End of a (Lucid)Era

Brenon Daly

Contact: Brenon Daly, Krishna Roy

After unsuccessfully trying to find a buyer for several months, LucidEra has turned itself over to a workout firm to sell off the patents and whatever else has value at the once-promising on-demand business intelligence (BI) vendor. We understand that CEO Robert Reid and the company’s board members have left LucidEra, replaced by Diablo Management Group. DMG, which got the mandate last week, has sole fiduciary control at LucidEra. A scrap sale, if it occurs, is likely within the next two months or so.

It’s a stunning fall for LucidEra, which was arguably the most visible startup in the market. Certainly, cofounder and former CEO Ken Rudin was one of the loudest – if not the loudest – evangelist for on-demand BI. (Rudin served as CEO until last July, when he assumed the role of chief marketing officer and turned the company over to Reid.) The company had raised some $23m from Crosslink Capital, Benchmark Capital and Matrix Partners over two rounds. We would note that if DMG does manage to sell LucidEra, the startups’ creditors will be first in line for payment, with any remaining funds then available to investors. LucidEra doesn’t have many creditor claims, but there are some.

In many ways, what initially allowed LucidEra to get going ultimately proved to be its undoing. From the beginning, the vendor tied its fate to Salesforce.com, specifically offering a pipeline reporting and analytics feature for the on-demand CRM vendor. That essentially made LucidEra an after-market add-on for Salesforce.com customers, which limited its market and always prompted questions about why Salesforce.com wouldn’t just offer that technology. It also got us wondering in a report two months ago why Salesforce.com wouldn’t just acquire LucidEra. That may still happen. If it does, however, Salesforce.com will be picking up just a fraction of what LucidEra had been when they last discussed a deal. And it will be paying just a fraction of the price, as well.

Navigating for relevance in a changing landscape

-Email Thomas Rasmussen

It’s becoming increasingly evident that once-dominant makers of personal navigation devices, such as Garmin and TomTom, have lost their way. They have seen billions of dollars in market capitalization erased as smartphone manufacturers have encroached on their sector, largely through M&A. Consider the most-recent example of this trend: Research in Motion’s acquisition of startup Dash Navigation earlier this month.

RIM’s buy is more of a catch-up move than anything else. Rival Nokia has already spent the last few years – and several billion dollars – acquiring and building a dominant presence in the location-based-services (LBS) market. And let’s not forget about the omnipresent Google. Starting with its tiny 2005 purchase of Where2, the search giant has quietly grown into a LBS powerhouse that we suspect keeps even the larger players up at night.

The Dash Navigation sale may well signal the start of some overdue consolidation, a trend we outlined last year. Specifically, we wonder about the continued independence of TeleNav, Telmap and Networks in Motion. TeleNav, for instance, is the exclusive mapping provider for the hyped Palm Pre through Sprint Navigation. But with the trend for open devices, we wonder how long that will be the case.

ECM: And then there was one…

Brenon Daly

Contact: Brenon Daly

With the US government having blessed on Friday the pending marriage between Open Text and Vignette, the only remaining obstacle in the $310m pairing is a vote by Vignette shareholders next month. And we expect pretty quick approval of the offer from Vignette’s long-suffering shareholders, who had seen their shares lose half their value in the half-decade preceding Open Text’s move. Over that same period, Open Text stock had gained about 16%, handily outperforming the 15% loss posted by the broader Nasdaq Index. (Share price is important in this transaction because Open Text is paying roughly one-third of the bill for Vignette in equity. Open Text stock is up nearly 10% since the deal announcement.)

If, as expected, Vignette shareholders sign off on the sale in their July 21 vote, the deal would mark the second major enterprise content management (ECM) vendor taken off the board in 2009. In January, Autonomy Corp announced a somewhat unexpected move into ECM by shelling out $775m in cash for Interwoven. That transaction closed in mid-March. The recent pairings continue a trend of major consolidation in the ECM market that started back in 2003, with EMC buying Documentum for $1.8bn. IBM, Oracle and Hewlett-Packard have also announced ECM deals of their own, pushing the announced value of acquisitions in the sector to $9.4bn since January 2002. For those of you keeping score at home, the one notable enterprise software company that hasn’t made an ECM move of its own is SAP. Of course, SAP just happens to be the largest partner for Open Text. So if the German giant does look to make a buy, we have a pretty good idea of who it might call.

