Where to go after the sale?

Brenon Daly

Contact: Brenon Daly, Thejeswi Venkatesh

In an effort to bolster its Smart Grid offering, Siemens AG reached earlier this week for eMeter, a company that the German giant had invested in three years ago. The sale comes after San Mateo, California-based eMeter had looked to raise a round of funding last summer, on top of the roughly $70m it had already raised.

Along with Siemens, other investors in eMeter included Foundation Capital, Sequoia Capital and Northgate Capital. And while the returns may not have been electrifying (if you’ll pardon the pun), we understand that the investors will actually book a decent gain. (Subscribers to The 451 M&A KnowledgeBase can click here to see our record of the transaction, which includes our estimates for both the revenue and sale price of eMeter.)

The ink was barely dry on the agreement when rumors started flying about what eMeter CEO Gary Bloom would be doing now that he has free time on his hands. (Understandably, he won’t be joining Siemens when the deal closes this month.) A longtime former Oracle executive, Bloom is perhaps best known for heading up Veritas at the time of its sale to Symantec, the largest-ever software transaction.

The most intriguing bit of gossip around a possible job for Bloom is that he may step into a senior sales role at BMC, a company where he also serves on the board. Candidly, the Houston-based company could use some additions in that area, as it has seen a number of key departures of sales executives (Luca Lazzaron, Jim Drill) in the past few months. Once a steady performer, BMC has come up short of Wall Street estimates recently. The sluggish growth has clipped one-third of the value of BMC shares since last summer, sending them to their lowest level in more than a year.

SuccessFactors works the other side of the deal

Brenon Daly

Contact: Brenon Daly

In one of the quickest M&A turnarounds, SuccessFactors has gone from a seller to a buyer in just a matter of days. The human capital management (HCM) vendor announced over the weekend that it would be selling itself to SAP for $3.4bn in cash, the largest-ever SaaS deal. The ink was hardly dry on that transaction when SuccessFactors said on Tuesday that it will hand over $110m for Jobs2Web, a recruiting marketing platform with about 150 customers. (For the record, the mammoth SAP-SuccessFactors pairing is expected to close in the first quarter of 2012, while SuccessFactors’ purchase of the Minnesota-based startup should be done by the end of the year.)

The addition of Jobs2Web makes a great deal of sense for SuccessFactors, and in some ways, it shares some similarities to another deal earlier this year – salesforce.com’s $326m pickup of Radian6. In both cases, the startups added technology around mining social media sources and powerful analytics to expand the acquirer’s existing product portfolio.

There are even more similarities between Jobs2Web and Radian6, besides simply having numerals in their names. Both startups were founded far from any of the typical launch pads for tech companies. Jobs2Web has its headquarters in Minnetonka, Minnesota, while Radian6 was in the even more remote location of Fredericton, Canada.

But more importantly, both targets were incredibly capital efficient, each raising about $5m in VC on their way to a solidly valued exit. (Updata Partners was the sole institutional backer for Jobs2Web, which was advised in its sale by Raymond James & Associates.) According to our understanding, Jobs2Web garnered a valuation of roughly 6 times sales in its sale, while Radian6 was valued north of that.

SAP looks to SuccessFactors for success in the cloud

Brenon Daly

Contact: Brenon Daly

After struggling for years to build its own on-demand offering, SAP plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.

SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.

However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey. We’ll have a full report on the transaction in tonight’s Daily 451.

BMC rumored to be going mobile

Brenon Daly

Contact: Brenon Daly

Rumors are swirling that BMC will announce the acquisition of AirWatch, a purchase that would extend the systems management provider’s reach into the fast-growing mobile device market. The deal, which may print next week, would mark the first major move to consolidate the highly fragmented mobile device management (MDM) space, a market where we count more than 50 vendors of all sizes. AirWatch is one of the largest MDM players, and will get valued that way, according to sources. The rumored price tag is about $250m, or roughly 10 times revenue.

If the deal comes together, it would represent BMC’s only significant acquisition in mobility. The company nibbled in the market last summer, reaching for startup Aeroprise in July. (That was primarily a technology transaction, basically adding mobile capabilities to BMC’s flagship Remedy IT Service Management Suite.) Assuming this deal closes, we would expect other tech giants – both IT management companies as well as security vendors – to look at acquiring MDM capabilities as well.

