Searching for identity, Quest picks up e-DMZ

Contact: Steve Coplan

Quest Software has announced the acquisition of e-DMZ Security, an independent and self-funded player in the growing privileged identity management (PIM) market, for an undisclosed sum. The PIM market originally coalesced around compliance requirements for enforcing the separation of duties for administrators and logging their access to sensitive systems, but security and governance concerns have added further impetus. While certainly attractive given its discrete focus and capital structure, e-DMZ also appealed to Quest on the basis of its proxy-based architecture (and a new set of capabilities to constrain the sudo command environment). (Click here for our full report on the transaction.)

This is Quest’s second acquisition in the identity management market (broadly defined), following the purchase of Völcker Informatik last July. That deal marked a sea change in Quest’s identity management strategy – and signaled that M&A would play a key role in that strategy. Quest’s identity management portfolio has held the most appeal for IT administrators relying on Microsoft Active Directory (AD) to manage users, a constituency that Quest describes as ‘AD-centric.’ The Völcker buy showed that Quest is looking to migrate from serving this well-defined customer set with an array of operational tools to addressing more fundamental enterprise-level requirements for provisioning, entitlement management, auditing and compliance based on a service-oriented architecture.

PIM was already a category on the M&A radar before Quest’s purchase of e-DMZ. However, the deal does remove one potential acquirer from the list for the remaining vendors in the market, including Cyber-Ark Software, Lieberman Software, Cloakware (a division of Irdeto, which itself is a subsidiary of media conglomerate Naspers), BeyondTrust and potentially Xceedium and FoxT technologies. On the other hand, the transaction will likely reinforce the rationale for an acquisition that is already in motion.

Nokia + Microsoft = Love?

Brenon Daly

Contact: Brenon Daly

Maybe it’s the fact that today is Valentine’s Day and love is in the air, but we’ve been thinking about the recent closeness of Nokia and Microsoft in a whole new way. Recall that the Finnish handset maker said on Friday that it’ll be basically breaking up with its own OS to start dating Windows Phone. ‘You’re just not doing it for me anymore,’ the hardware told the software before also asking Symbian to clean its stuff out of their previously shared house. ‘Don’t forget your toothbrush.’

By dumping its longtime partner, Nokia has cleared the way for a new relationship with Microsoft, which looks like a compatible union to our eyes. After all, both giants are on a slow fade right now, largely watching while the rest of the mobile industry passes them by. (To put that into human terms, we can’t help but envision Nokia and Microsoft as a somewhat elderly couple, more likely to watch On Golden Pond (on VHS, no less) than to head out to the theater and catch The Social Network, for instance.)

Have these companies truly been struck by Cupid’s arrow? Is the ‘strategic alliance’ just a bit of handholding before a proper marriage? Well, from our view, an acquisition – although still unlikely – is less unlikely than before. Why? For one thing, the block to this long-rumored pairing has always been that Microsoft wouldn’t want to jeopardize its relationships with other device makers by settling fully on Nokia.

But frankly, that’s less of a concern now if only because Windows Phone has been left behind, even by hardware makers that have long relied on Microsoft for software to power their computers. For instance, Dell has largely embraced Google’s rival OS, Android, for its tablets. And Hewlett-Packard went out and dropped $1bn on Palm Inc to have its own OS for devices rather than continue to run Microsoft’s mobile OS. Given that many of its former partners have already paired off, maybe Microsoft believes the time is now to tie up with Nokia, for better and for worse.

Visa plays with virtual goods

Contact: Jarrett Streebin

This week marked another major entrance into the virtual goods market with Visa snapping up PlaySpan for $190m in cash. The deal comes a half-year after Google struck the first significant transaction in the market, paying a reported $55m for Jambool. With the market for social games and virtual goods amounting to real money, it’s likely that these giants won’t be the last buyers here.

We predicted these sorts of deals in our recent virtual goods Sector IQ. In fact, we named PlaySpan as one of the startups likely to get taken off the market. However, we matched it up with eBay’s PayPal. Our reasoning: PlaySpan would have provided an avenue to improved developer relations for PayPal, where it has struggled, as well as massively boosted its market share. Instead, credit card behemoth Visa took out the Santa Clara, California-based startup and it’s likely that PayPal will suffer as a result, particularly in its all-important relations with developers.

