Valuations separated by more than the Atlantic

Brenon Daly

Contact: Brenon Daly

Comparing the valuations of US tech companies with their European counterparts, we can’t help but notice the fact that the recovery hasn’t been enjoyed equally on both sides of the Atlantic. We noted a few months ago that the strong US dollar had opened the way for some opportunistic shopping on the continent. Although most European currencies have inched back up since then, there are still discounts available because the valuations of the companies are still lagging their US peers and rivals.

Earlier this summer, we pointed out that discrepancy in Deltek Systems’ purchase of Maconomy, which valued the Danish ERP vendor at twice the level it started the year – but still below Deltek’s current valuation on the Nasdaq. Similarly, Adobe acquired Day Software at a price that was four times higher than the Swiss company’s own valuation last summer. However, Adobe’s own valuation is higher than the take-out valuation for Day, which included a 60% premium. (Adobe is still valued higher, even though it lost 20% of its value Wednesday after forecasting weaker-than-expected results.)

But those deals pale in comparison to the arbitrage that OpenTable did in its reach across the Atlantic for toptable.com. OpenTable values the British restaurant reservation service at basically 6 times trailing sales, while the San Francisco-based company trades at 19x trailing sales. (For those of you who haven’t looked lately, OpenTable trades in the mid-$60 range, commanding a market cap of some $1.5bn. Incidentally, various measures of OpenTable’s valuation – specifically, both trailing and forward price to earnings ratio – line up almost exactly with those of salesforce.com.)

OpenTable booking seats at negotiating table in Europe

Brenon Daly

Contact: Brenon Daly

Often when a company takes its business to a foreign country, something gets lost in translation. EBay found that as it looked to expand its online auctions internationally, and on a smaller scale, OpenTable ran into some of that as well. Roughly two years ago, the San Francisco-based online restaurant reservation service pulled out of both Spain and France. Even now, OpenTable’s international operation contributes only about 6% of total revenue as it burns money.

So, perhaps the thinking in its recent transatlantic move is: If you can’t beat them, buy them. In its first acquisition for geographic expansion, OpenTable said last week that it will pay $55m in cash for toptable.com, a UK reservation site. (Frankly, we have been expecting a move across the ocean by OpenTable since its IPO.) OpenTable has had its offering in the UK since 2004, but the company has acknowledged that the UK is its most competitive market.

While the acquisition should help bolster its presence there, we should note that OpenTable operates in a very different way than toptable.com. OpenTable looks to replace a restaurant’s existing reservation book, which is typically a pen and some paper, with the company’s proprietary electronic reservation book. On top of that one-time installation fee, OpenTable then charges a monthly subscription fee as well as making money each time a diner sits down at a restaurant table that was booked through the service. In contrast, toptable.com – along with other services that use the ‘allocation’ model – simply moves some of the available reservations online, with reservations there then recorded in whatever system the restaurant is currently using.

One advantage that toptable.com has, according to OpenTable, is that its approach is ‘lighter’ in that it doesn’t require an upfront hardware purchase. OpenTable is considering taking toptable.com and its allocation approach back into continental Europe, where toptable.com had started to move. If that organic expansion from its inorganic acquisition doesn’t take off, look for OpenTable to buy again. Germany, where OpenTable has had operations since 2007, looks like another market where OpenTable might want to reserve a few seats at the negotiating table.

IBM and HP bag big game on M&A safari

Brenon Daly

Contact: Brenon Daly

With the news today that Hewlett-Packard is closing its recent pickup of Fortify Software, we wanted to take the opportunity to point out that the deal almost belongs in the minority of M&A moves HP has made so far this year. What are we talking about? Basically, that the tech giant has been doing giant deals. Of the seven acquisitions HP has announced so far in 2010, fully three of them have been valued at more than $1bn.

We noted in mid-April, which is before it inked any of its three 10-digit acquisitions, that HP had telegraphed to the market that it was going to do fewer transactions, but they were going to be bigger deals. (And we should add that its purchase of application security vendor Fortify wasn’t just a pocket-change deal. We understand that it paid $275m or so for the company.)

What’s interesting to note is that in the five months since we indicated that HP would be big-game hunting, one other company has joined it on safari: IBM. Big Blue has inked a pair of deals valued at more than $1bn since April – the pickup of AT&T’s Sterling Commerce business as well as Monday’s purchase of Netezza. Along the way, it has also done a steady flow of transactions valued at $150m-500.

