The rich valuation of integration

Brenon Daly

Contact: Brenon Daly

A lot of attention (and the accompanying financial rewards) around data management has tended to pile up in security, storage, analytics and other well-known market segments. Rather quietly but consistently, data integration has joined the list of richly valued markets as customers use these offering to get at the massive stores of information that run their businesses. The premium valuation is showing up both on Wall Street and, just recently, in M&A, too.

Take the case of Informatica. Shares of the data-integration provider have nearly doubled over the past year, and currently fetch their highest price in a decade. Informatica currently trades at a $3.8bn market capitalization, a rather rich six times its projected 2010 sales of $640m. The company has always stressed that part of its value has been in its independence among the software giants, but Informatica has nonetheless attracted M&A speculation in the past.

Those highly valued (and highly visible) public market vendors have helped drive up the valuation of smaller data-integration startups. For instance, we estimate that IBM paid about $200m for Cast Iron Systems, which we understand was running at about $30m in sales. And just last week, Dell reached for Boomi in a deal that valued the company at more than twice that multiple. (Subscribers can see our full report, which includes our estimates on the revenue as well as the price of Boomi.)

Windstream makes hosting splash among private equity waves

Ben Kolada

Contact: Ben Kolada

Windstream Communications bought into business services once again, this time picking up managed hosting, colocation and cloud computing provider Hosted Solutions. The deal is the first hosting play for Windstream, and shows that private equity buyers aren’t the only ones shopping in the sector.

Windstream is paying $310m in cash for Hosted Solutions, which posted $52m in trailing sales. The deal values Hosted Solutions at 12.7x its trailing EBITDA, and more than double the price that ABRY Partners paid for the company in April 2008. Hosted Solutions employs 125, and Windstream initially plans to retain the majority of those employees, though we expect there will be some corporate turnover as part of the integration.

Although telcos have gone shopping for colocation and hosting companies this year (with the most notable deal being CyrusOne’s sale to Cincinnati Bell), private equity firms have dominated the headlines. We recorded 10 hosting and colocation deals this year with deal values of at least $100m. Of this group, half of the targets went to private equity buyers, and four of those deals involved the target company simply jumping from one PE portfolio to another. Further, buyout shops, including firms both in the US and abroad, accounted for nearly half (46%) of the total spending for these 10 deals.

Top 10 hosting and colocation deals of 2010

Buyer category Number of acquisitions Percent of total spending
Private equity 5 46%
Hosting/colocation 3 32%
Telecommunications 2 22%
Total spending $3.8bn

Source: The 451 M&A KnowledgeBase

Bidding war keeps Phoenix Technologies rising

Brenon Daly

Contact: Brenon Daly

Shareholders in Phoenix Technologies were originally supposed to have their say today on the planned take-private of their company. Instead, they’ll be sitting tight, waiting to see if the maker of core systems software can fetch yet another round of topping bids. The vote is currently scheduled in two weeks, and we wouldn’t at all be surprised if the price put to shareholders then is higher than the one on the table now.

Original bidder Marlin Equity Partners is currently offering $4.20 for each share of Phoenix Technologies, valuing the company altogether at $152m. That’s roughly 9% higher than the $139m that Marlin initially offered in mid-August before getting jumped by The Gores Group. (RBC Capital Markets is advising Phoenix Technologies in the process.) To our mind, there’s more than a little irony in a bidding war around Phoenix Technologies, a company that has been unknown and unloved for much of its two decades on the Nasdaq.

In any case, the tug-of-war over Phoenix Technologies is a far cry from the wildly lucrative bidding war around 3PAR earlier this summer. A comparable escalation would push the offer for Phoenix Technologies a bit above $7 per share, or more than $250m. That’s not likely to happen. But we could certainly imagine a few more dollars tacked on to the final price. Investors expect that as well. Shares of Phoenix Technologies have traded above the official bid all week.

Take two for SunGard Availability Services

Ben Kolada

Contact: Ben Kolada

SunGard recently disclosed that it is taking a second look at divesting its Availability Services (AS) division. The company first attempted to shed the AS segment in 2004, but the move was canceled when SunGard was acquired by a consortium of private equity firms. The unit contributes slightly more than one-quarter of SunGard’s total revenue, and, like the rest of SunGard’s business lines, has seen a decline in sales. However, the AS division has proven more resilient than the remainder of SunGard’s businesses; the revenue of those three units combined has dropped nearly 8% in the first nine months of this year, compared to the same period last year.

Meanwhile, sales at the company’s AS division fell only about 3%, due in part to declining demand for disaster recovery (DR) services. If cut free, we expect that the independent SunGard AS could focus on and invest in its managed hosting, cloud and colocation businesses, which, over time, would more than offset losses from its traditional DR services. In particular, the division’s managed hosting services have considerable room to grow, as we project that global revenue for that segment will increase 20.8% in 2011.

