2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

Tech bankers see a bit more of everything in 2011

Brenon Daly

Contact: Brenon Daly

As we all know, banking is a cyclical business. And after a painfully sharp downturn in recent years, the business is swinging back. It looks to be swinging even higher in 2011, according to our annual survey of many of the top dealmakers. (See our full report on the results.) We would note, too, that the rebound is expected for both the tech M&A market as well as the tech banking industry itself.

Consider this: Four out of five tech investment bankers said their pipeline appears fuller now than it did a year ago, up from two-thirds of them who said the same thing in our previous year’s survey. If we flip it around, just one out of 20 bankers (7%) said the pipeline is drier than it was a year ago, down from one out of five (20%) who said the same thing in the previous survey. The recovery is even more pronounced when we consider that in our 2008 survey, more than half of the bankers said they had fewer mandates in the pipeline than they did the prior year.

Meanwhile, concerning the tech banking business itself, respondents indicated that their firms expect to be hiring more in the next six months. They also reported that deals were closing more quickly and fee rates on the transactions were actually ticking higher.

Teradata pays a tidy premium for Aprimo

Brenon Daly

Contact: Brenon Daly

Announcing its first major acquisition since it was spun off into a stand-alone company more than three years ago, Teradata said it will pay $525m in cash for Aprimo. The deal marks a significant bet by the data-warehousing giant on the application market. Specifically, Aprimo brings a marketing automation offering to run on top of Teradata’s existing business analytics offering. Aprimo products will continue to be marketed and sold under the company’s name once the transaction closes, which is expected in the first quarter.

According to a conference call discussing the acquisition, Aprimo is expected to generate about $80m in annual sales. (We understand that roughly $60m of that is recurring revenue.) That means Teradata is paying a healthy 6.5 times revenue for Aprimo. That’s slightly ahead of the valuation that IBM paid in its big marketing automation play four months ago. Big Blue handed over $523m in cash for Unica, valuing the publicly traded company at 4.8 times trailing revenue.

Part of Aprimo’s premium could likely be attributed to the fact that it was steadily moving its business from a license model to a subscription basis. In fact, Aprimo’s SaaS offering accounted for a majority of its revenue. IBM’s move was important in the Aprimo process, as we gather that Teradata and Aprimo started talking only after Big Blue had closed its acquisition.

Is Earthlink looking to link up to a hosting company?

Ben Kolada

Contact: Ben Kolada

Earthlink on Monday said that it is acquiring regional competitive local exchange carrier (CLEC) One Communications for $85m in cash or stock, plus the assumption of $285m in debt. The deal is Earthlink’s second telecom play of the year, and from our view, it looks like the beginning of a strategy that’s already playing out at Windstream Communications.

The One Communications announcement came just three weeks after Earthlink closed the purchase of southeastern US CLEC ITC Deltacom. Both One Communications and ITC Deltacom are fairly large, as regional CLECs go. ITC Deltacom generated $451m in revenue in the four quarters before its sale, and we understand that One Communications came in at $575m in trailing sales. However, both companies’ sales were declining, and we suspect that the deals were primarily done to build out Earthlink’s facilities-based presence and lay the ground for an eventual hosting play.

If that’s correct, then the ISP will be setting itself on a similar track to the one laid by Windstream Communications. The Little Rock, Arkansas-based company picked up six telecom service providers before announcing last month that it was buying hosting provider Hosted Solutions. At least three other telcos have scooped up hosting companies just in the past two months. The reason for the shopping spree is pretty simple if we consider the relative growth rates of the two sectors: While the core telecom market continues to decline, hosters are putting up fairly solid growth – and that should continue. In their 2010 ‘Multi-Tenant Datacenter North American Market Overview’, our colleagues at Tier1 Research project that the sector’s total North American revenue will hit $11.1bn in 2013, up from an estimated $6.8bn this year.