The disappearing LBO

Brenon Daly

Contact: Brenon Daly

With private equity (PE) firms bidding against one another (as was the case with SumTotal Systems) and bidding against strategic buyers (as was the case with Borland), we might be tempted to think that the tech buyout barons are back. Umm, not really. So far this year, PE firms have accounted for just $3bn of the almost $53bn in announced M&A spending. (For more, see our second-quarter M&A report.)

To put that into perspective, consider that in 2006 there were nine individual transactions that topped the $3bn amount that we’ve tallied for the entire first half of this year. In 2007, there were another six LBOs that each eclipsed the aggregate PE spending so far in 2009.

Viewed on a relative basis, the diminished activity of financial buyers compared to strategic acquirers is even more dramatic. Not too long ago, buyout shops could outbid public companies simply because credit was cheap. That helped PE firms account for nearly one-quarter of every dollar spent on tech deals. The level now is closer to a nickel of every dollar.

LBOs as percent of overall tech M&A spending

Period Percent
2009 YTD 6%
2008 9%
2007 27%
2006 21%
2005 15%

Source: The 451 M&A KnowledgeBase

Hey Larry, wanna buy a bridge?

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Although Oracle announced the purchase of Conformia Software on Wednesday, the market is currently buzzing with speculation that the tech giant has closed – but not yet announced – a much larger transaction. Several sources have indicated that Oracle has acquired GoldenGate Software. The two companies have had a deep relationship for some time and while a deal has been kicked around in the past, talks stalled because GoldenGate always priced itself higher than Oracle was willing to spend. We haven’t heard what Oracle ended up paying for GoldenGate, which we understand was generating slightly more than $100m in trailing sales.

In many ways, this rumored deal echoes IBM’s purchase of DataMirror two years ago. In that transaction, Big Blue paid $161m, or 3.3x DataMirror’s trailing 12-month (TTM) revenue. Of course, 2007 was a high-water mark for recent valuations, both on the Nasdaq and among VC-backed companies. (GoldenGate has received a reported $33m from Summit Partners.) According to our analysis of data from the 451 M&A KnowledgeBase, VC-backed companies sold for a median valuation of 6.2x TTM in 2007, compared to just 2.8x TTM sales so far this year.

If Oracle is indeed picking up GoldenGate, the acquisition should enable the database giant to compete more effectively with IBM’s Information Server and other data management offerings from Big Blue. GoldenGate’s technology would give Oracle the opportunity to extend its data migration, high-availability and real-time integration capabilities to non-Oracle environments. GoldenGate already provides data migration capabilities for Siebel applications and real-time integration for Oracle’s data warehouse, for example, so there’s already technical integration in place.

Corporate dealmakers ready to deal

Brenon Daly

Contact: Brenon Daly

Companies expect to be busier with M&A during the rest of the year than they’ve been so far in 2009, even though they’re likely to pay steeper prices for their deals. That’s the takeaway from our recent survey of corporate development executives at more than 60 technology firms. The survey, which closed Monday evening, updated our full report from last December and will figure into our midyear M&A webinar on Thursday.

If not bullish, the projections in our midyear survey are much less bearish than they were in our previous survey at the end of last year. Six out of 10 respondents said their companies will pick up their rate of shopping, while just one out of 10 projected their M&A pace will tail off for the rest of 2009. That’s a notable swing back to optimism from the December survey, when just four out of 10 said they expected to be busier, and two out of 10 said they would slow their acquisition pace.

The view from corporate dealmakers is significant because, collectively, they set the tone in the tech M&A market. So far this year, strategic buyers have accounted for $50bn of the $53bn in announced deal values, with financial acquirers tallying just $3bn. In terms of how they assess the buying environment, however, the view is pretty evenly split. Roughly one-third of the respondents said valuations of private technology companies would fall further in the second half of 2009, with another one-third saying they would hold steady, and another one-third predicting they would rebound before the end of the year.

What’s the outlook for mobile payment startups?

-Contact Thomas Rasmussen

The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.

The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.

However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.

