The ball is rolling in semiconductor networking M&A

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.

A deflating bubble

Brenon Daly

Contact: Brenon Daly

If, as some observers suspect, the valuations for tech startups are overinflated, then at least a bit of air is expected to leak out of the bubble. According to our recent survey of corporate development executives, two-thirds of the respondents indicated that they expect valuations for private companies to decline through the rest of the year. The 65% who predicted a slide in the exit prices for startups is more than five times higher than the 12% who projected that valuations would tick higher. (The question about startup valuations was part of a larger survey about M&A expectations for the rest of 2011. See our full report on the survey.)

Interestingly, the mid-2011 outlook is almost exactly the inverse of what corporate development executives told us at the beginning of the year. In our previous survey, 71% forecasted higher M&A valuations for startups this year, compared to just 9% who saw a decline. In fact, the only time the sentiment from our mid-2011 survey even loosely lines up is back in the 2009 survey, which was conducted at the depth of the Great Recession. At that time, nearly nine out of 10 respondents projected that private company M&A valuations in that year would decline, compared to just 5% who predicted an uptick.

Projected change in private company valuations

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 12% 23% 65%
December 2010 for 2011 71% 20% 9%
December 2009 for 2010 58% 36% 6%
December 2008 for 2009 4% 9% 87%
December 2007 for 2008 39% 28% 33%

Source: The 451 Group Tech Corporate Development Outlook Survey

Forget the rebound, many companies see double dip

Brenon Daly

Contact: Brenon Daly

According to many big tech acquirers, the rest of 2011 is shaping up to look an awful lot like 2009. From forecasts for declining valuations to indications of a dramatically more conservative approach to M&A, there was a bearishness in the responses to our special midyear survey of corporate development executives that hasn’t been seen since we were mired in the Great Recession. (See the full report.)

And while the responses to our most recent survey may not have hit the same lows of two years ago, many views began to approach those gloomy levels. In any case, it was a dramatic reversal from the relatively robust forecast given at the beginning of 2011. Taken altogether, the responses to our most recent survey indicate that there’s a growing concern about a recessionary ‘double dip’ that threatens to stall dealmaking for the rest of the year.

Just one-third (32%) of the corporate development executives we surveyed last month indicated that they expected their company to pick up the pace of M&A in the second half of 2011, down half (52%) from those who predicted an acceleration for full-year 2011 in our survey back in December. Meanwhile, the number who projected a slowdown more than doubled to 18% from 7%. Another way to think about it is that nearly one out of five people told us that their company won’t be as busy in the remainder of the year as it was in the first half of 2011.

Projected change in M&A activity

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 32% 50% 18%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

The ever-rising costs of HP’s makeover

Brenon Daly

Contact: Brenon Daly

The bill for Hewlett-Packard’s makeover just keeps climbing. Even beyond the $10bn that has been erased from the market valuation of the company since announcing its unprecedented reorganization, the ailing giant is facing some real cost in the coming days.

For starters, it’s on the hook for $11.7bn to cover its pending purchase of information management vendor Autonomy Corp. That’s no small amount. In fact, it stands as the largest price paid for a software company in seven years. (And it’s one of the richest, valuing Autonomy at almost 12 times trailing sales, while HP itself currently trades at just 0.4x sales.) On top of that, there’s also the $1bn charge that’s looming for the shutdown and restructuring of the ill-fated webOS business.

But both of those costs are likely to be chump change compared to the losses that HP likely faces in getting rid of its Personal Systems Group (PSG) – assuming the company even finds a buyer for its desktop and laptop business. Recall that HP paid roughly $25bn in stock for Compaq, a consolidation move that made HP the largest single vendor of PCs. If it is able to sell that division now, we figure HP would be lucky to get about $5bn for it, or roughly one-fifth the amount it originally paid. (See our full report on HP and the rest of the PC industry.)

In calculating the potential purchase price for PSG – and this is strictly on a back-of-the-envelope basis – we looked back on what IBM got when it divested its PC business back in late 2004. Big Blue’s business was generating about $9bn in sales, and Lenovo paid just $1.75bn in cash and stock, plus the assumption of debt. HP’s PC business is slightly more than four times larger, so applying that loose multiple gets us into the neighborhood of $7bn.

However, a couple of factors will undoubtedly put some pressure on the multiple for HP. First, we would argue that IBM had a much more valuable brand with its ThinkPad line than the HP/Compaq brand. But far more important than those specific concerns around brands is the fact that the broader PC market has eroded significantly in the half-decade since Big Blue divested its business. To get a sense of just how far the PC market has fallen, consider the results from the most recent survey of consumers from our sister company, ChangeWave Research. Earlier this month, just 7% of respondents indicated that they expected to buy a laptop in the coming 90 days, with just 3.5% indicating that they planned to buy a desktop.

