A bid and a raise for SumTotal

Brenon Daly

Contact: Brenon Daly

The sum total of all interested parties in SumTotal Systems may well be greater than the two that have already disclosed themselves. At least that’s the thinking among investors – or rather, speculators – in the learning management software vendor. Recall that earlier this month, Vista Equity Partners tossed the struggling company an unsolicited offer of $3.25 for each share. (Vista is being advised by Union Square Advisors.) As we noted, the bid included a ‘go-shop’ provision.

SumTotal never got back to Vista on its offer, but it did throw its arms around a slightly richer one from Accel-KKR on Friday. The white knight bid $3.80 for each SumTotal share, valuing the company at about $124m, or $20m more than Vista’s offer. However, we would note that SumTotal shares have traded slightly above Accel-KKR’s offer price since the bid was unveiled. (On Monday afternoon, SumTotal stock was changing hands at $3.85.) Like Vista’s initial offer, Accel-KKR’s included a go-shop provision. On that front, it seems like the shopping may not be done for SumTotal.

‘Animal spirits’ stir M&A market

Brenon Daly

Contact: Brenon Daly

The M&A market is back. OK, not really. But looking at this week’s deal flow, one could forget that spending on acquisitions plummeted 85% in the first three months of the year. (We recently noted that Q1 2009 was the first time since we began tracking tech M&A in January 2002 that we saw a quarter without a deal worth more than $1bn.) Literally as soon as the calendar flipped to April, we saw one 10-digit transaction, and that’s been followed by three others.

Of course, most people point to Oracle’s pending purchase of Sun Microsystems as evidence that ‘animal spirits’ (as Keynes would say) are starting to stir again. That purchase stands as the largest IT transaction since Hewlett-Packard’s $13.9bn acquisition of EDS last May. (Yesterday we reported how Oracle’s planned pickup has reshuffled our league table, at least in the early going of 2009.) Another way to view the mammoth size of the deal is to consider that the $260m break-up fee in Oracle-Sun is larger than all but 15 of the announced deal values so far this year. (As an aside, we would note that the $260m represents 3.5% of the deal value, which is a point above where many other transactions come in.)

However, there were other signs of life in the sector this week beyond that big acquisition. Well-known buyer Symantec returned to the market for the first time in a half-year, paying what we understand was $18m for Mi5 Networks. Also, private equity players notched a pair of deals. And we even saw an unsolicited bid for a public company. We would note that it wasn’t a run at some micro-cap company that no one has ever heard of, much less owns shares in. Emulex is a 30-year-old vendor that earns money and typically trades about three million shares each day. Broadcom offered $9.25 for each share of Emulex, for a total equity value of $764m. However, Emulex stock has been trading above $10 since the offer.

Credit Suisse: Leaping up the league table

Brenon Daly

by Brenon Daly

While most of the focus of Oracle’s mammoth purchase of Sun Microsystems has been on the impact on the tech landscape, we’d like to note that the pending transaction is also likely to radically reshape another market: tech banking. True to form, Oracle didn’t use an outside adviser, while Sun tapped George Boutros and Storm Duncan from Credit Suisse Securities. That means CS gets sole credit for the largest tech deal of 2009, vaulting to the head of our league table.

To put the pending Oracle-Sun deal into perspective, consider that the equity value ($7.4bn) is larger than the total announced equity value of all US IT transactions that CS advised on in 2008 ($6bn). In our annual league table report, CS ranked as the 11th-busiest tech adviser, after finishing third in 2007. In the early going of 2009, CS is the bank to catch. (It also has a co-credit, along with Barclays Bank, for helping to sell Interwoven to Autonomy Corp, which was banked by Deutsche Bank Securities and Morgan Stanley. That was the largest deal of the first quarter.)

Tech banking, of course, is only a small part of the overall operations at Zurich-based Credit Suisse Group. And on Thursday, the institution had some good news for Wall Street. It reported better-than-expected earnings of some $1.7bn for the first quarter. Several other rival banks also posted positive results. The ADRs of CS added 15% in late-afternoon trading on Thursday, meaning they have risen by one-third in value since the start of 2009.

