year of 2009.

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 282 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%

Source: The 451 M&A KnowledgeBase

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Shallow pool in mobile optimization becoming shallower

Ben Kolada

Contact: Ben Kolada

After Allot Communications dipped its toes into the pool of mobile optimization targets by acquiring small Ortiva Wireless, Citrix cannonballed with the acquisition of Bytemobile. These two deals significantly drained the already shallow pool of acquisition targets in this market. Interested buyers should dismiss the ‘don’t run when wet’ precaution, and jump in before there’s no water left.

Consumers are buying data-intensive devices in droves, and data consumption is exploding as a result. Because seamless data use is considered a right rather than a privilege these days, cell carriers unable to provide flawless transmission risk customer desertion. Tackling this concern, mobile operators are employing every option available to relieve their bandwidth bottlenecks, including relying on a new breed of mobile traffic optimization firms.

As these upstarts emerge as viable solutions, they’re becoming increasingly attractive acquisition targets both for the vendors that traditionally have served telcos, and for non-traditional vendors hoping to pull in cash-rich telco customers.

However, interested acquirers need to move fast. In a recent report, we identified 11 remaining vendors, ranging from pre-revenue firms to established midmarket players. But less than half of those vendors target mobile optimization as their core business. Click here to see who we think may be next in the buyout line.

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U-Blox acquires Cognovo in LTE chip push

Contact: Thejeswi Venkatesh

U-Blox has announced the acquisition of UK-based software-defined-modem designer Cognovo for $16.5m in cash. Switzerland-based U-Blox, best known for designing GPS receiver modules, will combine baseband chip technology from Cognovo with the 4G stack from 4M Wireless, a company it bought in April for $9m. The combined technology will further its push toward gaining market share in LTE chips. Growthpoint Technology Partners advised Cognovo.

Cognovo was founded in early 2009 and is based in Cambridge. Shortly after its founding, chip giant ARM Holdings handed over its Vector Signal Processor (VSP) technology to Cognovo in exchange for a 15% equity stake in the company. ARM also provided convertible debt financing to Cognovo and held a seat on the target’s board.

In recent months, the explosion in smartphones has set off a race for spectrum that has resulted in the fragmentation of frequency bands and wireless technologies. Each band requires specific chip and antenna support, making it difficult for phone manufacturers like Apple and Samsung to support all bands without compromising on cost and performance.

Cognovo helps overcome this problem by defining wireless modem functionality in the form of a software program that is independent of hardware design. To help meet mobile phone power-consumption requirements, Cognovo uses VSP, which provides an architecture and instruction set that is optimized for wireless algorithms.

Independent now, but will independenceIT someday be acquired?

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Application hoster and desktops-as-a-service provider independenceIT (iIT) announced on Wednesday the tech-and-talent acquisition of cloud management platform Veddio Cloud Solutions. The cloud aggregator’s dashboard platform will be used to control iIT’s cloud workspace products. According to The 451 M&A KnowledgeBase, this is iIT’s first acquisition on record, but it won’t be its last. As it continues to fill out its product platform, will the company someday turn from acquirer to acquired?

Veddio offers a dashboard application that integrates services from a variety of Internet infrastructure providers, such as telco competitive carriers and MSPs. Through its dashboard, Veddio offers white-label application and cloud hosting, hosted PBX, email hosting, managed firewall, domain name registration, software virtualization and data backup and recovery services. As of the acquisition announcement, the five-employee firm had approximately 150 channel partners.

Though this is iIT’s first acquisition, according to our records, the company is planning additional inorganic moves both in the short and long term. We’re told it is eyeing another tech-and-talent acquisition. Specific details weren’t provided, but the next play will likely focus on the delivery of cloud services.

We’d also note that, although currently becoming more of an acquirer, independenceIT could someday become acquired. The small firm (it has 31 employees) could already be considered a prized target. The pickup of Veddio should provide for triple-digit-percent growth and when we last covered iIT, in 2010, we noted that it had already been profitable for two years.

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salesforce.com ‘acq-hires’ Microsoft talent by acquiring Thinkfuse

Ben Kolada

Contact: Ben Kolada

Taking a page from the playbooks of Google and Facebook, salesforce.com is ‘acq-hiring’ Microsoft-nurtured talent. The CRM giant announced on Tuesday the tiny acquisition of team collaboration SaaS startup Thinkfuse. The target immediately ceased operations and terminated its service, suggesting this was more of an acq-hire than anything else. Through the deal, salesforce.com gets its hands on about five employees, three of whom have had software engineering experience at Microsoft, according to their LinkedIn profiles.

