SGI lives on, as Rackable closes deal and takes name

Brenon Daly

Contact: John Abbott

Rackable Systems has won approval from the bankruptcy courts to acquire Silicon Graphics Inc for $42.5m in cash, as other potential bidders passed on the one-time tech stalwart. And, just as Tera Computer did when it bought the much-better-known Cray in 2000, Rackable has opted to take on the Silicon Graphics name and branding. Rackable Systems becomes Silicon Graphics International, and the brand will be SGI. The Rackable name will survive only as a product moniker.

The higher price – the original offer was just $25m – now includes the equity of SGI’s international subsidiaries and federal systems businesses. The combined companies will have 5,000 customers and 1,350 employees worldwide, though the headcount is expected to shrink fairly rapidly to 1,250. The headquarters will stay in Rackable’s hometown of Fremont, California. Rackable’s current president and CEO Mark Barrenechea will hold the same roles and the board of directors will remain unchanged. However, some SGI executives will join the new management team, including Diane Gibson (senior VP of operations), Eng Lim Goh (senior VP and chief technical officer) and Robert Pette (VP of visualization).

Target customers are medium- and large-scale datacenters and high-performance computing (HPC) firms with Rackable’s x86 cluster compute systems, shared memory clusters, modular systems, storage products, data management software, HPC tools and visualization software. However, Rackable will have to work hard in the current economic climate. While sales were up slightly from the previous quarter, the company’s just-released first-quarter figures showed a year-over-year revenue decline of 34.5% to $44.3m and a loss of $13.4m.

What’s the return on Borland’s M&A?

Brenon Daly

Contact: Brenon Daly

Looking a bit closer at Micro Focus’ $75m acquisition earlier this week of Borland Software, my colleague John Abbott noted that the British company was essentially picking up the Segue Software business that Borland itself bought three years ago. Borland paid $100m, or an enterprise value (EV) of $86m, for the testing and quality assurance tools vendor, which worked out to about 2.3x EV/trailing 12-month (TTM) sales. The purchase of Segue in February 2006 came as part of a larger overhaul of its business, which included Borland ditching its developer tools division.

Fast-forward three years, and Segue is being valued by Micro Focus at just 80% of the amount that Borland paid for it. If we look at Borland’s overall EV of just $67m, the contrast is even starker. Micro Focus is paying a mere 0.7x EV/TTM sales for Borland, which is just one-third the multiple that Borland shelled out for Segue. This isn’t to pick on Borland or knock it for agreeing to sell itself for $1 per share, which is probably as good an outcome as it could have hoped for.

However, the valuation gap does highlight a larger problem in realizing value through M&A. Consider that since 2002, Borland – under various chief executives – has spent more than $300m on nearly a dozen deals. And yet, when all of the firm’s dealmaking was priced by another market participant (in this case, Micro Focus), the aggregate value was actually two-thirds lower. Granted, Borland was shopping in a different time than our current recession, which has obviously pushed valuations down these days. (And the valuation decline is nowhere near as drastic as we’ve seen elsewhere in the market, such as the bankruptcy of Nortel Networks, a company that was once worth more than $200bn.) Still, it’s always worth noting the price a company pays when it buys and the price it gets when it ultimately sells.

Select Borland acquisitions

Date Target Equity value
February 2006 Segue Software $100m
October 2002 TogetherSoft $185m
October 2002 Starbase $24m

Source: The 451 M&A KnowledgeBase

Comings and goings on US exchanges

Brenon Daly

Contact: Brenon Daly

The flurry of M&A announcements on Wednesday not only boosted trans-Atlantic shopping totals so far this year by nearly 20%, it also continued the trend of thinning the ranks of US public companies. The pair of Nasdaq-listed firms that got erased on Wednesday (Borland and Vignette) brings the number of acquisition announcements of US public tech companies to some 22 so far this year.

To be clear, that sum is made up of deal announcements, not closed transactions. So it includes offers that have been rejected by the would-be target (Emulex) as well as bids where the terms are still in play (SumTotal Systems). Against that, we have had only a minimal ‘repopulation’ of the US exchanges. Just three tech companies – none of which is a true IT vendor – have gone public this year. That’s about to change with SolarWinds, which is expected to hit the market in a week or two. (And on the consumer Internet side, OpenTable set the terms of its planned IPO on Thursday.)