Select recent telecom-hosting transactions

Date announced Acquirer Target Deal value
December 15, 2010 Telephone and Data Systems TEAM Technologies $47m
November 22, 2010 Sidera Networks Cross Connect Solutions Not disclosed
November 4, 2010 Windstream Communications Hosted Solutions [ABRY Partners] $310m
November 3, 2010 Cbeyond MaximumASP (assets) $31m
May 12, 2010 Cincinnati Bell CyrusOne [ABRY Partners] $525m
March 22, 2010 TDS Telecommunications VISI $18m
January 25, 2010 Cavalier Telephone NET Telcos (assets) Not disclosed

Source: The 451 M&A KnowledgeBase

Defense goes on offense

Ben Kolada

Contact: Ben Kolada

Constraints in federal defense spending are causing traditional defense contractors to look outside their core for growth. The latest move is Raytheon’s pickup of cyber security firm Applied Signal Technology. The $490m acquisition, announced today, wraps up a two-month process from when Applied Signal announced that it would seek ‘strategic alternatives’ to increase shareholder value.

Raytheon’s $38-per-share offer for Applied Signal represents a 37% premium over Applied Signal’s closing share price the day before it announced it was looking to boost its share price. We suspect the high valuation was partly the result of a competitive bidding process that included Raytheon competitors L-3 Communications and Cobham. However, this isn’t the first competitive process we’ve seen for a defense-focused IT service provider. The Applied Signal transaction comes just half a year after its larger rival, Argon ST, was scooped up by Boeing. We understand the Argon property was the focus of an even more hotly contested process, with Boeing eventually paying a premium of 41% above Argon’s share price the day before the deal was announced.

The rise in defense IT valuations is the result of traditional defense contractors looking for growth channels as the federal spigot tightens. After a dozen years of consistent growth in federal defense spending, the Office of Management and Budget projects defense expenditures will decrease by an aggregate of 5% from 2010-2015. Meanwhile, spending on IT defense is expected to rise. As a result, firms like Argon and Applied Signal have received healthy valuations, but they are not alone. Since late October, when Applied Signal announced it was looking at strategic alternatives to increase shareholder value, including selling itself, acquisition speculation has spilled over to Mercury Computer Systems, a maker of hardware and software systems for the defense industry. Since Applied’s announcement, shares of Mercury Computer have risen 40%.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to asking corporate development executives in our annual survey to look ahead and predict M&A activity and valuations in the coming year, we also asked them to look back and tell us which deal of the previous year they thought was the most significant. The winner for 2010? Intel’s $7.7bn purchase of McAfee, an unexpected transaction that landed the largest stand-alone security company inside the dominant supplier of microprocessors. At nearly twice the value of the previous largest security deal, it’s a risky bet that security will become another integral consideration around silicon, along with power consumption and performance.

The landmark Intel-McAfee pairing barely edged out Hewlett-Packard’s contested acquisition of high-end storage vendor 3PAR in the voting by corporate development executives for the Golden Tombstone for the top deal of the year. Past winners of the highly coveted award include Oracle-Sun Microsystems (2009), HP-EDS (2008) and Citrix-XenSource (2007).

We suspect that the competition for next year’s Golden Tombstone may be even more intense, at least according to one indication in our survey. (See our full report on the survey.) When we asked corporate development executives about how likely they were to do ‘transformative acquisitions,’ more than half (52%) said they planned to do one of these risky, bet-the-company kind of transactions. In our 2009 survey, just one out of five respondents said that.

A less-than-bullish outlook for corporate shopping

Brenon Daly

Contact: Brenon Daly

The results of our annual survey of corporate development executives are in and the outlook for technology M&A in the coming year is less than bullish. Consider this change in sentiment: the number of respondents who thought the overall M&A market would improve in the coming year dropped from half (52%) in the 2009 survey to just one-third (35%) this time. Meanwhile, the percentage that projected the market will be worse tripled from just 7% last year to 23% this year. The fact that roughly one out of four corporate buyers expects the market to deteriorate is a rather bearish sign, we would suggest.

Moreover, that bearishness around the overall market carries over to projections about their own company’s buying plans for 2011. Just half (52%) said they expected to be busier in 2011 than this year. That’s down from two-thirds (68%) who said the same thing last year. (In 2009, 15% of respondents said the acquisition pace at their firms would ‘increase significantly,’ twice the level that said the same thing in this year’s survey.) See our full report on the outlook for M&A activity and valuations in the coming year from corporate development executives.

Secondaries are primary for recent IPOs

Brenon Daly

Contact: Brenon Daly

The IPO window may be slammed shut right now, but the few tech companies that have managed to make it public have found the window wide open when it comes to selling more shares. In the past week or so, QlikTech, RealPage and IntraLinks have all priced their secondary sales. All three companies only came public last summer and have had strong runs since their debuts.

