Quick to offer, slow to vote

Brenon Daly

Contact: Brenon Daly

Even with the recent flurry of deal announcements, the pace of actually getting those proposed transactions in front of shareholders hasn’t necessarily followed suit. On Monday, a pair of buyers of public companies said they wouldn’t be holding votes on the proposed acquisitions, which were both announced in mid-April, until mid-July. To be sure, the anticipated three-month gap between announcing the transactions and shareholders voting on them isn’t alarmingly long. But it does continue the rather drawn-out dealmaking process that we’ve seen since the credit crisis tore apart Wall Street.

In the larger of the two announcements, Oracle said Sun Microsystems shareholders will have the opportunity to sound off on the planned $7.4bn deal on July 16. That is almost two weeks longer than it took to close its slightly larger purchase of BEA Systems last year. And if, as expected, Sun shareholders agree to the pending acquisition and Oracle closes it immediately, the time from announcement to closing would be roughly twice as long as the time for its multibillion-dollar purchase of Hyperion Solutions as well as its smaller acquisition of Stellent.

Meanwhile, Thoma Bravo, which plans to pick up Entrust, originally intended to put its $114m offer before shareholders on Monday. Instead, they will vote on the deal July 10. The delay comes despite not a single superior bid surfacing for the security company during its ‘go-shop’ period. The target said it shopped itself to 35 other potential suitors from mid-April to mid-May, but received only three non-binding offers. Entrust’s board didn’t judge any of them ‘superior’ to Thoma Bravo’s original offer. Shareholders will have their say on that in a month.

Back to basics for PE

-Contact Thomas Rasmussen, Brenon Daly

Coming off a dealmaking binge fueled by cheap credit, private equity (PE) shops have been investing much more soberly since the debt market collapsed late last summer. Highly leveraged multibillion-dollar buyouts have gone the way of the collateralized derivatives. As financing has become much more expensive, PE shops have in turn become more price sensitive. Deals are much smaller and generally done with equity these days. The heyday of the PE buyout boom saw dollars spent on deals balloon from $56bn in 2005 to $98bn in 2006 before peaking at $118bn in 2007. Last year saw a drastic ‘normalization,’ with disclosed spending by PE firms falling three-quarters to just $26bn. Spending on buyouts has plummeted this year, with just $3bn worth of deals through the first five months of 2009.

Even as the aggregate value of LBOs has declined sharply, we would note that the volume remains steady. (The 90 PE deals announced so far this year is roughly in line with the totals for the same period in three of the past four years.) We might suggest that this indicates a return to basics for PE firms. Instead of bidding against each other in multibillion-dollar takeouts of smoothly running public companies, buyout firms are returning to more traditional targets: unloved, overlooked public companies as well as underperforming divisions of companies.

In terms of recent take-privates, we would point to Thoma Bravo’s pending $114m acquisition of Entrust, which valued the company at less than 1x sales. And looking at divestitures, we would highlight the recent buyout and subsequent sale of Autodesk’s struggling location-services business. Hale Capital Partners acquired the assets in February for a very small down payment and what we understand was a $10m backstop in case things went awry. New York City-based Hale Capital put the acquired property through a pretty serious restructuring. (The moves got the division running at what we understand was an EBITDA run-rate of $5m on approximately $20m in trailing sales.) Hale then sold the assets for $25m in cash and stock in mid-May to Telecommunications Systems following a competitive bidding process. Through the terms of the divestiture, Autodesk also had a small windfall in the sale of its former unit, pocketing an estimated $5m.