Synopsys heats up EDA M&A with Magma buy

Contact: Thejeswi Venkatesh

After sitting out of the market for the first eight months of the year, Synopsys is suddenly on a buying spree. Having snapped up two smaller players in as many months, the largest electronic design automation (EDA) player has announced a definitive agreement to buy Magma Design Automation for $7.35 per share in cash, representing an enterprise value of $507m.

Size matters in the mature EDA market, and Synopsys claims that the combined company will be better able to invest more in R&D and further ‘technology acceleration’ in areas such as mobile chips. However, there are concerns about whether the deal will pass regulatory muster, given substantial overlap in product offerings. That explains the asymmetry in breakup fees – Synopsys will pay $13m more if it fails to close the acquisition than what Magma would pay if it backs out ($30m vs. $17m).

The deal values Magma at a trailing sales multiple of 3.6, based on reported revenue of $142m. That’s a handsome valuation compared to the 2.2x multiple that Mentor Graphics, the next-largest player after Magma, was offered by Carl Icahn in his unsolicited bid earlier this year. Synopsys will use existing cash ($230m of which is onshore) and debt to finance the deal. Qatalyst Partners banked Magma. We’ll have a full report on this deal in tonight’s Daily 451.

The new (unexpected) IPO hotspot

Brenon Daly

Contact: Brenon Daly

Forget Silicon Valley or New York or even Boston. The new tech IPO hotspot is a place that typically only gets flown over by investment bankers looking in the more traditional locations for the next companies trying to make it public. What’s the exotic and (potentially) lucrative new launch pad? Indianapolis. That’s right, the same city that has seen its football team go winless so far this season is putting up big points on the board for IPOs.

One company based in Indiana’s capital has already gone public this month, and another one has just followed up with a prospectus of its own. Angie’s List raised more than $100m in its mid-November offering. (The subscription-based service review site priced its shares at the high end of their expected range, and has seen them trade back down to around the offer price.) And just before Thanksgiving, ExactTarget filed its paperwork for a $100m IPO of its own.

Or, more accurately in the case of ExactTarget, the online marketer has re-filed for an IPO. It originally filed its S-1 almost exactly four years ago, but pulled that in mid-2009 as the equity market melted down. In the intervening years, ExactTarget has gotten substantially bigger. In fact, the company’s revenue in its most recent quarter ($55m in Q3) is higher than its total for the last year it was on file (full-year 2007 sales of $48m).

Another area it has bulked up: its underwriting team. Although ExactTarget originally went with a full slate of midmarket banks to bring it public, it now has bulge-bracket firms J.P. Morgan Securities and Deutsche Bank Securities leading the deal, along with original sole lead Stifel Nicolaus Weisel (or Thomas Weisel Partners, as it was known back then).

Securing a tweet

Brenon Daly

Contact: Wendy Nather

Whisper Systems has announced that it has been acquired by Twitter (appropriately enough, the news was tweeted). Terms of the acquisition were not disclosed, but given Whisper’s emphasis on Google Android security, we expect that the deal was as much about the brains behind the technology as it was about the tools themselves. Whisper’s products include WhisperCore, a set of functions for data and network encryption as well as permissions management; WhisperMonitor, an Android-based firewall for mobile devices; Flashback, a cloud-based secure backup service for Android data; TextSecure, a facility for encrypting SMS messages on the fly; and RedPhone, an encryption function for voice that saw heavy use by activists during Egypt’s political uprising.

Twitter has inked 15 transactions, but this is the first one that focuses on security, and it’s in an area that appears to add real gravitas to the communications technology: it’s not just for ensuring that your Uncle Fred can’t accidentally get to your status updates. Mobile devices and protection against regimes make a solid combo, and they bolster Twitter’s use as a real-time reporting system. It’s not clear how many of the current products will remain viable under Twitter’s control, but the reasoning behind the choice of Whisper, as opposed to any number of other mobile device security startups, seems pretty clear.

