Looking up at the data warehousing incumbents

Brenon Daly

Contact: Matt Aslett

The face of the data-warehousing sector has changed considerably in the past 18 months. A series of acquisitions has seen Vertica Systems, Greenplum and Sybase snapped up by Hewlett-Packard, EMC and SAP, respectively. Further, Teradata and IBM have strengthened their hands to compete with Oracle and Microsoft with their respective purchases of Aster Data Systems and Netezza.

According to our 451 Information Management report, Data Warehousing: 2009-2013, Oracle, IBM, Teradata and Microsoft accounted for 93.6% of the total revenue in 2010, a level that will only drop slightly to 92.2% by 2013. Those figures were calculated prior to the recent M&A activity, but in order to make a considerable dent in the dominance of the big four, any acquiring company will not only have to buy a data-warehousing player but also invest in its growth.

EMC has the right idea: Greenplum had 140 employees when it was acquired in July 2010. EMC’s Data Computing Products Division now has more than 350 employees, and is set to reach 650 by the end of the year. Netezza can benefit by being part of the much larger IBM, but Big Blue is also investing in growing the business. IBM is expected to increase headcount there from 500 in September 2010 to 600 now, and a target of 800 by year-end. We believe that HP will have to make a similar investment in Vertica, which had just 100 employees at the time of its acquisition, just as Teradata is likely to boost the headcount at its new Aster Data ‘center of excellence’ beyond the estimated 100 employees Aster Data has today.

As for the remaining data-warehousing specialists, while they can all boast differentiating features and strategies, they must also be looking for acquisitions of their own. On their own, they can’t hope to compete with the investments available at their deep-pocketed rivals.

A new era at Google?

Brenon Daly

Contact: Brenon Daly

It’s a new era at Google. After the market closes, Google’s once-and-future king Larry Page will give his first report to Wall Street since returning to the throne at the search company he helped found. Page took over at the beginning of the month, with Google shares trading essentially where they were a year ago.

Page, of course, is replacing Eric Schmidt, the ‘grownup’ who was brought in a decade ago to run Google, who now serves as executive chairman at the company. It’s interesting to note from our view that Schmidt steps from Google’s corner office back into a tech industry that looks very different from when the avowed technologist joined the company in 2001. Consider this: both companies where Schmidt basically spent his entire career – most notably Sun Microsystems, but also a relatively brief stint in charge of Novell – have been sold while he was at Google.

Further, both of the sales of Schmidt’s previous companies were pretty much scrap sales, valuing the once-formidable companies at less than one times their revenue. (Collectively, the equity value for both Sun and Novell at the time of their sales is just one-twentieth Google’s current valuation.) Of course, there are some observers who say it’s only a matter of time before Google – having largely missed the shift to social networking – may be headed for a long, slow decline of its own. Just like Sun and Novell.

Cisco shares are a flop for Flip’s owners

Brenon Daly

Contact: Brenon Daly

Since the purchase of Flip, Cisco Systems shares have been a flop. That’s actually an important consideration for the former owners of digital camera maker Pure Digital Technologies, which Cisco shuttered on Tuesday. Recall that when the networking giant (somewhat inexplicably) reached for Pure Digital two years ago, it covered the $590m purchase with its own equity. It was the first time Cisco had used its own equity as currency in four years, according to our records.

For the first year or so after the deal closed on May 21, 2009, Cisco basically tracked the S&P 500 Index. However, over the past half-year, Cisco stock has slumped as it has failed to execute, as the company indicated in a recently leaked memo from CEO John Chambers. Those acknowledged missteps have left Flip’s backers (at least the ones who haven’t sold) underwater on their holdings. Since the deal closed, Cisco stock has dropped 10% while the S&P 500 has tacked on 50%.