Altogether, we calculate the tab for Big Blue’s five-month shopping spree at roughly $4.8bn for its nine acquisitions. (Incidentally, the amount of cash it spent is basically the same amount its business generated over that same period.) Meanwhile, HP spent about $1bn more ($5.8bn in disclosed or estimated deal values) on its seven purchases since mid-April. Taken together, these two companies have averaged about $2bn of M&A spending in each of the past five months. And they were sniping at each other about ‘buying’ R&D? Really?

M&A activity since mid-April 2010

Company Number of acquisitions Total M&A spending
HP 7 $5.8bn*
IBM 9 $4.8bn*

Source: The 451 M&A KnowledgeBase *Includes disclosed and estimated deal values

A bit of Big Blue inconsistency

Brenon Daly

Contact: Brenon Daly

Perhaps Mark Hurd feels vindicated. No, we’re not referring to the former Hewlett-Packard chief executive settling a lawsuit with his old shop. Instead, we’re talking about IBM’s stunning flip-flop with regard to high-profile M&A by itself and rival HP. At the least, Big Blue’s recent comments now appear inconsistent; at the worst, they smack of hypocrisy.

The specifics: A week ago, Big Blue’s CEO was blasting HP for ‘overpaying’ for deals, and for relying on M&A rather than R&D. Ironically, Sam Palmisano made these comments just as his own company was putting the final touches on its acquisition of Netezza, a deal that values the data-warehousing vendor at nearly 7 times this year’s forecasted sales for the current fiscal year. That’s more than twice the median software valuation, and basically matches the valuation that HP is handing over for ArcSight.

Incidentally, both transactions valued the targets, which had only come public within the past three years, at their highest-ever valuations. But if we look at how the shares of ArcSight and Netezza have performed so far this year, it becomes very clear that IBM was the much more aggressive suitor. Excluding the pop ArcSight shares got when word of a deal leaked in late August, the security vendor’s stock had only ticked up about 10%. In contrast, Netezza stock had run 150% from January to the day before Big Blue announced its purchase.

A Big Blue move into the data warehousing market

Brenon Daly

Contact: Brenon Daly

A little more than three years after Netezza debuted on the NYSE, the data-warehousing vendor is being erased from the Big Board at basically twice its valuation at the time of its IPO. Under terms, IBM is handing over $27 in cash for each share of Netezza, which went public at $12 in July 2007. However, after the strong debut, which valued the company at around $1bn, gravity set in on Netezza shares. They spent most of 2008 and all of 2009 under the $12 offer price.

Earlier this summer, however, Netezza shares started running. The run was fueled by strong second-quarter results that saw total revenue surge 45%, as well as lingering M&A rumors. (We noted in early July that we had heard EMC was interested in Netezza before it opted for rival data-warehousing vendor Greenplum. IBM’s bid values Netezza at twice the level it was trading at the time.)

As Netezza shares continued climbing to new highs on the market, the move whittled away the premium Big Blue is offering. Compared to the previous day’s close, IBM is paying just a 10% premium for Netezza. But judged against where Netezza was trading a month ago, the premium is 80%. We would add that Netezza shares have traded above the $27 bid since the open Monday morning. UBS advised IBM, while Qatalyst Partners advised Netezza.

Based on the enterprise value of $1.7bn given by IBM, the offer values Netezza at 8.9 times sales in its fiscal year that ended in January. (As a trading comparison, Teradata currently garners a valuation that’s about one-third that level.) At the end of its second quarter, Netezza guided Wall Street to expect about $250m in sales for the current fiscal year, meaning IBM is paying 6.8x projected sales. While that is a relatively rich valuation, it’s much lower than rival EMC paid in its big data-warehousing purchase. We understand that it handed over $400m for Greenplum, which was running at about $30m in sales.

Any deals to be done in open source content management market?

Brenon Daly

Contact: Brenon Daly, Kathleen Reidy

Following a massive wave of consolidation that swept through the enterprise content management (ECM) market, the list of significant vendors has basically narrowed to a handful of tech giants. Essentially, it’s just one stand-alone ECM provider with other software companies offering ECM as part of their broader portfolio. All of them have done deals to expand their ECM business, with the collective bill for acquisitions across the sector topping more than $12bn since 2002.