Consumers are becoming more and more comfortable not only buying virtual goods, but also buying real goods in games. This should continue to fuel the amazing growth in this emerging market. Both PlaySpan and Jambool are particularly well-positioned to capture this business because the back-end technology and security required for purchasing goods – even if they are make-believe goods – is incredibly complex. Most developers prefer to leave that to outside providers like Jambool and PlaySpan, just like online retailers left the transaction part of their business to PayPal for years. Given that Google and Visa have bought into this market in the past few months, it’s clear that virtual goods are here to stay.

Cisco adds Inlet to its video puzzle

Ben Kolada

Contact: Ben Kolada, Jim Davis

Cisco recently announced that it is acquiring video encoding provider Inlet Technologies for $95m in cash. The deal is the latest addition to Cisco’s ongoing strategy of helping service providers such as Telstra build content delivery networks that can serve video to TVs, PCs and mobile devices for pay TV services.

Cisco has picked up a lot of video-related technology over the years. Despite its networking expertise, video is a notoriously difficult beast to tame, and even more so when dealing with video over less-predictable public IP networks. Cisco bought V-Bits in 1999 for $129m to add video-processing gear to its repertoire, but stopped production in 2002. In 2000, Cisco spent $369m to acquire PixStream for its video headend gear for IPTV systems, but then closed the operation four months later when the stock market bubble burst.

When it got serious about gaining expertise in video, Cisco spent $6.9bn in 2005 on Scientific-Atlanta, a major equipment supplier to the cable industry. In 2006 Cisco acquired UB Video, a Canadian firm focused on developing MPEG-4 AVC software for use in encoding and decoding equipment. Later that year it also bought video-on-demand (VOD) software specialist Arroyo Video, whose products formed the basis of VOD servers sold to cable and IPTV providers. In acquiring Inlet, Cisco picks up an established player in the market for video encoding equipment used to ready video for delivery over multiple delivery mechanisms. Inlet’s encoding systems have two strengths: one is that they are powerful enough to do high-quality live streaming over IP networks, the other is that the gear is built for adaptive bit-rate streaming, which is becoming a favored method for delivering video to mobile devices.

Inlet reportedly recorded $7.6m in revenue in 2009 and claims to have doubled sales last year. Assuming that the company closed 2010 with $15m in revenue, Cisco’s $95m offer would value Inlet at 6.3 times trailing sales. While that multiple is more than twice as high as the average for all tech transactions, it’s actually slightly less than similarly sized video encoding competitor On2 Technologies received from Google last year. On2’s investors balked at Google’s original $106m offer, which valued the target at 6.1x sales, but later settled for a revised bid of $132m, or 7.5 times sales. (Click here for my colleague Jim Davis’ full report on the Inlet transaction.)

A four-bagger for VMware

Brenon Daly

Contact: Brenon Daly

If the virtualization thing doesn’t work out for VMware, the company could always spin off a hedge fund. At least that’s what we’ve been thinking as Verizon Communications’ purchase of Terremark Worldwide appears set to close very soon. When the deal does wrap, VMware will walk away with a tidy windfall from a savvy bet that the virtualization kingpin made on the hosting provider back in mid-2009.

Recall that in May 2009, VMware picked up a 5% stake in Terremark for $20m, paying just $5 for each of the four million shares. According to terms, that block of equity will be worth $76m when it comes time to cash out to Verizon, which is paying $19 for each Terremark share. A four-bagger in just a year and a half is a return that might even make John Paulson envious. The gain on VMware’s investment in Terremark even outpaces the return of its own highflying stock, which has ‘only’ tripled in that time.

A public signoff from McAfee

Brenon Daly

Contact: Brenon Daly

After nearly two decades in some form or another as a public company, McAfee all but certainly reported its quarterly results to Wall Street for the final time on Tuesday morning. The company’s sale to Intel is expected to close in the coming weeks, a deal that will bring the largest stand-alone security vendor under the ownership of the largest semiconductor maker. For 2010, McAfee reported sales of $2.1bn and cash from operations of $595m. It didn’t hold a conference call because of the imminent close of its sale to Intel. (We suspect that the company won’t miss that quarterly ritual.)