Recall that QlikTech priced its IPO above the expected range, something of a rarity in the current climate. After coming public in mid-July at $10, the stock traded above $20 two months later and has held that level. Shares in the analytics company closed at $23.79 on Tuesday. Incidentally, the company didn’t sell any shares in the offering. Instead, the three main backers (Accel Partners, Jerusalem Venture Partners and Stiftelsen Industrifonden) are all lightening their holdings in the 11.5-million-share secondary.

Meanwhile, rental property software provider RealPage put in the paperwork for its follow-on offering just three months after first selling shares to the public. The company sold four million shares, raising about $98m. Another 6.35 million shares came from selling shareholders, notably Apax Partners. Although RealPage initially came public below its expected range at $11, the shares have traded at twice that level since mid-October. RealPage closed Tuesday at $27.90, giving the company a market cap of about $1.8bn.

And IntraLinks priced its 10-million-share offering at $20 each. That’s up substantially from the $13 that the on-demand document management company first sold shares to the public back in early August. IntraLinks is selling two million shares, with the remaining eight million coming from its backers. The stock closed Tuesday at $19.16.

Digital Realty’s M&A train will slow in 2011

Ben Kolada

Contact: Ben Kolada

Wholesale datacenter provider Digital Realty Trust has been on a buying spree this year, having spent more than 10 times what it shelled out in all of 2009. In total, the company has spent $1.3bn for acquired properties. The majority has come on just two transactions: Sentinel Data Centers and Rockwood Capital’s 365 Main portfolio. Although the deals are starting to pay off, we don’t expect that the firm will write such big checks in 2011.

With the newly acquired properties, Digital Realty’s sales have surged. The company’s revenue is projected to hit $867m this year, which would represent a 70% increase over 2009. Compare that to the more organic growth of 26% in 2009 over 2008. The 365 Main purchase, which closed in mid-July, catapulted third-quarter total revenue 45% over the previous year’s quarter.

However, deals the size of Sentinel Data Centers and 365 Main won’t happen again for some time. San Francisco-based Digital Realty says it will continue to buy properties in 2011, but expects to spend far less than it has this year. The firm says total spending on acquisitions in 2011 will likely be in the range of $200-450m. The midpoint of the range is about one-quarter what Digital Realty has spent so far on deals this year, but still north of the $220m it spent in 2009.

Select Digital Realty Trust acquisitions, 2010

Date announced Target Deal value
June 2 Rockwood Capital (365 Main portfolio) $725m
January 25 Sentinel Data Centers (New England portfolio) $375m

Source: The 451 M&A KnowledgeBase

Google adds to NFC with Zetawire

Ben Kolada2 Comments

Contact: Jarrett Streebin, Ben Kolada, Vishal Jain

Google continues to gobble up startups, and we’ve just uncovered a deal that supports its near field communications (NFC) ambitions. We’ve learned that Google recently picked up Zetawire, a Canadian startup focusing on mobile payments transactions. Like most of Google’s buys, this was a small deal, but it plays into a bigger market.

Little is known about Toronto-based Zetawire, but we suspect that the company was in the pre-revenue stage, making its only valuable asset a patent and corresponding trademark awarded by the US Patent and Trademark office. According to the filing, the patent provides for mobile banking, advertising, identity management, credit card and mobile coupon transaction processing. These features would allow a consumer to make purchases using their smartphone instead of their credit card. Think of a smartphone with this technology as a virtual wallet (in fact, the company has also trademarked the name Walleto for these very purposes).

This acquisition bolsters Google’s position in the coming wave of NFC and the phone as a device for payments, tracking and identification. For Google, the timing of the deal couldn’t have been better. Although we understand that the transaction closed in August, just earlier this month Google released its Nexus S smartphone, which has built-in NFC capabilities. In the meantime, Google’s competitors are hard at work. Research in Motion has also filed a patent for NFC functions, and Nokia in June announced that all of its phones will have NFC capabilities by 2011. Isis, a partnership involving telcos AT&T, T-Mobile and Verizon, is also planning a similar mobile wallet and UK startup Proxama has been working on NFC-focused technology for payments and advertising. (We’ll take a deeper look at the Zetawire purchase and the greater NFC market in an upcoming Post-Merger IQ.)