Although three of the four acquisitions salesforce.com has announced this year (including Thinkfuse) have been tiny transactions, this small trend likely doesn’t represent a shift in M&A strategy. The company has a history of buying young firms, primarily for technology tuck-ins. According to The 451 M&A KnowledgeBase, the average time from when a company was founded to when it sold to salesforce.com is just under four years. What’s also notable, though, is that salesforce.com’s last team collaboration acquisition – Stypi, announced in May – was also a small acq-hire. However, the Stypi service is being maintained, at least for now.

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The (bargain) quest for Quest

Brenon Daly

Contact: Brenon Daly

Nobody wants you, then everyone wants you. In the year leading up to the proposed management buyout of Quest Software in early March, shares of the management software vendor had shed one-quarter of their value. (At one point in its slide last August, the stock dipped to $15 – its lowest point in two years.)

The ongoing bidding war, of course, has changed all that. Since sinking to its low-water mark last summer, Quest’s valuation has risen a cool $1bn, with an unidentified suitor (widely assumed to be Dell) bidding about $2.4bn for the old-line software company on Monday. The latest offer is $27.50 per share, some 20% higher than the $23 per share offered by Insight Venture Partners back in early March. Just to put some context around the price, Quest stock hasn’t changed hands above $30 in 11 years.

And yet, even with the four rounds of bumped bids, Quest is still trading slightly below the median valuation of significant acquisitions so far this year. According to The 451 M&A KnowledgeBase, the 50 largest transactions in 2012 have gone off at 3 times trailing sales. The latest bid for Quest values the company at 2.7 time trailing sales.

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LANDesk lands the largest MDM deal so far

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Two months ago, LANDesk Software switched from being a company that got bought to a company that does some buying of its own with the pickup of Managed Planet. (The old-line systems management vendor has had five owners in recent years.) LANDesk followed up that acquisition with another one earlier this week, reaching for mobile device management (MDM) vendor Wavelink. What’s more, the transaction is likely the largest one in the MDM sector so far.

Although terms weren’t disclosed, the deal triggered a Hart-Scott-Rodino (HSR) review, which would indicate that it is valued at more than the threshold level of $68m. (A source confirmed the HSR review of the transaction.) We understand that the price was actually closer to $90m, or about 4.5 times our estimated revenue for Wavelink of $20m. That would move LANDesk’s acquisition of Wavelink ahead of the sector’s previous big print, Symantec’s purchase of Odyssey Software. (Terms weren’t disclosed, but we estimate that Big Yellow paid $60m for its MDM partner Odyssey.)

As its own market segment, MDM emerged three years ago as iPhone and Android devices started popping up in offices and IT needed management tools since Research In Motion’s highly popular BlackBerry Enterprise Server did not support these devices at the time. Over the past 18 months, more than 80 vendors of varying sizes and sustainability have appeared to offer software and services to manage the ever-increasing number of smartphones and tablets.

That has tipped MDM toward commoditization, which is reflected in recent deal flow in the sector. For instance, big-name buyers such as Motorola Mobility, RIM and Numara have all done MDM deals valued at less than $10m, according to our estimates. However, there are a couple of medium-sized private MDM providers that are nearing breakeven and driving the evolution of this market to include application and data management.

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The IPO machine is back in ServiceNow

Brenon Daly

Contact: Brenon Daly

The Wall Street machine is primed to churn out its next new technology public company, as ServiceNow gets set to debut next week. Sure, the gears of the machine got jammed up a bit in the last offering (Facebook shares are still under water), but it should be humming again with the IPO of the on-demand helpdesk vendor.

Eight-year-old ServiceNow will almost assuredly create more than $2bn in market value overnight and, we suspect, restore the way an IPO is ‘supposed’ to work. (Well, let us qualify that last point: Wall Street speculators – which is how we characterize people who play IPOs, rather than invest in a company for the long term – simply expect new offerings to be priced to pop. And when the shares don’t, well, they dump and run, as Zuckerberg & Co. learned firsthand.)

But we don’t expect any ‘Facebook hangover’ for the ServiceNow IPO. The reason? The company is not only growing solidly (nearly doubling revenue), but is also generating relatively predictable growth, with long-term annual contracts (averaging 2.5 years) and renewal rates that run at almost 100%.

Unlike Facebook, ServiceNow also has the advantage that it is selling into a well-established market, although it is approaching it in a disruptive way. (Meanwhile, the existing IT systems management giants are suffering through tough times: Mercury Interactive has all but disappeared inside a reeling Hewlett-Packard, while BMC has attracted the unwelcome attention of a hedge fund for the company’s ‘underperformance.’)

And finally, there’s the matter of who’s running the two companies and their respective relationship with the would-be buyers of their stock. At Facebook, CEO Mark Zuckerberg couldn’t be bothered to meet with Wall Street investors during much of the roadshow. On the other hand, ServiceNow CEO Frank Slootman made investors a boatload of money on the last company he took public. He steered Data Domain through its IPO in 2007 and then sold the data de-duplication vendor two years later for roughly three times the value it came public at.

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