The unexpected acquisition, which received our Golden Tombstone award as the most significant transaction of last year, was supposed to have already closed. When the $7.7bn deal was announced in mid-August, the companies indicated that they expected it to close before the end of 2010. It got overwhelming clearance from McAfee’s shareholders in early November, with 1,500 ‘yes’ votes for every one ‘no’ vote. US regulators signed off on the transaction in December.

But it took another month for European regulatory authorities to give their blessing – and they did so only conditionally. Among other things, Intel had to assure the European Commission that it won’t prevent other security providers from working on its chips and that the vendors will be able to use ‘functionalities’ of Intel’s products in the same way that McAfee is able to. While Intel may not be thrilled about making concessions to the EC, at least the six-month-old deal isn’t getting bogged down there. Remember that it took Oracle some nine months to close its purchase of Sun Microsystems, largely because of European regulatory concerns.

At long last, Open Text makes a BPM play

Brenon Daly

Contact:  Brenon Daly

More than a year and a half ago, we noted that Metastorm was looking to buy its way into some adjacent markets such as risk and compliance or perhaps collaboration. The planned shopping trip would have come after the business process management (BPM) provider pulled its IPO paperwork. At the time, however, we wondered if the would-be IPO candidate might not head to the other exit: a trade sale.

Specifically, we floated the single name of Open Text, which we noted had consolidated much of its core enterprise content management (ECM) market but still appeared to be losing deals to rival vendors with more robust BPM offerings. However, we thought that valuation might make it tough to bridge the bid/ask spread between the two sides. In most of its dozen deals over the past decade, Open Text has paid somewhere in the range of 0.5-1.5 times trailing sales for its acquisitions. That’s true for its most visible purchases, including deals that saw it gobble up rival ECM firms Hummingbird in August 2006 and Vignette in May 2009, as well as add image capture software maker Captaris in September 2008.

As it turns out, valuation didn’t necessarily snag Open Text’s significant acquisition to bolster its BPM credentials. The company said late last week that it will hand over $182m in cash for Metastorm. In a conference call, Open Text indicated that Metastorm was generating $70-75m in sales, implying a valuation of about 2.5x sales for the BPM provider. That’s a fair bit richer than the valuation that the Canadian consolidator has paid in the past. However, we suspect that guidance assumes a bit of revenue write-downs and (perhaps) a bit of sandbagging. The reason? Metastorm said in mid-2009 that it was above that level of revenue in 2008 and targeting $90m in 2009. In its IPO filing, Metastorm reported $60m in sales for 2007.

KIT buys in bulk

Ben Kolada

Contact: Ben Kolada

No stranger to inorganic growth, video asset management provider KIT digital just announced three acquisitions worth $77m. The company’s recent dealmaking brings its total M&A spending to $151m since 2006 – a hefty sum considering that KIT currently sports just a $350m market cap. While similarly sized firms might stop for a breather, KIT plans to announce another large purchase by the end of the quarter.

KIT has bought KickApps, Kyte and Kewego as it continues to consolidate the video asset management market and add social media to its platform. Kyte, the least expensive of the three targets, will provide KIT with mobile video content delivery while Paris-based Kewego provides a video distribution software platform for internal communications to enterprises in the EMEA region. KickApps, arguably the most valuable of the acquired assets, provides social media software for interactive video to enterprises. (A side note: KickApps is betting the farm on the role that social media will play in KIT’s evolving business – the company’s equity holders took their $45m payout entirely in KIT digital stock.)

As if announcing three acquisitions at once isn’t enough, the company claims to be on track to close another large transaction by the end of the quarter. KIT wouldn’t comment on who its next target would be, and the video asset management market is still too fragmented to tell which companies are on KIT’s radar. But we expect that the new target will continue KIT’s M&A strategy of buying companies for geographic expansion, entry into new verticals and complementary technology. KIT will pay for its new property out of the proceeds from its recently closed IPO, which netted $103m.