PE spending falls of a cliff

Year Average deal size (total known values/total deals)
2005 $218m
2006 $305m
2007 $395m
2008 $106m
2009 $26m

Source: The 451 M&A KnowledgeBase

Intuit-PayCycle: A kind of homecoming

Brenon Daly

by Brenon Daly

Looking at Intuit’s acquisition of PayCycle Inc, we might note that the alumni network can pay off – and pay off big. Intuit picked up the payroll services startup earlier this week for $170m in cash. We understand that PayCycle generated only about $30m over the previous four quarters, meaning Intuit paid an estimated 5.7x sales. (Granted, by looking solely at revenue, we’re arguably shortchanging PayCycle. The company, which has some 85,000 customers, sells its payroll services on a subscription basis, meaning revenue substantially lags actual contracts it has billed.) In a somewhat unusual mandate, Goldman Sachs advised Intuit, while Lane, Berry & Co., now owned by Raymond James & Associates, advised PayCycle.

There are a number of connections between Intuit and PayCycle. The Palo Alto, California-based startup was founded by a pair of former Intuit executives (Martin Gates and Rene Lacerte) who then turned the company over to Jim Heeger, Intuit’s former chief financial officer. Also, board member David Hornik of August Capital formerly drew a paycheck from Intuit, as did fellow investor Tom Blaisdell of DCM.

For sale: Supercomputer startup SiCortex

Brenon Daly

Contact: John Abbott

Supercomputer vendor SiCortex appears to have run out of funding options and has put itself up for sale. Gerbsman Partners has been retained to find a buyer for the assets, including the intellectual property, in whole or in part. Founded in 2003, SiCortex sought to lower the cost of developing a supercomputer by sourcing up to 80% of its chip development from off-the-shelf components, primarily multiple low-cost MIPS cores, leaving only 20% of the work to do on custom logic. There are three families of systems, Desktop, Department and Division, ranging from 72 to nearly 6,000 processors. A big selling point was energy consumption, with claims of 60-80% less electricity use than Intel-based clusters. The technology approach is similar to that of IBM’s Blue Gene supercomputers, except that SiCortex was aiming at the bottom 50,000 supercomputer users, rather than the top 500.

Over the years the company raised $68.1m in funding from Flagship Ventures, Polaris Venture Partners, Prism Venture Partners, JK&B Capital and Chevron Technology Ventures. It also acquired the PathScale multicore compiler suite from Qlogic in August 2007. A year later, ex-Novell executive Chris Stone was hired as CEO in hopes of taking SiCortex into its next phase of growth. Momentum appeared to be gathering: 75 computers shipped to customers (including NASA, Lockheed Martin and Argonne National Laboratory), 300 applications up and running plus first-quarter revenue doubling from the previous year. Gross margins were more than 50%.

Sealed bids to Gerbsman are due by June 25. However, with the venerable Silicon Graphics recently selling to Rackable Systems for less than $50m, the prospects for a richly valued sale of SiCortex don’t look very good. We would also note that fellow supercomputer systems startups Fabric7 and Panta Systems have already closed their doors. Look for a full report on the sector in tonight’s MIS sendout.

Is Dell in the market for a GlassHouse?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

After getting its M&A machine revving in the second half of 2007, Dell largely unplugged it after that. It has inked just three deals over the past year and a half, and only one of those has been significant. In February 2008, Dell spent $155m for email-archiving company MessageOne, in a transaction that was a bit of a family affair. The other two buys: a $12m play for a consulting shop and a tiny amount for a Web address to help sell its Adamo line of laptops.

And now, Dell’s efforts to bring in a new executive to do deals for the company have gotten hung up. David Johnson, formerly IBM’s top dealmaker, had been tapped to take over that role at Dell. However, Big Blue sued Johnson, saying the move to Dell would violate the terms of his employment agreement. (Meanwhile, back in Armonk, New York, Cosmo Nista, who had worked corporate development for IBM’s hardware division, has been named acting head of M&A at the company, replacing Johnson, according to one source.)

If Dell is looking to do a deal, our research director for storage, Simon Robinson, has come up with a pretty solid nomination: GlassHouse Technologies. The IT infrastructure services vendor pulled its IPO paperwork in March and recently indicated that it may do some shopping of its own. However, if GlassHouse were to go to the other side of a transaction, it could very well be in a sale to Dell, which is already an investor in GlassHouse as well as being its largest partner. And strategically, the services offered by GlassHouse would fit nicely with Dell’s effort to become a larger supplier of servers and storage to its enterprise customers.

