Should Cisco dial up eBay’s Skype?

Contact: Thomas Rasmussen

In eBay’s recent report on second-quarter results, the online auction house announced a somewhat disappointing performance in its two core businesses, Payments and Marketplaces, but did see strong results from a surprising source: Skype. The VoIP service increased year-over-year revenue by 25%, while overall sales declined as the legacy Marketplaces revenue sank 14%. Skype revenue hit $170m in the quarter, bringing sales for the division over the past year to $587m. The service is closing in on a half-billion users, finishing June with 481 million users. All in all, that’s a solid performance for a unit largely considered the bastard child of the Silicon Valley auction giant.

However, that certainly isn’t enough to keep Skype inside eBay. The acquisition, which eBay has admitted overpaying for and has written down a huge chunk of the $3.2bn cost, remains largely irrelevant and immaterial to its core e-commerce business. The service has never been integrated into auctions – much less adopted by buyers and sellers – at a level anywhere close to what was planned when eBay picked up Skype four years ago. It stands as the company’s largest-ever purchase and a stark reminder of an ill-conceived deal by the earlier leadership of Meg Whitman. Current CEO John Donahoe has been clear that eBay is returning to its roots, and Skype won’t be a part of that.

So where will Skype go? We see the VoIP vendor on a dual track. It could well get spun off in an IPO. (Provided, of course, that the catastrophe at Vonage hasn’t poisoned the market for VoIP companies.) Or, Skype could look for an acquirer, although we wonder how deep the pool could be for potential buyers that could write a $2bn or so check for it. But we do have one possible interested party: Cisco. Granted, this is a proposal from left field and we’re not suggesting that talks between the companies are going on or anything. However, there is some indication that such a pairing might not be too farfetched. Cisco has increasingly been bulking up its consumer division and its strategy around the media-enabled home is finally starting to come to fruition. Video plays a big part of those plans, and the firm has been talking about expanding its TelePresence offering from the enterprise to the home. An acquisition of Skype with its enormous and growing user base and proven technology on desktops and mobile devices would do just that, and would fit well with its M&A strategy of picking up market adjacencies.

SaaS deals echo in security industry

Brenon Daly

Contact: Brenon Daly

There are more than a few echoes of Symantec’s purchase of MessageLabs last October in McAfee’s reach last week for MX Logic. In terms of strategy, both acquisitions added millions of end users of on-demand security to the two largest security software companies, which have been slowly looking to increase that side of their business. MessageLabs had attracted more than eight million users at 19,000 customers, while MX Logic brings more than four million users at 30,000 customers.

As far as deal terms go, both buys were done at a similar valuation. Symantec paid 4.8 times trailing sales for MessageLabs, while we estimate McAfee is paying closer to 4 times trailing sales for MX Logic. (If we include the potential $30m earnout in the price, the multiple hits 4.9 times MX Logic’s trailing revenue.) And, we would add that both deals stand as the largest security transactions of their respective years, with the sales of these private software-as-a-service (SaaS) companies eclipsing the prices paid even for public vendors. Symantec shelled out $695m in cash for MessageLabs, topping McAfee’s $497m pickup of Secure Computing as the largest security deal in 2008. So far this year, McAfee’s $140m purchase of MX Logic is the industry’s biggest security transaction, slightly ahead of the contested take-private of Entrust for $124m.

We also suspect that both SaaS acquisitions will pay dividends for Symantec and McAfee. (We have heard from several sources that Symantec is particularly high on its reach across the Atlantic for MessageLabs.) Undoubtedly, these deals will deliver a higher return than the other large SaaS security acquisition, Google’s pickup of Postini. Done two years ago, that buy handed Postini a valuation that’s twice as rich as either MessageLabs or MX Logic. But unlike the moves by Symantec and McAfee, Google didn’t snag Postini for its security offering. Instead, the search giant had the ill-conceived notion that a startup could serve as the platform for its push of Google Apps. Not surprisingly, that idea hasn’t panned out. We certainly haven’t heard much about Postini in the two years since the search giant bought it.