Hosters lose another telco acquirer

Ben Kolada

Contact: Ben Kolada

In the latest billion-dollar-plus telco transaction, Level 3 Communications has announced that it is acquiring Global Crossing in an all-stock deal worth $1.9bn. (The actual price of the acquisition – the largest we’ve recorded for Level 3 – is closer to $3bn when Global Crossing’s debt is included.) And while the deal impacts the telecom industry by bringing together two well-known fiber operators, in a way it more significantly impacts the hosting and colocation markets by removing yet another potential telco buyer. (We’ll have a full report on Level 3 buying Global Crossing in tonight’s Daily 451.)

Earlier rumors in the hosting and colocation industries had Level 3 as a potential acquirer, perhaps picking up CDN vendor Limelight Networks or hosting company Internap Network Services. These rumors were made more convincing by the growing trend of telcos buying into hosting and colocation. But in their conference call discussing the transaction, executives at Level 3 and Global Crossing put those rumors to rest, saying they don’t expect to announce another acquisition anytime soon. Further distancing Level 3 from the hosting M&A game is the fact that the company doesn’t appear to be too interested in hosting or datacenter services at all, since it chose a target that generates only 5% of its total revenue from these segments.

We previously noted that CenturyLink is likely out of the market as well, following its purchase of Qwest Communications for an enterprise value of $22.4bn, which saddled the company with a mountain of debt (the deal closed April 1). Last year, CenturyLink and Qwest held an aggregate $19bn in debt; that’s nearly equal to the revenue the two companies generated over the same period. Further, that debt load is more than five times the combined company’s free cash flow. Debt repayment obligations will likely put a halt to CenturyLink’s steady M&A activity, thereby forcing the company to focus on organic growth. With CenturyLink/Qwest and now Level 3 focused on integration, we expect that acquisition speculation following the next telco-hosting deal will be somewhat tempered.

Oracle: The giant moves quietly in M&A

Brenon Daly

Contact: Brenon Daly

For a giant of a company, Oracle certainly strikes quietly when it moves to pick up some companies. Consider its latest purchase, the as-yet-unannounced acquisition of data-quality vendor Datanomic. Although Oracle hasn’t formally announced the purchase, the company does have it listed on its Web page for acquisitions. (That listing followed speculation by several market sources last week that Oracle had indeed sealed the deal.)

Oracle has already shown that it is ready to spend to buy in the data-quality market. A little more than a year ago, Oracle reached for Silver Creek Systems, an OEM partner that provided product-oriented data quality. Shortly after that transaction was announced, my colleague Krishna Roy speculated that Datanomic might be the next data-quality-related vendor to get snapped up, highlighting both Oracle and IBM as possible buyers for the UK-based company. We believe that Big Blue did look at Datanomic, which it considered a nice complement to the business it got when it bought Initiate Systems in early 2010. (Initiate had an OEM arrangement with Datanomic.)

Fittingly for a deal that wasn’t really announced, financials also weren’t revealed. Our understanding is that Datanomic had been posting strong growth recently, increasing revenue some 60% last year to about $15m. That rate, combined with the fact that there were undoubtedly other large bidders for Datanomic, make us absolutely confident that this transaction is significantly larger than Oracle’s related purchase of Silver Creek, which we estimate went off at $40m or so. In fact, we wouldn’t be surprised to hear that it was in the neighborhood of twice that amount.

TI-NatSemi: Large and analog

Brenon Daly

Contact: Brenon Daly

The fragmented market for makers of analog integrated circuits looks a whole less scattered now that Texas Instruments has reached for National Semiconductor. Already the largest analog vendor, TI will have some 17% of the market provided its $6.5bn all-cash offer for NatSemi closes later this year. (If it can’t close the deal, for whatever reason, TI faces a $350m reverse breakup fee, while NatSemi would have to pay a $200m termination fee.)

As it stands, the pending purchase of NatSemi would be the third-largest semiconductor deal, but the single largest by a non-financial buyer. Recall that in the pre-Credit Crisis days of 2006, buyout consortiums took Freescale Semiconductor private in a $17.6bn buyout while another private equity (PE) club carved the semiconductor business out of Royal Philips Electronics. Given the travails that the Freescale LBO has faced over the past half-decade, we suspect that PE shops won’t be looking to do any buyouts that big anytime soon.