A ‘feature rich’ bidding war for Data Domain

Brenon Daly

Contact: Brenon Daly

A multibillion-dollar bidding war over a technological feature? As crazy as it sounds, that’s one way to look at the contested effort to acquire Data Domain. (Obviously, the company offers much more than the data de-duplication technology that it’s known for. But some rivals – and even one of its current suitors – have nonetheless dismissed Data Domain as a ‘feature’ in the past.) EMC on Monday topped NetApp’s two-week-old agreement to pick up Data Domain.

Even though EMC raised the bid on Data Domain to $30 in cash for each share, the market is clearly expecting more. In mid-afternoon trading Tuesday, Data Domain shares were changing hands at $31.27 – roughly 4% above EMC’s offer. NetApp, which originally offered $25 in cash and stock for each share of Data Domain, hasn’t yet responded to EMC’s move. (As an aside, the bid-and-raise for Data Domain came just hours after we noted bidding wars for two other public companies.)

EMC entering the fray for Data Domain isn’t surprising. According to its offer to purchase the company filed with the US Securities and Exchange Commission, EMC planned to discuss an acquisition with Data Domain in early May, but the target cancelled the meeting. Only a few days later, NetApp, which is being banked by Goldman Sachs, announced its bid for Data Domain, advised by Qatalyst Partners. At this point, EMC hasn’t formally retained a banker to advise it on landing Data Domain (much to the dismay of fee-hungry bankers everywhere). Incidentally, speaking of Qatalyst, the boutique officially announced that it has hired former Goldman Sachs software banker Ian Macleod, which we heard about more than two months ago.

Auction action

Brenon Daly

Contact: Brenon Daly

With one bidding war over a Nasdaq-traded company wrapped up last week, two new skirmishes broke out on Monday. Both Borland and MathStar received conditional offers of higher prices than had previously been floated for the companies. The bid-and-raise process at both these otherwise-neglected companies indicates the M&A market has recovered notably from its low point earlier this year.

In the larger of the two transactions, Borland said in a proxy filed in support of its existing agreement to sell to Micro Focus that it has received a nonbinding ‘expression of interest’ from an unnamed buyout shop. The offer – which is conditional on the firm completing due diligence on the application lifecycle management software vendor – has the firm paying $1.20 for each share of Borland. That tops Micro Focus’ offer in early May of $1 for each share of Borland.

Micro Focus’ bid, which has been blessed by the boards of both companies, came after it first showed interest in picking up Borland in July 2007, according to the proxy. Meanwhile, the proxy indicated that the unnamed financial acquirer only contacted Borland on May 21 of this year. The buyout firm added that due diligence would take about two weeks, and that its offer was not conditional on financing. Borland said in the proxy that it has opened its books to the unnamed suitor.

Meanwhile, after being in play for more than a half a year, MathStar attracted the interest of Tiberius Capital, a Chicago-based fund that offered to buy half of the company at $1.15 per share. That tops an existing offer of $1.04 for each MathStar share from another company. We would note both of these deals come after a seven-week bidding war over SumTotal Systems, which saw the final price soar 50% above the opening bid.

Former high-flyer Cassatt sold in low-multiple deal to CA

Brenon Daly

Contact: Brenon Daly

Few datacenter startups in recent memory have commanded as much attention – or as much investment – as Cassatt. The company, which drew in some $100m in backing, had top engineering talent and proven executives, starting with CEO Bill Coleman. Realizing the promise of all that, however, has proved difficult for Cassatt. It has shuffled through a number of business plans, trying to find a viable strategy. And now, we understand, Cassatt has sold to CA Inc for a fraction of the amount it raised. An announcement is expected next week.

It’s an unfortunate – if unsurprising – end to Cassatt. The company has been for sale for several months and we understand that a number of tech giants, including Oracle and IBM, looked at Cassatt. We can only imagine that talks with any would-be buyers must have been complicated by the fact that they would have had a hard time knowing exactly what they would be buying. Cassatt itself would have had a different answer, depending on when the question was asked.