SunGard AS is already investing in cloud and managed hosting services, as well as refining its geographic focus. We recently wrote about the division extending the capability of its cloud computing platform to provide an enterprise cloud service, and noted the appointment of Andrew Stern, former CEO of managed hosting provider USi, to its chief executive seat. As part of its geographic realignment, the company sold its South African operations two years ago and acquired Irish managed hosting provider Hosting 365 this past March.

Rich tech companies put away their checkbooks

Brenon Daly

Contact: Brenon Daly

Where are the corporate buyers? That’s what we were wondering when tech M&A activity in October came in well below both the year-ago period and the monthly average so far this year. Consider this: October stands as the first month in 2010 that so-called strategic buyers didn’t announce a single transaction valued at $1bn or more.

Instead, the shopping in October was led by private equity (PE) shops, notably The Carlyle Group. The buyout firm announced the two biggest tech deals of the month, with back-to-back acquisitions of CommScope and Syniverse Technologies. Carlyle values those two purchases at $6.5bn – representing half the value of all tech M&A spending in October. (See our full report on October’s M&A totals.)

Carlyle’s big pair of deals in October follows a more representative September, when IBM and Hewlett-Packard held the top two spots for large deals. (IBM paid $1.8bn for Netezza on September 20, a week after HP said it will pay $1.65bn for ArcSight.) More broadly, tech companies have posted a number of 10-digit transactions since the summer, with Intel notching two of them, plus the typically acquisition-averse SAP doing the largest deal in its history in May.

It’s hard to figure out exactly what’s keeping companies out of the market these days. Third-quarter financial results, many of which were announced in October, have been solid for the most part. Similarly, guidance for the fourth quarter and into 2011 has been relatively upbeat. Reflecting that, the Nasdaq tacked on nearly 6% in October, helping the tech-heavy index approach the highs that it hit both back in April and in mid-2008. Further, the cash just keeps gushing into the treasuries at many tech companies.

Oracle goes shopping in e-commerce

Brenon Daly

Contact: Brenon Daly

Oracle says it will pay $1bn in cash for Art Technology Group, the second public company the consolidator is set to erase from the Nasdaq so far this year. Terms call for Oracle to shell out $6 for each of the roughly 165 million shares outstanding for ATG. That represents a 46% premium over ATG’s closing price in the previous session and the highest price for the stock since 2001, and almost twice the level it was trading at in August. (ATG also got roughed up on the market in February, when it did a secondary offering.)

Although investors weren’t thrilled with the dilution, the secondary did essentially double the company’s cash on hand. Backing out that amount gives the proposed transaction an enterprise value of $850m. That’s 4.25 times ATG’s projected 2010 sales of $200m – a fairly rich multiple for a company that was growing at 11-12%. We suspect that the premium came because Oracle had to top another bidder. In our minds, the most likely other suitor would be Autonomy Corp. Morgan Stanley advised ATG on the deal, which is expected to close early next year.

Frightfully light M&A totals in October

Brenon Daly

Contact: Brenon Daly

The economic recession may be (officially) over, but the recession in tech M&A lingers on. If anything, it’s getting deeper, with the fourth quarter starting at a particularly sluggish pace. In the just-completed month of October, we tallied only 243 deals worth a collective $11.7bn. Not only is that substantially below the same month last year, but it also significantly lags the average monthly M&A activity that we’ve recorded so far this year. The reason? Corporate buyers largely sat out the month.

Year over year, the number of deals in October 2010 declined 15%, while spending dropped 22%. Similarly, when compared to earlier months in 2010, October is going down as one of the weakest months for acquisitions. Through the first three quarters of the year, the average number of monthly transactions stood at 268, or about 9% higher than the 243 deals in October. (Indeed, only one month in 2010, August, has recorded fewer deals than October.) The drop-off in M&A spending in October is even more pronounced. The total value of transactions hit just $11.7bn, which is 25% lower than the average monthly spending of $15.7bn in the nine months leading up to October.

Obviously, we don’t want to read too much significance into a single month worth of numbers, particularly in a business as inherently lumpy as M&A. Nonetheless, we might suggest that M&A has joined a number of other markets that have largely been bypassed by the recovery. Clearly, the impact of tech acquisitions not getting done is nowhere near as significant, for instance, as the dreadful employment picture (one out of 10 Americans out of work) or the seemingly intractable housing mess (banks will likely foreclose on more than one million homes this year). But the continuing tech M&A slump is still worth noting as yet another sign of how far we are from where we once were

Riverbed bolts onto Steelhead

Brenon Daly

Contact: Brenon Daly

Riverbed Technology just keeps flowing higher. Shares in the company, which hit the Nasdaq four years ago, notched their highest-ever close Wednesday. The market values the WAN traffic optimization (WTO) vendor at a staggering $4.2bn. That works out to some 7.7 times projected 2010 sales of $545m and some 6.2 times next year’s forecasted revenue of some $680m.