We would also note that Wednesday’s ‘twofer’ of Borland and Vignette is actually the third time in the past month that two deals for US public companies have been announced in a single day. The other days: April 20, with Oracle-Sun Microsystems and Trilogy-Autobytel, and April 13, with Thoma Bravo’s bid for Entrust and Image Holdings’ reach for InFocus. In terms of banking, JP Morgan Securities did the double Wednesday, advising both Borland and Vignette on their sales to Micro Focus and Open Text, respectively. But the bank is doing its part to add back public companies, leading the SolarWinds offering.

Trans-Atlantic transactions take off

Brenon Daly

Contact: Brenon Daly

It was a big and busy day on Wednesday for British companies shopping in the country’s former colony across the Atlantic. Collectively, the three deals boosted the total disclosed value of acquisitions by UK-based firms so far this year by nearly 20%. For starters, LSE-traded software vendor Micro Focus picked up one full Nasdaq-listed company and bits of another US public company, spending a total of about $155m. Taken together, the simultaneously announced deals are the second-largest transaction announced in 2009 by a UK-based buyer. Adding to that, British defense giant QinetiQ reached for a well-funded security startup in a deal that features a handsome valuation and a pretty rich possible earn out.

In the more significant purchase, Micro Focus picked up long-ailing Borland Software for $1 per share, or an equity value of about $75m. In the same breath, it also scored a business line from Compuware for $80m. Micro Focus says the addition of Compuware’s application testing/automated software quality (ASQ) unit will help bolster its existing ASQ offering, a suite of tools that it sells under the Data Express name.

One of the more interesting aspects of Micro Focus’ double-up deal is that the company tapped Arma Partners to run both processes. (The transaction was headed up by Arma’s Paul-Noël Guély, along with Keith Robinson, Varun Sunderraman and Graham Smith.) Arma has served as a kind of house bank for Micro Focus, advising on four of the company’s past five deals. On the other side of the table, Updata Advisors worked with Compuware on its divestiture and JP Morgan Securities advised Borland. We’ll have a full report on the moves by Micro Focus in Thursday’s 451 Group sendout.

In a separate transaction, QinetiQ (through its North American arm) moved deeper into the cyber-intelligence world by buying Cyveillance. Terms call for QinetiQ to hand over $40m upfront, along with a possible $40m earn out over the next two years. Cyveillance, which we understand didn’t use a banker, generated sales of about $10m in 2008. Look for a full report on the relatively richly valued transaction in tonight’s 451 Group MIS email.

Macrovision buying again?

Email: Yulitza Peraza, Thomas Rasmussen

Since the start of 2008, Macrovision has put on hold its previously active acquisition program and has instead focused solely on divestitures. Now, it looks like the company may be done shedding businesses and may actually look to add them. The switch comes as Macrovision dumped its tremendously unprofitable eMeta business for an estimated $800,000 in November (down significantly from the $35m it paid for the unit in 2006), and finally closed its $255m TV Guide Network sale to Lionsgate in March. Macrovison popped back up as a buyer for the first time in 10 months in mid-April, purchasing Muze from Enterprise Partners Venture Capital for $16.5m.

Macrovision’s portfolio cleanup hasn’t been lost on Wall Street. Shares of the digital home entertainment giant are up 60% so far this year, pushing its market capitalization to about $2bn. It also holds nearly $300m of cash and short-term investments in its treasury. On the other side of the balance sheet, it holds some $888m of debt. Investors will get their latest update on Macrovision on Thursday, as the company is slated to report first-quarter earnings.

In terms of M&A, Macrovision tells us it’s ready to continue shopping, albeit opportunistically. (We suspect that, given its current debt load, the firm won’t be looking at large deals.) As possible targets, we would highlight a pair of micro-cap digital content companies. First, OpenTV, an interactive TV broadcasting middleware vendor that is already reviewing an outright takeover offer by Kudelski Group, which already owns 28% of the company. (OpenTV shares are trading above the offer price, but even then the firm is valued at only twice its cash holdings.) A second possibility is SeaChange, a digital video storage & distribution vendor that trades at just 0.6x enterprise value/trailing 12-month revenue. Picking up either company would help to bolster Macrovision’s standing in the digital content distribution market as well as enhance the value of its metadata search business.