In its early days, Cassatt was a high-performance computing vendor, but then switched to utility computing and, most recently, positioned itself as an eco-efficient IT vendor. (One byproduct of the ever-evolving business model is that Cassatt was only able to collect two dozen or so customers over its six-year history. We understand that the company did about $12m in revenue last year.) That’s not a knock on Cassatt. The company had grand plans – and raised money to match them. But in the end, it was probably too early into this market. Cassatt’s technology may well play a role in helping to manage the datacenter in the future, but that’s up to CA now.

Emptoris shrugs off possible fine, goes shopping

Brenon Daly

Contact: Brenon Daly

A little more than four months after selling to Marlin Equity Partners, Emptoris reached into the deep pockets of its buyout shop owner to fund its first acquisition: the recent pickup of the contract and service management business from Click Commerce. The deal was part of a larger divestiture of Click Commerce by Illinois Tool Works (ITW), effectively unwinding its September 2006 acquisition. In all, three Click Commerce units went to Marlin, with only the contract and service management unit getting slotted under Emptoris.

As we noted when ITW announced the divestiture last October, Click Commerce was a puzzling purchase for ITW, a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. ITW paid $292m for Click Commerce in 2006. Although terms weren’t disclosed, we understand that the unit Emptoris acquired was generating some $15m in sales. With the additional revenue, we estimate that Emptoris would be running north of $50m.

Whatever size the check that Emptoris wrote for the Click Commerce division, we would note that one insider at rival Ariba quipped that Emptoris better not spend all ‘our’ money. The Ariba source was needling its rival about the fact that a patent lawsuit between the two companies is currently in the final stages. A jury has awarded – and the court has affirmed – some $6m in damages to Ariba. Emptoris is appealing the judgment.

Intalio gets its rollup rolling

Brenon Daly

Contact: Dennis Callaghan

Intalio’s open source rollup has finally started to roll. The company recently took the wraps off a deal it actually did earlier this month, picking up open source CRM software vendor CodeGlide. The acquirer, which has raised some $45m in venture funding, said earlier this year that it planned to do as many as 10 acquisitions over the next two years. (Intalio indicated that it was eyeing small firms with only a dozen or so employees. For its part, CodeGlide had only four employees, all of whom have gone over to Intalio.)

Intalio has wasted little time in making CodeGlide’s software available as Intalio CRM and it plans to eventually make components of this software available under the AGPL open source license. While we can think of more exciting markets than CRM that Intalio could have bought its way into, the deal nonetheless makes a lot of sense, particularly when viewed in light of its Intalio Cloud offering.

In the same breath that it announced the CodeGlide acquisition, Intalio unveiled Intalio Cloud, which is an IBM or Hewlett-Packard server appliance preloaded with Intalio’s applications – both business process management (BPM) and CRM – along with elastic compute and storage utilities. The box is designed to be the basis for companies’ internal private clouds and is available as a managed service offering. It also powers Intalio’s own on-demand wares. So why does this all make sense?

Combine CRM, BPM and cloud infrastructure and you have the main ingredients for becoming a true platform-as-a-service (PaaS) vendor. Intalio will be able to make both its BPM software and new CRM software available on demand and now has the technology to allow customers to build and/or customize their own business applications; it can offer this technology in the cloud or via private clouds. Successful PaaS initiatives – think LongJump and Salesforce.com – require not only good development tools but also an actual application platform that underlies these tools, which are then used for building customizations, mashups and process applications on top of the platform. Less-successful PaaS offerings like those from Coghead, whose technology was built on Intalio’s software, were separate from an underlying application platform and found it harder to deliver on their promise (at least until Coghead was acquired by SAP).

It may take Intalio a few months to deliver on its PaaS vision, but the company is starting to get the right tools in place. What’s next on its shopping list? We would guess a mashup vendor.