id Software exit signals continued consolidation in gaming

-Contact Thomas Rasmussen

While we have been expecting continued consolidation in the gaming sector for a long time now, we didn’t see this combination coming. Id Software, a staunchly independent, Mesquite, Texas-based shop best known for founder John Carmack and the Doom franchise, sold recently to Rockville, Maryland-based ZeniMax Media. ZeniMax is a relatively small, privately held publisher, having picked up Bethesda Software in 2001. However, the firm has wealthy backers. It raised $300m in 2007 from private equity shop Providence Equity Partners and according to a US Securities and Exchange Commission filing, raised another $105m in debt financing on July 7, which was specifically earmarked for the acquisition of id. Given that ZeniMax undoubtedly wants to retain id’s employees (even giving a seat of the board to id CEO Todd Hollenshead), we suspect ZeniMax also had to tap into its equity to cover the purchase price, which wasn’t revealed.

This deal makes us wonder about the outlook for the remaining independent legacy videogame studios. Specifically, we’re referring to Bellevue, Washington-based Valve Corp and Cary, North Carolina-based Epic Games. Not that we’re suggesting any formal shopping is taking place. But if the id exit shows us anything, it is that in a time when development costs are skyrocketing and financing is harder to come by, it might be wise for studios to join forces with a larger publisher. That’s particularly true as the current economic slump has painfully shown that the videogame industry is not as ‘recession-proof’ as some people had hoped. Shares of Electronic Arts, which serve as a kind of proxy for the entire videogame industry, have been cut in half over the past year, compared to a mere 6% decline in the broader software stock index during the same period.

Videogame-related M&A by the big four, 2006-present

Acquirer Number of acquisitions Total known deal value
Activision Blizzard 10 $5.69bn (includes merger with Vivendi)
Electronic Arts 9 $771m
Microsoft 4 $235m
Sony 6 N/A

Source: The 451 M&A KnowledgeBase

Advisors in EMC-Data Domain: a chorus and a solo

Brenon Daly

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

Credit Suisse tops mid-2009 league table

Brenon Daly

Contact: Brenon Daly

In the midyear update to our league table, Credit Suisse Securities has emerged as the busiest adviser in tech M&A for the first two quarters of 2009. It was a dramatic rebound for Credit Suisse, which fell out of the top 10 in 2008 after ranking third in 2007. The bank owes much of its standing to its role in helping to sell Sun Microsystems to Oracle, which was the tech industry’s largest deal since mid-2008. (Our league table is based on acquisitions of US-based IT businesses that were announced – but not necessarily closed – in the first half of the year.)

But it wasn’t just the one whopper deal that put Credit Suisse on top. In fact, the bank not only advised on the highest amount of tech M&A spending ($10.4bn), it also advised on the largest number of transactions (10). That’s even more noteworthy since Credit Suisse did not participate in the wave of consolidation that has swept through investment banking over the past year. The next two firms in our rankings both bolstered their tech banking practices by doing some M&A of their own.

Banc of America Securities, which ranked second on our midyear league table, has enjoyed a significant boost in its tech advisory business since it closed its purchase of Merrill Lynch on January 1. The combined entity advised on six deals worth some $8.3bn so far this year. Just behind Banc of America is JP Morgan Securities, which added Bear Stearns in a distressed sale in mid-2008. JP Morgan ranked third, with five deals valued at $8bn. We will have the full standings and analysis on the midyear league table in a special report that will be included in tonight’s Daily 451 sendout.

League table standings, midyear 2009

Bank Number of deals Amount of spending
Credit Suisse Securities 10 $10.4bn
Banc of America Securities 6 $8.3bn
JP Morgan Securities 5 $8bn

Source: The 451 M&A KnowledgeBase

IBM’s ‘Tuesday twofer’ still leaves it behind most years

Brenon Daly

Contact: Brenon Daly

In a highly unusual move, IBM did the M&A equivalent of a ‘Tuesday twofer,’ buying both big and small yesterday. In terms of the high-dollar deal, Big Blue said it will hand over nearly $1.17bn in cash for predictive analytics software vendor SPSS. The purchase of SPSS is the company’s largest transaction since it shelled out $5bn for Cognos in November 2007. In fact, we suspect the $1.17bn paid for SPSS is roughly the same amount that IBM spent on the nine deals it has announced (many of them with prices undisclosed) since picking up Cognos.