The company has garnered that rich valuation by selling its Steelhead appliances, which basically help customers move network traffic more quickly. Through M&A, Riverbed has added some smarts to its boxes. That expansion has been crucial for Riverbed because it is still basically a one-product shop, while its rivals (notably Cisco and Blue Coat Systems, but also Juniper Networks) pitch WTO wares as part of a larger network offering.

Most recently, the company picked up protocol analysis and packet-capture technology with its purchase of CACE Technologies. Although exact terms on the deal – only Riverbed’s second acquisition – weren’t revealed, the company did indicate that it paid less than $20m for CACE, which is perhaps best known for its Wireshark and WinPcap tools. (My colleague Steve Steinke has our full report on the purchase.) The deal comes a year and a half after Riverbed bought Mazu Networks, which added visibility and security technology through the startup’s network behavior anomaly detection offering.

Oracle parlays new interest in chips into small stake in Mellanox

Brenon Daly

Contact: John Abbott

When Oracle started hinting recently about its growing interest in chip vendors, Mellanox Technologies was at the top of our list of potential acquisition candidates. It turns out that Oracle is indeed interested in Mellanox, but only in a chunk of it. Oracle said earlier this week that it bought 10% of Mellanox’s ordinary shares on the open market.

Oracle didn’t reveal the price it paid for Mellanox or when it was in the market. But on a back-of-the-envelope basis, the stake probably represents about a $70m bet on Mellanox. (The company has about 35 million shares outstanding, and the price has been bumping around $20 each for much of the past month.) Other significant investors in Mellanox include Fidelity Management & Research, with an 11.7% stake, Alger with 7.5%, and the company’s CEO, Eyal Waldman, who owns 5.3% of the company.

As it picked up the chunk of equity, Oracle was quick to add that the purchase is for investment purposes only, and is not the start of a larger play for Mellanox, friendly or otherwise. Its stated motive is to solidify common interest in the future of InfiniBand.

Mellanox is one of only two suppliers making silicon for InfiniBand switches and adapters, the other being QLogic. It formed a close relationship with Sun Microsystems eight years ago, and more recently, its chips have been used within Oracle’s Exadata and Exalogic data-warehousing and storage appliances. In return for Oracle’s dollars, Mellanox will make Oracle Solaris one of its core supported OS platforms. But it will continue to work with Oracle’s rivals, including IBM, Hewlett-Packard and Dell.

As far as datacenter communications fabrics go, InfiniBand has maintained its technical lead over Ethernet and it looks like it will be doing so for a while to come. Even so, Mellanox has also launched a parallel set of 10Gb Ethernet products in the past few years in order to maintain its growth. And it’s also been looking to diversify into the consumer space, if reports that it recently tried (apparently unsuccessfully) to acquire fellow Israeli company CopperGate Communications for $200m are true. Privately held CopperGate develops chips for home entertainment devices and digital home broadband networking.

Symantec still struggling with storage

Brenon Daly

Contact: Brenon Daly

Symantec gives its latest quarterly update on business after the closing bell Wednesday, with Wall Street wondering if the company will ever emerge from its ‘Veritas hangover.’ The storage business, which Symantec picked up in its $13.5bn purchase of Veritas in late 2004, has long weighed on Big Yellow’s overall performance. The division posted the sharpest revenue decline at Symantec’s three business units in the previous fiscal year, and was the only one that shrank again in the first fiscal quarter. The storage business will likely shrink again in the just-completed second fiscal quarter.

None of that, of course, is new. In fact, more than two years ago, we noted how Symantec was busy knocking rumors about unwinding any of the underperforming Veritas assets. But ever since rival McAfee sold to Intel, the paltry valuation of Symantec has come into sharp relief. Consider this: Symantec generates three times the sales of McAfee ($6bn vs. $2bn) but garners less than twice McAfee’s valuation (current market cap of $12.5bn vs. McAfee’s $7.7bn equity value in its sale to Intel).

Perhaps that valuation discrepancy alone accounts for the market buzz we’ve heard recently that Symantec may be (once again) considering shedding Veritas. That move has been looked at a number of different times, in a number of different ways, over the years.

Most recently, we heard a variation on it that had the storage business going to EMC in return for the RSA division and some cash. Another rumor had the business landing at a buyout shop. (Although shrinking, the storage business is still Symantec’s largest unit, and runs at the highest margin in the company. It generates more than $1bn in operating income.) Whatever the destination, it may well be time for Symantec to acknowledge that its grand experiment of a combination of storing and securing information hasn’t gone according to plans. Wall Street has certainly given that verdict, having clipped Symantec shares in half since the Veritas deal was announced.