Zix: a prescription for divestiture

Brenon Daly

Contact: Brenon Daly

One conclusion to draw from the recent pickup in divestitures is that dividing corporate attention often means diluting corporate returns. Consider the situation at Zix Corp. The Dallas-based company has a small but growing business selling email encryption. In mid-2003, Zix moved into electronic prescriptions through its $1.5m acquisition of the assets of PocketScript. The plan was to expand its business of providing secure communications to the billions of prescriptions written every year in a less costly and more secure way.

However, after nearly six years of trying to realize those goals, Zix has little to show for it. Revenue from the e-prescriptions unit totaled just $5.4m, or 19% of Zix’s overall sales, in 2008. Sales at the division last year slipped 11% from the year before, compared to a 26% increase in its core email encryption business. (And we would note that both units employed some 73 people, giving an idea of the relative returns of each unit.)

Moreover, the e-prescriptions division has only one-third the number of subscribers that Zix estimates would be required to cover the costs of developing the service, according to the company’s own calculations. And now, Zix has acknowledged that it may never get the business to that level on its own. The firm hired Allen & Co late last week to advise it on ‘strategic alternatives’ for its e-prescriptions unit.

Could ad slump lead to ValueClick exit?

-Contact Thomas Rasmussen

Recently, we’ve covered the hardships of online advertising companies. However, for a clear example of just how tough the environment really is, we point to the weakness at ValueClick, one of the few remaining publicly traded pure-play advertising firms. Amid an advertising slump and tough competition, the vendor has seen its first-quarter revenue decline 20% from the same quarter last year and its own projections point to a similar decline for the current quarter. With the advertising market seemingly trapped in the doldrums for the foreseeable future, we wonder if an opportunistic acquirer might consider a run at ValueClick.

ValueClick trades at an enterprise value of about $800m. This is about half its 2008 high, and down about two-thirds from 2007, when Google and Microsoft were throwing billions of dollars around to secure market leadership. With $592m in trailing 12-month (TTM) revenue, the company trades at a scant 1.3x sales. This is a far cry from the multiples paid for aQuantive and DoubleClick of 10x TTM sales and 12x TTM sales, respectively.

With $100m in cash and no debt, ValueClick CEO Tom Vadnais has indicated that the company is interested in doing some shopping of its own. However, given the dire state of the economy, we think a takeout is a much more plausible outcome over the next year or so. The potential acquirers include the usual suspects such as Microsoft, Google and IAC/InterActiveCorp; soon-to-be-independent AOL; and large media companies. However, we would hasten to note that most of these vendors have full traditional advertising portfolios, so an acquisition of ValueClick would merely be for boosting market share.

What’s on NICE Systems’ shopping list?

Brenon Daly

Contact: Brenon Daly

After being out of the market for more than a year, NICE Systems is looking to do deals again. The Israeli company inked a pair of asset purchases in 2008, with a total bill just shy of $20m. Those pickups came after NICE made its largest acquisition to date, the $280m cash-and-stock purchase of Actimize. With no debt and some $530m in cash and equivalents, NICE certainly has the means to do deals. The firm didn’t offer a peak at its shopping list, but said Tuesday at the RBC Technology, Media and Communications Conference that it will be active.

As its most-significant acquisition, the addition of Actimize bolstered NICE’s analytics offering, helping to expand the number of applications the company sells. (Actimize has also thrived under NICE. We understand that the startup has doubled its revenue to $60m in the two years since NICE acquired it.) Founded in 1986, NICE sold recording technology for call centers for much of its corporate life. In the past year or so, it has expanded into additional applications, such as workforce management, customer feedback and governance, risk and compliance. Roughly three-quarters of NICE’s revenue comes from its enterprise business, with the rest coming from its security unit.

Of course, the market has been speculating on and off for many years about a large deal by NICE involving a combination with archrival Verint Systems. However, valuing any potential transaction remains a challenge because of Verint’s majority owner, Comverse Technology. (Yes, that’s the company that has been wracked by allegations of fraud and options backdating scandals, with its founder and former CEO living on the lam in Africa. The company’s financial statements are also woefully out of date.) We understand that Comverse retained a banker some time ago to help sell off some assets. If Comverse wanted to reheat that effort and shed Verint, we’re pretty sure that NICE would put aside historical rivalries and consider that consolidation play.