Epiq’s expensive e-discovery deal

Brenon Daly

Contact: Brenon Daly

Announcing the largest e-discovery deal in some three-and-a-half years, Epiq Systems said earlier this week that it will borrow $100m to acquire Encore Discovery Solutions, a service provider for law firms. (My colleague Nick Patience has the full details on the acquisition.) The rationale is fairly straightforward: Epiq wanted to shore up its presence in the western US, so it reached for Phoenix-based Encore. That sort of geographic consolidation happens all the time – but it rarely happens at the kind of valuation that Epiq is paying in its services play.

Encore had generated some $40m in revenue, according to Epiq, meaning it’s trading at 2.5 times sales. That’s a fairly high multiple for a services shop, which typically have lumpy – and concentrated – revenue. (That goes double for a market like e-discovery that is largely driven by unpredictable events like lawsuits.) Unlike Epiq, Encore didn’t have its own e-discovery software, instead licensing it from other vendors. Clearly, however, the lack of IP didn’t hurt Encore’s price.

More representative of the e-discovery market is probably Unify Corp’s purchase last summer of Daegis. Unify paid $37.5m, or 1.6x sales, for Daegis, which generates about half of its sales from tools and the other half from associated services. But from Epiq’s view, the purchase of Encore sets up a relatively low threshold for a return (it is borrowing at around 3.5%) and adds bulk to a business that has a fair amount of momentum. Epiq said recently that its e-discovery business has posted five straight quarters of growth, finishing 2010 with sales at the unit up 45% to a record $81m.

Multiples match on Lawson and Epicor

Brenon Daly

Contact: Brenon Daly

If nothing else, we now know the clearing price for ‘vintage’ ERP companies. (Or more accurately said, we know the proposed clearing price.) That’s at least one conclusion we can draw from the highly unusual situation where there are two deals going on simultaneously for two of the industry’s larger players, Epicor Software and Lawson Software. The two planned acquisitions – representing, collectively, $2.8bn of spending – line up almost exactly in several key metrics.

The numbers: the equity value of Apax’s offer for Epicor is $976m, with an enterprise value (EV) of $1.1bn. On an EV basis, that works out to about 2.5 times trailing sales and roughly 5x maintenance revenue. That mirrors very closely the takeout valuation that Lawson received in an unsolicited bid last month from PE-backed Infor Global Solutions, which it is currently reviewing. Lawson is being valued at 2.4x trailing sales and about 4.5x maintenance revenue. Even on an EV/EBITDA basis, the valuations are not all that dissimilar: Epicor garnering a 20.5x valuation, compared to Lawson’s 15.4x.

Apax goes double or nothing in big software bet

Brenon Daly

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

EMC bolsters security portfolio with NetWitness

Brenon Daly1 Comment

Contact: Brenon Daly, Josh Corman

Announcing its first deal in almost five months, EMC moved to bolster its security management portfolio by picking up fast-growing NetWitness. The purchase adds the rich network data and powerful analysis capabilities of the NetWitness NextGen platform, which is a bit like a TiVo for network traffic – capturing, indexing and storing massive amounts of network traffic. From a financial point of view, it is EMC’s first significant security acquisition since buying RSA Security in mid-2006.

In fact, we would estimate that the price of NetWitness tops EMC’s spending, collectively, on the four bolt-on acquisitions it has made to RSA since the $2.1bn deal. According to our understanding, NetWitness more than doubled revenue to about $45m in 2010. Given the growth rate and premium customer list NetWitness had assembled, we have no trouble believing market speculation that EMC paid $450-500m for NetWitness. A double-digit multiple isn’t out of whack for a fast-growing startup that has strategic value to EMC. We understand, for instance, that last summer EMC paid just shy of $400m for Greenplum, a data-warehousing startup that was clipping along at just under $30m in sales.