Where might Omniture shop next?

-by Thomas Rasmussen, Kathleen Reidy

When we checked in with Omniture last month, we noted that it was likely to do a bit of shopping. My colleague Kathleen Reidy expanded on that recently with an in-depth report on the possible M&A moves by the analytics giant. Omniture has already shown itself ready to shop, having picked up five companies since its IPO in 2006. Those acquisitions, along with a solid organic growth rate, have helped to push up Omniture’s revenue seven-fold in the past three years. The company finished 2008 with $296m in sales. First-quarter results are due Thursday before the opening bell.

Having essentially consolidated its core market (except for a few private competitors), where might the giant shop next? We think a broader push into marketing automation seems a logical next step. Email marketing is one of the most active areas of Omniture’s Genesis ISV partner program. Potential targets in this space include Eloqua, a well-known and established player in marketing automation. The vendor pulled in an estimated $35m in revenue last year and has so far raised more than $40m in venture funding. Other potential targets include Silverpop, Right On Interactive and Marketbright. Like Mercado Software, which Omniture scooped up last October, all of these email marketing startups are Genesis partners.

Omniture’s acquisitions to date

Target Date Deal value Technology/Rationale
Mercado Software October 14, 2008 $6.5m Retail site search/merchandising
Visual Sciences October 25, 2007 $394m Web analytics market share
Offermatica September 7, 2007 $65m Multivariate testing
Touch Clarity February 14, 2007 $48.5m Behavioral targeting
Instadia January 18, 2007 $11.4m Web analytics market share – Europe

Source: The 451 M&A KnowledgeBase

A somewhat secure M&A market

Brenon Daly

Contact: Brenon Daly

With RSA set to open later this week, we thought we’d take a look back on deal flow since the trade show closed last year. Over the past year, we’ve seen some 83 acquisitions of security companies, with total spending of about $4.2bn. While that’s down from the comparable year-earlier period (April 2007-April 2008: 90 deals worth $5.2bn), the drop-off in security M&A has not been as steep as the overall decline in tech deals. In fact, the number of security transactions slipped just 7% from the previous year, compared to an 18% drop in the number of total tech M&A. Spending on security deals also fell less than the overall market.

Moreover, there are a number of trends that have emerged since the last RSA event that suggest security M&A may well remain healthier than the overall market. For starters, the big shoppers have done big deals. By our tally, Symantec has inked the largest security transaction since the end of last year’s RSA, paying $695m in cash to bolster its on-demand offering with MessageLabs. And McAfee checked in with the second-largest acquisition. Its $497m all-cash purchase of Secure Computing was its largest deal in a decade, and its only acquisition of a public company in at least seven years (excluding the pickup of Bulletin Board-listed Citadel Security Software in 2006).

In addition to the strategic vendors, we’re also seeing financial buyers – both through funds and PE-backed companies – looking to do deals. For instance, Sophos went back to its investors to help finance its $341m acquisition of Utimaco, the largest purchase by a privately held security company of a public counterpart. Also, Vector Capital took home Aladdin Knowledge Systems and, more recently, Thoma Bravo has a pending $114m offer for Entrust. Certainly there have been a few scrap sales, but that’s to be expected in an over-funded market like security. Overall, deal flow remains comparatively healthy in the security sector.

Oracle-Sun: a system on the cheap

Brenon Daly

Contact: Brenon Daly

Oracle’s big step into the hardware market comes at a relatively small price. In buying Sun Microsystems, Oracle is paying just one-tenth the valuation that it paid in its other multibillion-dollar acquisitions. The difference: the other purchases added software vendors with increasing sales and solid profitability, while Sun provides neither of those. Sun revenue is likely to slip about 10% in the current fiscal year, which ends in June, and the company has lost money in three of the past four quarters.