But we find this deal even more interesting due to the fact that one of Whisper’s founders, security researcher Moxie Marlinspike, has also been making the conference rounds discussing a well-known problem: that of Internet-wide trust in domain name system (DNS) and SSL infrastructure. Certificate authorities that underpin transactions over the Internet have been increasingly attacked directly (with COMODO and DigiNotar being prime examples; the latter went bankrupt as a result of its breach), and DNS-based attacks are on the rise. Marlinspike not only points out the inherent design problems in the trust-based system, but also has proposed the most plausible solution: overhauling the structure into a new system he has dubbed Convergence. When you have access to an Internet security architect of Marlinspike’s caliber, you don’t let it go to waste. We’ll be watching for new developments on a possibly more fundamental level than just secure text messaging for Tweets.

A potentially expensive missed call

Brenon Daly

Contact: Brenon Daly

With AT&T’s planned purchase of T-Mobile USA now looking increasingly unlikely to close, we may have to take an eraser to our deal totals for 2011 – a very big eraser. Like most other M&A databases, The 451 M&A KnowledgeBase tallies transactions by their date of announcement rather than close. (However, we do note when the transaction is officially complete in our deal records, where relevant.) And recent regulatory developments in AT&T’s proposed consolidation of T-Mobile, which was announced eight months ago, appear to indicate the $39bn pairing may not get consummated.

If that happens, the total M&A spending for 2011 will decline by a full 17%. The planned purchase, which is the largest telco transaction in a half-decade, is three times the size of the next-largest deal announced so far this year, Google’s $12.5bn proposed purchase of Motorola Mobility.

Another way to look at it: AT&T’s $39bn cash-and-stock purchase of T-Mobile roughly equals the average monthly M&A spending around the globe for two full months so far this year. Without the big telco deal, the total value of all 2011 transactions is likely to come in just slightly below the $226bn we recorded in 2004. If that’s where spending does indeed land this year, it would represent an uptick of about 28% compared to 2010 full-year total of $172bn.

Numara keeps flowing along

Brenon Daly

Contact: Brenon Daly

Throughout its long and winding 20-year history, the name may have changed for Numara Software, but the business is still the same. The IT service desk management vendor was originally known as Blue Ocean Software, a name that got erased during the three years the company was owned by Intuit. After TA Associates sponsored a carve-out of the business in October 2005, the newly independent company came up with the name of Numara, a play on its former moniker that means ‘new ocean’ in Latin.

Regardless of what the Tampa, Florida-based company has been called, it has consistently thrown off a ton of cash. According to our understanding, privately held Numara runs north of $100m in sales and north of 35% EBITDA margins. Just recently, the company began to put some of that cash to work in M&A.

After two years out of the market, Numara recently reached across the Atlantic to pick up an Estonian mobile device management (MDM) startup called Fromdistance. (The deal was a tiny one, lining up very closely with the terms for a similar purchase by Research in Motion earlier this year. We estimate that RIM paid about $6m for German MDM startup ubitexx, which was generating less than $1m in sales.) And Numara may not be done shopping. We understand that the company is currently looking at a handful of other possible acquisitions and could well shore up a deal in the next few months.

HP takes itself out of the market

Brenon Daly1 Comment

Contact: Brenon Daly

Over its two previous fiscal years, Hewlett-Packard has spent more than $20bn on a dozen acquisitions, with five of them costing the tech giant more than $1bn each. Those days are over, according to recently named CEO Meg Whitman. In her first conference call discussing quarterly financial results on Monday, Whitman told investors not to expect any ‘major M&A’ in the current fiscal year, which runs through the end of next October. That means HP will look to ink deals valued mostly at less than $500m, she added later in the call.

That conservative M&A plan comes as HP enters what Whitman described as a ‘reset and rebuilding year.’ Both revenue and earnings are projected to slide in the current fiscal year, but HP didn’t offer specifics on the decline. The company scrapped its revenue forecast altogether, while saying only that it expected to earn ‘at least’ $4 in non-GAAP earnings per share (EPS), compared to $4.88 in non-GAAP EPS in the just-completed fiscal year. With roughly two billion shares outstanding, that indicates HP will likely net at least $1bn less this year than last year. No wonder HP isn’t in the mood to go shopping these days.