Macrovision’s buying and selling since 2002

Type Total value Total volume
Acquisitions $3.2bn 11
Divestitures $510m 5

Source: The 451 M&A KnowledgeBase

M&A rumors follow reality

Brenon Daly

Contact: Brenon Daly

There’s yet more proof that the M&A market is back. No, we’re not talking about the fact that April boasted the highest monthly deal spending since June, with some $21bn worth of announced transactions. We’re referring to something that’s far less quantitative: deal whispers.

Indeed, the traffic in M&A rumors has grown substantially in recent weeks, and many big names are popping up. It may just be a byproduct of the resurgent Nasdaq, which has risen one-quarter in value over the past two months. But it’s nonetheless worth noting that there’s M&A buzz once again, even if some of the gossip strikes us as highly unlikely.

For instance, last week saw reports of QLogic attracting interest from EMC. We have a hard time understanding why EMC would want to be a storage networking company, particularly when it’s been tightening its relationship with networking powerhouse Cisco Systems. Nonetheless, the market was kicking around that possible pairing as Broadcom was pushing its unsolicited offer for QLogic rival Emulex. (Of course, QLogic was in the market last week, but on the buy side. It picked up seven-year-old startup NetXen for $21m. QLogic says NetXen, which generated essentially no revenue over the past four quarters, will contribute $5m in sales in the coming year.)

And then there were whispers of a deal that we suspect is even more of a long shot: the word was that BMC may be looking to snag SolarWinds before the latter goes public. However, that rumored pairing seemed unlikely from the start. We wonder, for instance, how BMC, which targets big-ticket sales at large enterprises, would have much success selling SolarWinds’ inexpensive, downloadable software. (The average license sale at SolarWinds is less than $6,000.) Still, it’s worth noting that it has been some time since we heard the term ‘dual-track,’ even if that’s almost certainly not the case with SolarWinds.

April M&A: not ‘cruel’ at all

Brenon Daly

Contact: Brenon Daly

With all due respect to T.S. Eliot, April actually turned out to be a pretty kind month, at least for dealmakers. (The poet’s justifiably renowned work, The Waste Land, begins, “April is the cruelest month, breeding / Lilacs out of the dead land….”) The number of transactions announced in the just-completed month hit the highest level we’ve seen so far in 2009. Indeed, it was the largest monthly tally since October, when Wall Street truly looked like a wasteland.

The surge in M&A spending is even more noteworthy. The aggregate value of announced deals in April was roughly $21bn, the richest single monthly total since June 2008. In fact, tech shoppers spent substantially more in April alone than they had in the previous four months combined (December 1, 2008-March 31, 2009: $16bn). We’ve noted some of the encouraging signs in the M&A market that could continue to boost shopping through the rest of the year. Maybe 2009 won’t be such a cruel year for dealmaking after all.

Deal flow, 2009

Month Deal volume Deal value
January 2009 219 $3bn
February 2009 191 $2bn
March 2009 235 $4bn
April 2009 255 $21bn

Source: The 451 M&A KnowledgeBase

Second time’s a charm for I-many?

Brenon Daly

Contact: Brenon Daly

As it reported its first profit since going public in 2000, I-many also said Wednesday that it will be going private in a $36m buyout by LLR Partners. The Philadelphia-based buyout shop – led by Greg Case, who joined LLR from Apax Partners last fall – offered 43 cents for each share of I-many. (Montgomery & Co banked I-many, with Rob Louv, John Cooper and Joe Morgan handling the mandate.) We understand that a number of other private equity firms looked at I-many, with the process picking up momentum at the end of last year.

While the proposed acquisition is slated to close this summer, it still has to clear a few hurdles. For starters, terms can change if I-many’s cash holdings dip below $8m before the deal closes. The company, which held $9m in cash at the end of the first quarter and expects to generate cash every quarter this year, said in a conference call that the $8m requirement is a ‘conservative’ level. So it shouldn’t have trouble hitting that. Indeed, I-many shares were trading in line with LLR’s offer on Thursday.