Still, the valuation drop-off is striking. Sun had generated some $13.3bn in trailing 12-month (TTM) revenue. Based on an offer that gives Sun an enterprise value (EV) of $5.6bn, Oracle is paying just 0.42x Sun’s TTM sales. In the four other acquisitions worth more than $1bn that Oracle has inked, the company has paid between 3.7x EV/TTM (Hyperion Solutions) and 5.2x EV/TTM sales (BEA Systems.)

Oracle’s multibillion-dollar deals

Date Target Equity value EV/TTM sales
December 2004 PeopleSoft $10.46bn 3.9x
January 2008 BEA Systems $8.5bn 5.2x
April 2009 Sun Microsystems $7.4bn 0.46x
September 2005 Siebel Systems $5.85bn 4x
March 2007 Hyperion Solutions $3.3bn 3.7x

Source: The 451 M&A KnowledgeBase

Symantec goes box shopping?

Brenon Daly

Contact: Brenon Daly

After holding off for some time, Websense finally rolled out its first secure Web gateway appliance earlier this month. Now we’re hearing that another major security vendor is about to get into the box business. Only this time, it’ll be through acquisition, rather than internal development like it was at Websense. Several market sources have indicated that Symantec has purchased Mi5 Networks, a security appliance startup based in Sunnyvale, California.

The acquisition is expected to be announced at next week’s RSA conference, according to a source. If indeed the deal goes through, it will be Symantec’s first since picking up MessageLabs for $695m last October. Obviously, the purchase of five-year-old Mi5 would be much smaller. (We weren’t able to learn terms of the deal.)

Mi5 has raised just $3.5m in venture backing from Labrador Ventures, First Round Capital and several angel investors. Among the company’s early backers is Sunil Paul, who founded Brightmail. (That’s right, the very same company that was run by current Symantec CEO Enrique Salem.) And finally, there’s an even more direct link in the rumored pairing: Mi5 is currently headed by Doug Camplejohn, a former executive at Vontu, which Symantec acquired in late 2007.

EBay unwinds and adds on

Brenon Daly

Contact: Brenon Daly

For a company that essentially matches buyers and sellers, eBay has been doing a lot of dealing of its own this week. It has picked up a controlling stake in Gmarket, the South Korean online auction house. When we wrote about this possible deal in mid-August, we noted that eBay was willing to pay a not-insignificant premium for Gmarket. Makes sense, given that international sales have been growing more than twice as fast as US sales in recent quarters. (Ebay reports first-quarter earnings next Wednesday.)

The acquisition of a chunk of Gmarket, which is eBay’s first purchase since November, comes as the company also moved to unwind a pair of previous purchases. In the more straightforward of the two, eBay said it will sell StumbleUpon back to the founders of the online bookmarking site. The divestiture comes two years after eBay paid $75m for the property.

We would note that the deal is actually the second sale of an online bookmarking site in the past month. In mid-March, LookSmart divested its Furl property to Diigo, picking up an undisclosed chunk of equity in its privately held rival. While neither transaction performed as the acquirer had hoped, LookSmart did indeed look smarter than eBay because it paid only $1m for its flier on Furl, compared to the $75m that eBay handed over for StumbleUpon.

Rather than go the same route of divesting to former owners, eBay hopes to find a whole new set of buyers for its planned unwinding of Skype. It plans to spin the VoIP vendor to public market investors next year. (We’ll withhold comment on the rather unconventional ‘dual track’ that eBay has now set up for Skype. Just as we’ll withhold comment on the fact that ‘Skype’ rhymes with ‘hype.’)