However, all of that activity has been done by – and for – proprietary software firms. In a recent report, my colleague Kathleen Reidy analyzes how M&A might play out for open source content management startups. Granted, the market is still young, with many of the startups still bootstrapped. (Reidy looks at a dozen potential open source content management targets, including their funding and their focus.)

So which startup might be the first to go? We speculate that Alfresco Software could eventually find itself inside a larger company. However, it probably won’t be the company we initially thought it would be. Adobe and Alfresco have a tight relationship, with Adobe embedding an Alfresco repository in its LiveCycle for content services like workflow, indexing and version control. But with Adobe reaching across the Atlantic for Day Software, it probably has all the Web content management technology it needs.

OpenPages: a restart that finished strong

Brenon Daly

Contact: Brenon Daly

In the startup world, a restart rarely goes anywhere. What typically happens is a company swaps one failing business plan for another, with the inevitable wind-down delayed only by a fresh round of capital. Yet that’s not the case with OpenPages, which secured a solid exit with its sale to IBM after completely overhauling its business.

OpenPages, which sells software for the governance, risk and compliance (GRC) market, has virtually nothing in common with the company that started out in 1996. As its name implies, OpenPages was originally a content management vendor. The firm survived the dot-com bust, but only after trimming its headcount from more than 300 down to 15. In the aftermath, it also switched to Plan B for the business: GRC.

Although the initial draw to the GRC space was Sarbanes-Oxley, OpenPages found success in the broader market. By 2006, Sarbanes-Oxley only accounted for about 15% of revenue at the firm. As it recast its business, OpenPages also recapitalized the business. It raised some $10m in 2004 and added another $10m in 2007. (Back in the Bubble Era, it had raised about $60m from investors.)

The sale to IBM makes a fair amount of sense, both strategically and financially. Big Blue and OpenPages have been partners for at least three years. In addition to OpenPages’ technology fitting well with the BI portfolio IBM acquired with Cognos, there’s also a large chunk of services revenue that Big Blue can pocket around an OpenPages implementation. (OpenPages has some 140 customers.)

And, at least as we understand the deal, the exit valued OpenPages at a healthy 5 times its estimated $35m in sales. (Both the price and the valuation line up almost exactly with the other large GRC deal of the year, EMC’s purchase of Archer Technologies back in January.) In our view, whatever valuation OpenPages got should probably be viewed as a rich one when we consider the fact that the company nearly died penniless earlier in its life.

Is HP overcompensating?

Brenon Daly

Contact: Brenon Daly

Since when does an army without its top general go on the attack? That strategy would seem to go against convention, yet Hewlett-Packard has done just that since dumping Mark Hurd for his foibles. The tech giant has chased a pair of deals to valuations that are basically 2-3 times the prevailing market multiple. HP’s recent bidding war over 3PAR and the purchase of ArcSight shows a level of aggressiveness that indicates to us that the drivers for the acquisitions may have been emotional as well as financial, at least to a small degree.

If we step back and look at the setting for both deals, we can’t help but conclude that HP announced the transactions at a time when it looked vulnerable. Its star CEO had dramatically crashed back to earth, while its board (yet again) appeared to have bungled what looked like a fairly routine internal investigation. Statements by the company that it was ‘business as usual’ didn’t get much of a hearing on Wall Street. Shares that changed hands in the low $50s in April have been worth less than $40 for much of the past month. HP’s market cap lingers below $100bn, despite the company ringing up sales of about $120bn.

At the risk of drifting too far into psychology, we wonder if the deals weren’t a bit of overcompensation. (Certainly, paying 11x trailing sales for 3PAR might be considered overcompensation, or at the least, ‘heavy compensation,’ if you’ll forgive the pun.) If investors and others were going to view HP as weak or directionless while its corner office was empty, well, HP could use its vast resources to counter with a signal to remind everyone that it was formidable, with or without a fulltime CEO. Of course, we’re just playing armchair psychologist here. But something beyond just straight numbers seemed to be at work in HP’s recent moves.

A second exits gets ArcSight a 2x valuation

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard’s pending purchase of ArcSight is the third IT security deal so far this year valued at more than $1bn, after not having a single security transaction valued in 10 digits in 2009. While the other two deals have gone off at basically market multiples, ArcSight is being valued at twice that level. The largest ESIM vendor agreed to sell itself to HP for $43.50 per share, valuing the security firm at more than four times the level it went public just two and a half years ago.