The other big obstacle is a shareholder vote. Since the offer represents a 70% premium over where I-many’s shares were trading before the bid, one might think that a sign-off is automatic. But I-many’s shareholders have already shot down one offer. In December 2004, Selectica bid some $70m for I-many. That offer didn’t make it through because I-many’s shareholders said it undervalued the company. Indeed, a year and a half later, I-many shares had doubled.

The end of 2007, however, proved to be the high-water mark for shares of I-many. From more than $3, they dropped to a low of about a dime late last year. The company was in danger of getting delisted from the Nasdaq, which would have accelerated the payment of the notes that it sold in December 2007. According to terms, note holders have agreed to hold off on that, and will redeem them when the deal closes.

Sales of tech assets are on the rise

-by Thomas Rasmussen, Yulitza Peraza

At a time when both M&A volume and deal values have declined dramatically, the relative volume of asset sales continues to rise. There are two main contributors to this. First, companies are under increasing pressure to focus on their core operations, so they’re looking to divest underperforming business units. And second, cash-burning startups often find their venture backers unwilling to sink more money into them, resulting in wind-down sales of the intellectual property they had developed.

For the first quarter of 2008, the volume of asset sales represented some 15% of total announced transactions. That number doubled in the first quarter of 2009 and has even inched up a bit in April. About one out of every three transactions announced so far this year has been an asset sale.

For all the talk of unbridgeable valuation gaps, however, we would note that the buyers often get a sharp markdown on the price of the assets. Consider Artistdirect’s acquisition of SafeNet’s MediaSentry unit this month. SafeNet, which originally paid $20m for the division in 2005, wanted the MediaSentry assets off its books before the end of the first quarter, and Artistdirect’s new management was happy to fork over less than $1m for the unit. We understand that the deal closed within a few weeks. Or look at semiconductor startup Nethra Imaging, which picked up the assets of Ambric for an estimated $1m this month. Ambric had received an estimated $30m in funding, but when investors refused to step up with another round, the startup had little choice but to sell.

Asset sales spike

Period Volume of asset sales, as % of overall M&A
April 1-24, 2009 32.4%
Q1 2009 31.8%
Q4 2008 19.9%
Q3 2008 17.4%
Q2 2008 16.2%
Q1 2008 15.8%
Q4 2007 13.7%

Source: The 451 M&A KnowledgeBase

Going it alone can be expensive

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

Wall Street hasn’t been particularly supportive of tech companies that turn down unsolicited offers and opt to go it alone. Shares in a number of the targeted firms are currently changing hands at less than half the level that the would-be suitors were willing to pay for them. To wit: Microsoft was reportedly set to pay in the mid-$30s for each share of Yahoo, which is now trading in the mid-teens. And having spurned a $16-per-share unsolicited bid from Cadence Design Systems last summer, Mentor Graphics stock is now trading at about $7.

We mention that bit of cautionary history because there’s another showdown brewing. Broadcom, advised by Banc of America Securities, recently offered $9.25 for each share of Emulex, giving the unsolicited bid a total equity value of $764m. (As it often does, Goldman Sachs is advising the target.)

Broadcom’s bid values Emulex where it was trading last October. On an enterprise value basis, the proposed transaction values the maker of storage networking gear at just 1.2x its trailing 12-month (TTM) sales and 5.5x TTM EBITDA. Emulex investors want a richer valuation and have pushed the stock above $10 since the offer was unveiled. Broadcom has vowed to take the unsolicited bid directly to shareholders if the Emulex board rebuffs it. On its conference call Monday discussing fiscal third-quarter results, Emulex said only that it was ‘thoroughly’ reviewing Broadcom’s offer.

From Broadcom’s point of view, it’s understandable why it would want its fellow southern California-based company. If the deal goes through, Broadcom would get a foothold in a few interesting storage markets such as host bus adapters (for both standard servers and blade servers) and embedded storage processors for disk arrays. Broadcom sells Gigabit Ethernet and 10-Gigabit Ethernet products, but is not a player in the SAN market. With network convergence growing in popularity, Broadcom would also benefit from Emulex’s fiber channel technology and its new Fiber Channel over Ethernet adapters.