If it’s lucky, eBay may see the division valued at about half of the $4.1bn that it spent on Skype (including earnouts) back in September 2005. EBay has already acknowledged that it overpaid for Skype, writing down some $1.4bn of the purchase price. While reports have indicated that Skype’s initial founders may be trying to repurchase the company from eBay (a la StumbleUpon), it appears those talks have ended. Still, we could very well see Skype getting snapped up in a trade sale before it hits the public market next year. In a mid-October report, we noted that any of the telcos or even Nokia might be interested in owning the largest VoIP provider.

eBay deal flow

Year Deal volume Deal value
2009 0* $0*
2008 4 $1.5bn
2007 3 $385m
2006 2 $75m
2005 7 $5.1bn

Source: The 451 M&A KnowledgeBase *Excludes purchase of controlling stake of Gmarket

Former PC buyer focuses on InFocus

Brenon Daly

Contact: Brenon Daly

Having already played a central role in much of the recent consolidation of the PC industry, John Hui has shifted his attention to another segment of the tech hardware market: digital projectors. Hui on Monday unveiled a take-private plan for long-suffering InFocus, offering 95 cents for each of the 41 million shares of the digital projector maker. The board of directors, which includes an activist shareholder, has signed off on the $39m tender offer. The bid will go out within two weeks and needs two-thirds of shareholders to support it. (InFocus management and the company’s largest shareholder, who holds 12% of the company, have agreed to back the buyout.)

Hui founded and took public eMachines in 2000. Shares traded underwater after the offer and Hui, advised by Los Angeles-based boutique Averil Capital Markets Group, took the company private the following year in a $161m deal. Hui then turned around and sold eMachines to Gateway for some $256m in early 2004. Following the sale, Hui held a large stake of Gateway and looked to expand that through an unsolicited offer for Gateway’s retail PC division in 2006. Instead, Acer picked up Gateway for $710m in cash in 2007. Shortly after that deal closed, the combined Acer/Gateway acquired Hui’s 75% stake in European PC vendor Packard Bell.

For all of the buying and selling over the past decade, Hui has tapped Averil founder Diana Maranon, a former banker at Wasserstein Perella & Co. (remember that firm?) and lawyer at Skadden Arps. On the other side, InFocus retained a trio of bankers (Blake Kim, Brian Sapp and Seth Ferguson) from Thomas Weisel Partners. The mandate actually dates back to mid-December, when the company hired TWP to help it evaluate an unsolicited approach.

Preemptive consolidation in financial IT?

-Contact Thomas Rasmussen

With reports indicating that IBM has pulled its multibillion-dollar offer for Sun Microsystems, the second-largest deal of the year so far is the $2.9bn all-equity purchase of Metavante by Fidelity National Information Services (FIS) announced in early April. (Yesterday, Express Scripts announced that it will fork over $4.7bn for WellPoint’s NextRx subsidiaries.) In fact, we recently noted that the first quarter closed without a single transaction worth more than $1bn. It was the first time a quarter passed without a 10-digit deal since we began keeping records in January 2002. This transaction consolidates two active acquirers. Metavante and FIS have together inked more than 30 purchases over the past five years: FIS has completed 18 deals worth north of $7bn (excluding this pickup), while Metavante has closed 15 to the tune of about $1.4bn.

The combined FIS and Metavante will have revenue of $5.1bn, about $300m in cash after the transaction closes, and free cash flow of about $700m. However, though the management of the new company outlined its healthy cash flow as means for making further acquisitions, we don’t expect them to step immediately back into the market as the giants work on integrating the blockbuster deal. (We would note that both FIS and Metavante were out of the market in 2008.) Instead, we expect near-term consolidation to likely come from the firm’s two remaining large competitors Fiserv and First Data Corp, which Kohlberg Kravis Roberts took private for $30bn two years ago. Additionally, we could see Oracle and IBM using their vast cash reserves to buy their way into this sector. In fact, FIS and Metavante said in their conference call discussing their planned transaction that one of the reasons they were getting together was to stave off the expected competition from Oracle and Big Blue. So who might be of interest to any of these buyers? We suspect smaller players such as Jack Henry & Associates or even payments competitors TeleCommunication Systems and S1 Corp could well become targets.

Financial IT M&A by the now three largest buyers since 2002

Acquirer Number of deals Total deal value
FIS-Metavante 42 $12.7bn
First Data Corp 20 $9bn
Fiserv 28 $5.3bn

Source: The 451 M&A KnowledgeBase