KIT’s triple play

Date closed Target Deal value Target adviser Acquirer adviser
January 28, 2011 KickApps $44.7m America’s Growth Capital Janney Montgomery Scott
January 26, 2011 Kewego $26.7m Not disclosed No adviser used
January 25, 2011 Kyte $5.7m GrowthPoint Technology Partners No adviser used

Source: The 451 M&A KnowledgeBase

Motricity’s equity activity

Brenon Daly

Contact: Brenon Daly

Although shares of Motricity have been trading on the Nasdaq since mid-June, it’s only been in the past few weeks that most of the action has taken place. We have already chronicled the difficult birth of the company, which had to trim both its offer size and price to go public. Debt-heavy Motricity ended up raising only half the amount that it expected in its June IPO.

Born under a bad moon, Motricity appeared destined to live out a life of quiet woe on the public market. And for the first three months, that’s exactly how it played out for the mobile data platform provider. Shares changed hands in the single digits. Then the stock took off, tripling from September to November. (That run was enough to tempt Carl Icahn, a significant shareholder in Motricity, to look to lighten his load in December. However, the activist investor pulled the planned secondary last week.)

For its part, the company has found its own use for equity: an acquisition. Earlier this week, Motricity picked up mobile advertising and analytics startup Adenyo for $100m upfront and (perhaps) another $50m in an earnout. Terms call for Motricity to use an unspecified mix of cash and stock to cover the bill. Adenyo, advised by Citadel Securities, did get a collar on shares as part of the final consideration. But for now, the once-volatile shares of Motricity have been holding steady at about $20 each, which is at the high end of the collar’s range.

Time Warner Cable picks up NaviSite; is InterNap next?

Ben Kolada

Contact: Ben Kolada

In the second telco-hosting rollup in less than a week, Time Warner Cable is acquiring NaviSite for $230m in cash. This is TWC’s first foray into enterprise hosting and cloud computing services, and marks the end of a tumultuous year for NaviSite that included defending itself from an unsolicited take-private and continuously retooling its business toward enterprise-class services.

TWC, the second-largest cable operator in the US, is paying $5.50 per share, representing a 33% premium over the closing price on February 1. Including the assumption of cash and debt, TWC’s offer gives NaviSite an enterprise value of $277m, or 2.1 times trailing sales and 10.8x trailing EBITDA. While the offer is roughly in line with broad market valuation, it is far below what Terremark received from Verizon. In that deal, announced just last Friday, the target was valued at 5.8x trailing sales and 24.7x trailing EBITDA. Of course, we might argue that Terremark deserves its premium, since it is much healthier and larger than NaviSite. Terremark has 16 datacenters (compared to NaviSite’s 10) spread across a large international footprint, a robust and growing cloud platform and more than twice the sales of NaviSite.

While NaviSite is set to be acquired at a lower valuation than Terremark, TWC’s bid represents a level NaviSite hasn’t seen on its own since late 2007. Further, it’s substantially above the offer that NaviSite attracted just a half-year ago. In July 2010, Atlantic Investors, which already owned one-third of NaviSite’s equity, made an unsolicited offer for the remaining shares of the company. Atlantic Investors’ bid of $3.05 per share valued NaviSite overall at $128m. Time showed that NaviSite was right in rejecting that offer, which isn’t always the case in these unsolicited bids. After spurning the offer, the company continued in its dogged determination to become an enterprise-class hosting provider throughout 2010 and divested some $74m in non-core assets to get there.

After NaviSite’s sale, speculation is intensifying about which hoster will be acquired next. We’ve written before that Savvis is an obvious target, and Rackspace is the constant focus of acquisition speculation. We might add Internap Network Services to that list. The Atlanta-based company’s shares are up 6% in mid-Wednesday trading, continuing a run since the Terremark announcement on January 27. One reason we might point to a trade sale for Internap is that the chief executive has done it before. In January 2009, the company appointed a new CEO, Eric Cooney, who has a history of growing companies and leading them to successful sales. He was previously CEO of Tandberg, which was acquired by Ericsson for $1.4bn in 2007. Since Cooney’s appointment, Internap’s shares have climbed 170%, giving the company a market cap of slightly more than $400m. Look for a full report on TWC’s pickup of NaviSite in tonight’s Daily 451.