On the smaller side, IBM also said yesterday that it has acquired startup Ounce Labs, which makes source code analysis software. Terms weren’t revealed, but we wouldn’t be surprised to learn that the amount IBM paid for Ounce Labs was just 1% of the price it forked over for SPSS. Ounce Labs had raised some $29.5m in venture backing.

As a final thought on Big Blue’s doubleheader yesterday, we would note that the two purchases double the number of acquisitions that IBM has announced so far this year. The total of four deals in 2009, however, is basically half the number it had announced by this time in any of the previous three years.

Turning down the trade sale

Brenon Daly

Contact: Brenon Daly

Since the Wall Street crisis erupted last fall, the M&A advice most companies have gotten has been not to sell unless they absolutely have to. That sentiment has quieted overall dealmaking activity, as well as pressured valuations across the board. It turns out that not even promising startups could escape the malaise. Later this afternoon, Tim Miller, our head of financial markets, will present our findings on the status of the AlwaysOn Global 250 to the seventh annual Summit at Stanford University. One key finding about the AO 250 startups: only 12 companies sold in the year since the previous conference, which is just half the number in each of the three previous years. Tech giants that have picked up AO 250 startups since the last conference include CA Inc, Omniture, Nokia and Hewlett-Packard.

While the number of trade sales declined notably for AO 250 companies, there was a significant pickup in the other exit option, an IPO. Three AO 250 companies managed to make it to the public markets over the past year, creating an aggregate market valuation of some $2.5bn. Those offerings came despite talk about the IPO window being closed. Further, all of them are trading above their issue price even though the broader market has been rather inhospitable lately. The Summit at Stanford opens Tuesday and runs through Thursday afternoon. For more details on the conference, see the event page.

Barnes & Noble: buy and build (but slowly)

Brenon Daly

Contact: Brenon Daly

Nearly six months after picking up a startup that developed an application for reading e-books, Barnes & Noble put some of that technology to work last week as it opened what it is calling the world’s largest electronic bookstore. In early March, Barnes & Noble acquired Fictionwise for $15.7m, which allows the company to offer books for users of Blackberry phones, iPhones and other devices. The firm also plans to expand the devices available early next year, when Plastic Logic’s e-Reader is released.

That’s all well and good, but we wonder why Barnes & Noble is moving so slowly into the digital realm. The world’s largest bookseller won’t even have it’s ‘Kindle killer’ in the market until about a year after the Fictionwise purchase, by which time Amazon.com will have hundreds of thousands of its e-book readers in customers’ hands. (Meanwhile, Sony has had a version of its e-book Reader out for nearly three years, although it has had rather muted success.)

Granted, the digital book sector is a tiny slice of the overall $25bn book market. And clearly, other retailers have struggled with balancing their online sales strategy with the brick-and-mortar reality. But we would think that Barnes & Noble would want to push into this growth segment more aggressively. After all, it recently guided that sales at its bookstores open for more than a year will decline by some 4% in 2009.

Quiet close to Micro Focus-Borland after noisy process

Brenon Daly

Contact: Brenon Daly

After more than two months of back-and-forth negotiations, Micro Focus is set to take home Borland Software. Shareholders in Borland approved the $113m deal on Wednesday and Micro Focus shareholders signed off on it on Friday. Originally announced on May 6, the acquisition is set to close early next week. Along the way, Micro Focus had to pay 50% more than it originally bid, but still picks up the application lifecycle management vendor for just 1 times its sales.

The reason Micro Focus had to reach deeper into its coffers is that after the parties initially agreed to the transaction, at least two other shoppers popped up with offers of their own. Or more accurately, the would-be buyers indicated that they were interested in bidding. We already noted our suspicion that one of the pair was the recently launched 2SV Capital, although the firm didn’t pursue the nonbinding bid beyond an initial query.

As for the identity of the other suitor, which was identified only as Company A in US Securities and Exchange Commission filings, it turns out we were off with our guess of Embarcadero Technologies. In fact, we were off by about 3,000 miles. A source indicated that the mystery bidder was in fact Allen Systems Group, which has its headquarters in Naples, Florida. The privately held company has done some 30 acquisitions over the two decades it has been in business. We understand that the firm may have had trouble lining up the financing to top Micro Focus’ offer for Borland, which has an enterprise value of $164m. Allen Systems didn’t return several messages seeking comment.

With Data Domain done, what’s next for NetApp?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.