Buying and building at salesforce.com

Brenon Daly

Contact: Brenon Daly

At the rate Marc Benioff is going, we have to wonder how long it will be until he renames the company he founded. Or at the very least, shouldn’t Benioff, who founded salesforce.com in 1999 and continues to serve as the company’s CEO, be thinking about swapping the company’s current ticker (CRM) for something that captures the broad, all-encompassing vision for the ‘social enterprise’ that he laid out at last week’s Dreamforce?

After all, the company’s core sales force automation (SFA) product barely merited a mention at the conference. Instead, most of the attention was directed toward upgrades and expansions to the Chatter and Radian6 offerings, as well as moves to broaden its two main platform plays, Heroku and Force.com. As such, Dreamforce dramatically underscored just how much of salesforce.com’s future has been staked on its M&A program.

Of course, virtually all tech vendors use acquisitions to change the trajectory of their business, whether it’s a slight nudge in some new direction through a tactical purchase (Informatica comes to mind) or roll-the-dice-and-bet-the-company transformational transactions (Dell and, more painfully right now, Hewlett-Packard.) But hardly any other tech company (with the possible exception of VMware) has used M&A so consistently to expand beyond its original offering while still managing to preserve an acrophobia-inducing valuation.

Just consider the role that acquired companies played in announcements around salesforce.com’s conference:

  • Chatter has been bolstered by the purchase of two firms (GroupSwim and Dimdim), as has Service Cloud (InStranet and Activa Live). Service Cloud is salesforce.com’s largest non-SFA product.
  • The Data.com product, which was launched at the show, goes back to the purchase of Jigsaw Data in April 2010. It was further bolstered last week through a partnership with company records provided by Dun & Bradstreet.
  • Heroku was acquired last December, and salesforce.com noted at the conference that the platform currently has triple the number of customer applications built on it than it did a year ago.
  • The social media monitoring capabilities that salesforce.com obtained with its acquisition of Radian6, which was announced in late March, are only starting to make their way into the products but are a key part of the ‘social enterprise’ that the company has described.

Altogether, salesforce.com noted that non-SFA offerings – in other words, products and technology that got significant boosts through acquired IP or engineers – accounted for a full 20% of second-quarter revenue. (That was the first time the company has broken out revenue for its new products.) Given that salesforce.com booked nearly $550m in Q2 revenue, that would imply non-SFA sales of about $110m. To be clear, very little of that amount has come directly from the acquired companies, all of which were still in their early days. Instead, it’s the net result of the ‘buy and build’ approach at salesforce.com.

No bear market for M&A in August

Brenon Daly

Contact: Brenon Daly

Boosted by two blockbuster transactions, spending on tech deals announced in August surged to $40bn, the second-highest monthly total since the end of the Great Recession. In fact, the aggregate deal value for the just-completed month came in roughly 2-3 times higher than typical monthly spending over the past year. (The exception, of course, came in March, when AT&T announced its $39bn cash-and-stock acquisition of T-Mobile. However, that deal may not go through, as the US Department of Justice earlier this week moved to block the combination, which would create the largest US wireless carrier.)

More than half of the overall spending in August came from just two announced transactions: Google’s $12.5bn purchase of Motorola Mobility and Hewlett-Packard’s $11.7bn pickup of Autonomy Corp. (Incidentally, those deals spanned the range of valuations, with Google paying less than 1x sales for Motorola’s handset business while HP is paying more than 10x sales for the information management vendor.) In addition, there were other transactions of note in August, including the $3bn buyout of Emdeon, Datatel’s $1.8bn reach for SunGard’s education division and Windstream Communications’ $891m consolidation of PAETEC.

Overall, dealmakers remained surprisingly busy in August. For the fourth month in a row, we tallied more than 300 deals, a level that’s about one-third higher than it was a year ago. The activity is all the more unexpected when we think back to the whip-sawing markets we had in the first week or so of August, not to mention the fact that the Nasdaq shed 7% of its value in the month. At one point in August, the index sank to a level it hadn’t hit since early October 2010.

Ness gets a scant sendoff

Brenon Daly

Contact: Brenon Daly

Three-quarters of Ness Technologies shareholders have backed the planned $307m take-private of the IT services vendor, clearing the way for the sale to Citi Venture Capital International (CVCI) to close by the end of the month. CVCI acquired nearly 10% of Ness in early 2008 and first offered to pick up the whole company in July 2010, according to the proxy filed in connection with the proposed deal.

Last summer, CVCI indicated that it would be looking to pay $5.50-5.75 for each Ness share it didn’t already own. Three financial buyers who also got involved in the bidding last fall indicated that they would be prepared to top that by about a dollar a share. In the end, CVCI agreed to pay $7.75 for each share, roughly one-third more than the opening bid from the buyout shop .

And yet, despite the topping bid, Ness is exiting the public market at what would appear to be a rather paltry valuation. The company recently reported that it was tracking to about $600m in sales for 2011, and yet is selling for just $307m. (Including Ness’ small net debt position, the enterprise value of the deal is $342m.) That works out to a scant 0.6 times trailing sales – just one-third the median price-to-sales valuation for US publicly traded companies so far this year, according to our calculations.