HP put the enterprise value of the transaction, which is slated to close by the end of the year, at $1.5bn. That means the tech giant is paying 7.5 times ArcSight’s trailing sales of $200m. (For the current fiscal year, ArcSight is expected to put up about $225m in sales, meaning HP is paying about 6.7x projected sales.) On a trailing basis, both McAfee and VeriSign’s identity and authentication business garnered 3.5x sales in their respective sales to Intel and Symantec. (Morgan Stanley advised both McAfee and ArcSight, while JP Morgan Securities advised VeriSign.)

The high-multiple deal represents a stunningly successful outcome for ArcSight. As we have mentioned in the past, both HP and McAfee approached ArcSight in the summer of 2007, ahead of the company’s IPO. We gather that both were bidders in the range of $600-750m. Unlike other dual-track candidates, ArcSight didn’t opt for the trade sale, but went ahead with its offering even as the equity market turned bearish. ArcSight spent virtually its entire first year as a public company trading in the single digits, including a fair amount of time below its offer price. (At one point when its shares were underwater, CA Technologies lobbed a low-ball bid at the firm, we understand.) If we had to guess at another suitor in the current process around ArcSight, we might tap EMC as an interested party.

Even as its stock took off over the past two years, ArcSight never did a secondary offering. (For a company with about $200m in sales, it has a very narrow base of shares, totaling only about 38 million.) In this case, the unwillingness to sell shares – either a small chunk or all of them – except at an eye-popping valuation has generated a return that seems reminiscent of the late 1990s. ArcSight raised only about $30m to build a business that got valued at 55 times that level on the exit.

Private equity goes back to the hosting table in a big way

Ben Kolada

Contact: Ben Kolada

So far this year, three private equity (PE) firms have each shelled out at least $400m for a hosting provider, making 2010 the most active year for big-ticket hosting deals for PE shops. And these firms are no novices. Welsh, Carson, Anderson & Stowe, GI Partners and Oak Hill Capital Partners have a combined $32bn in capital under management, and each has had previous experience in the hosting sector. The fact that they’re coming back to the hosting market – and paying relatively rich valuations to do so – is a hearty endorsement of the sector’s long-term growth potential.

In the most recent deal, Welsh Carson teamed up with Peak 10 management to buy the company from Seaport Capital and McCarthy Capital. Although terms of the transaction weren’t disclosed, we understand the buyout consortium paid just north of $400m for Peak 10, or about 12 times the company’s annualized 2010 EBITDA. For comparison, Savvis, in which Welsh has been invested since 1999, is currently trading at 5x annualized EBITDA.

In another management buyout, SoftLayer Technologies’ management announced in August that it was partnering with GI Partners to buy the dedicated hosting specialist from its angel investors. Again, terms weren’t disclosed, but we believe the deal valued SoftLayer at about 10x its annualized EBITDA, or about $450m. As my colleagues Philbert Shih and Aleetalynn Schenesky-Stronge noted, GI Partners is a well-known participant in the hosting and Internet infrastructure space, having invested in Digital Realty Trust and The Planet. GI Partners intends to combine The Planet and SoftLayer, with SoftLayer’s management left in charge. The combined company, which would have $270m in estimated revenue for 2010, could go public as early as next year.

SoftLayer was GI Partners’ second hosting play of the year. In April, the firm banded together with Oak Hill Capital and ViaWest’s management to buy the company from a consortium of PE investors. Oak Hill Capital was the lead investor, with GI Partners and management retaining minority stakes. We estimate the price of the deal at $420m, which works out to about 10x ViaWest’s cash flow. Oak Hill Capital isn’t new to the datacenter industry, having previously invested in TelecityGroup.

More PE moves could be in the works, as we’re aware of quite a few more properties for sale. If the flurry of M&A activity during the recent VMworld conference is any indication of what happens when a group of likeminded individuals gets together, our 2010 Hosting & Cloud Transformation Summit could lead to a number of hosting and Internet infrastructure deals. The conference opens today in Las Vegas and continues through Wednesday.

Select PE hosting deals in 2010

Date announced Acquirer Target Deal value
September 1 Welsh, Carson, Anderson & Stowe/Peak 10 management Peak 10 $400m*
August 4 GI Partners/SoftLayer Technologies management SoftLayer Technologies $450m*
April 20 Oak Hill Capital Partners/ViaWest management ViaWest $420m*

Source: The 451 M&A KnowledgeBase *451 Group estimate