Some of that can be attributed to the fact that IT services vendors typically trade at a substantial discount to other technology firms. And yet, even within recent IT services deals, 0.6x trailing sales is the low end of the range for most acquisitions. (For instance, EDS went for that multiple in its sale to Hewlett-Packard in mid-2008, while Perot Systems got more than twice that (1.4x) in its purchase by Dell in September 2009.) In fact, Ness is selling to CVCI for a lower price than it fetched on the open market more than three years ago when the buyout shop first took its stake.

Limelight lightens its load

Ben Kolada

Contact: Ben Kolada

In a move to streamline its operations, Limelight Networks is divesting its EyeWonder assets to DG FastChannel. Although the deal comes at a considerable discount – DG’s $66m all-cash offer is only slightly more than half the amount that Limelight paid in cash and stock for EyeWonder less than two years ago – it should help the ailing CDN vendor focus on its core business. It could even pave the way for a sale of Limelight.

As my colleague Jim Davis notes, Limelight’s original decision to buy EyeWonder appeared strategically sound. The idea was that EyeWonder would funnel new customers to the Limelight CDN. That could have worked, but a missed development target meant that ad agencies were taking business elsewhere this year. As a result, revenue for the acquired company essentially flatlined. When Limelight picked up EyeWonder in December 2009, the target generated some $35m in trailing sales. The outlook two years later isn’t much better. New owner DG FastChannel indicated that it expects revenue from the acquired property to max out at $37m this year.

Wall Street appears to back the asset sale. Following the announcement, shares of Limelight closed the day up nearly 6% on volume that was almost triple the monthly average. Although the company has lost half its market value this year, due in large part to flat revenue growth and third-quarter revenue guidance that came in below analysts’ expectations, an opportunistic acquirer could swoop in to scoop up the company. Following the slide in share price, Limelight is sporting a market cap of just $300m. Add in the more than $100m of cash in its coffers and little debt, and the company could be had for relatively cheap for an opportunistic buyer.

Confab-ulous M&A at two cloud companies

Brenon Daly

Contact: Brenon Daly

Two of the most richly valued tech companies are each hosting annual get-togethers this week, and M&A is figuring into both of the confabs. VMware opened VMworld in Las Vegas on Monday, while saleforce.com followed a day later with Dreamforce in San Francisco. As these companies were getting ready to open the doors for the event, both announced that they had done acquisitions – with both deals coming in the security market.

VMware reached for PacketMotion, a startup that was able to capture who’s doing what on a network and whether they should be doing that at all. VMware indicated that the acquisition should allow its customers to automate security and compliance policies. For its part, salesforce.com added encryption vendor Navajo Systems. While terms weren’t announced on either transaction, we suspect that the price tags for both startups were in the low tens of millions of dollars. On the other side, we’d note that, collectively, VMware and saleforce.com are valued at north of $50bn.

Part of the tremendously rich valuation that both VMware and salesforce.com enjoy can be chalked up to the fact that each company is the sort of corporate representation for two key components of the whole cloud computing model: VMware for virtualization and salesforce.com for on-demand delivery of software and, more recently, infrastructure.

So it’s no surprise that these cloud stalwarts both recognized the need to shore up their cloud offerings by going out and buying security startups. After all, security remains probably the most important concern for broader adoption of cloud computing. In a recent survey, our sister organization ChangeWave Research asked both IT purchasers and users at companies to rate the security of current cloud offerings on a scale of 1 (very unsecure) to 10 (very secure). The median response was a distinctly middling 5.6. As a point of reference, the rating for cloud security was actually lower than the median rating for the reliability of cloud offerings, even after several high-profile outages at Amazon Web Services so far this year.

Corel erases iGrafx from its portfolio

Brenon Daly

Contact: Brenon Daly

A decade after picking up iGrafx, the private equity-backed Corel firm has divested the business process management (BPM) software company to newly formed buyout shop The Limerock Group. The move should allow new focus and resources for iGrafx, which was always an odd fit inside Corel. For its part, iGrafx sold almost entirely to enterprises, while Corel is known as a home for many faded, second-rate consumer brands, such as WordPerfect and PaintShop.

Perhaps not surprisingly, the iGrafx business suffered from a bit of neglect inside Corel. At one point, we understand the business was generating about $20m in sales, although it is probably only running at about half that level now. One area that iGrafx will undoubtedly look to expand is around consulting and other services that tend to play a not-insignificant part of BPM deployments. IGrafx may look to build that up through internal development, or the newly capitalized company could tuck-in a small consulting shop.

The move by Limerock, a firm founded by the team that built and eventually sold NetQoS for $200m, comes after a number of big-name buyers have inked BPM deals of their own over the past two years. (Limerock was advised by Northside Advisors, while Pagemill Partners worked the other side.) Significant acquirers that have bought their way into the market since mid-2009 include IBM, Software AG, Progress Software and Open Text. Valuations for these BPM deals has ranged from roughly 1x sales to almost 6x sales. Given iGrafx’s slumping sales and its awkward fit inside Corel, we suspect the business would have likely traded at the low end of that range.