Epicor has shot down an unsolicited offer from a hedge fund, confirming a move that the market had been expecting in the wake of the credit market collapse. The ERP vendor, which is being advised by UBS, told Elliott Associates that it wasn’t interested in the two-week-old bid of $9.50 for each share of Epicor. Although shares initially approached the $9 level on the news, the stock bottomed out at $6 last week. The gigantic spread reflects widespread doubt that Elliott and Epicor would strike a deal. With about 59 million shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. In addition, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Elliott owns 12% of Epicor. We noted even before the credit bubble burst that Elliott might have a tough sell with Epicor.
Unsecured M&A
In the past month alone, we’ve seen a number of landmark IT security transactions. Symantec inked the largest-ever software-as-a-service security deal, paying $695m for MessageLabs. The largest pure security vendor, McAfee, announced its biggest deal, doubling down on network security with its $497m purchase of Secure Computing. And the formerly somnolent Sophos shook off its sleepiness to go shopping. It recently closed its $341m purchase of Utimaco, the largest acquisition of a publicly held security company by a private company.
So with all of these big-ticket transactions, overall deal flow in security should be strong, right? Actually, year-to-date totals are running at less than half the level of either of the previous two years. The reason: large consolidation plays have been knocked off the table this year. So far, just one security transaction worth more than $500m has been announced, down from five during the same period last year and four in 2006.
Security M&A totals
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Source: The 451 M&A KnowledgeBase
SAP’s next big deal?
Earlier this week, SAP marked the first anniversary of its largest deal ever, the $6.8bn purchase of Business Objects. Now, some folks in the market are already lining up the next multibillion-dollar acquisition for the German giant. JMP Securities analyst Pat Walravens has floated the idea that SAP may be planning to buy data-warehouse titan Teradata. (Incidentally, Teradata celebrated its own first anniversary this week, having started trading on the NYSE on October 9, 2007.)
The pairing would make a fair amount of sense. We noted a year ago that SAP and Teradata have a deep partnership, sharing more than 200 customers. And SAP clearly needs more technological heft if it wants to sell a stand-alone data warehouse. (It currently offers its data warehouse as part of the NetWeaver BI integration stack.) But we have a hard time seeing SAP reaching for Teradata, which sports a $2.9bn market capitalization.
Typically, SAP doesn’t make consolidation plays like Teradata. (That’s the role of Oracle, which is likely to be less interested in Teradata since recently rolling out its high-end data-warehouse offering, HP Oracle Database Machine, which is its answer to the massively parallel-based warehouses offered by Teradata and others.) Instead, SAP generally favors small technology purchases, and one startup that we think would fit SAP pretty well is Greenplum. SAP thought well enough of Greenplum to put some money into its series C earlier this year.
However, SAP might find itself in competition for Greenplum with the startup’s other strategic investor, Sun. Greenplum has a data warehouse appliance for Sun servers. There’s also the alumni connection: Greenplum CEO Bill Cook worked for 19 years at Sun before running the startup. That said, Greenplum is not the only data-warehouse vendor Sun has invested in, having taken a minority investment in Infobright’s series C last month.
Take the next exit
In addition to clobbering existing stocks, the recent financial crisis has thinned the ranks of companies that we had expected to offer up stock in the coming months. In the past week alone, two companies that we had short-listed as IPO candidates (back when there was an IPO market) both got swallowed in trade sales.
On Wednesday, MessageLabs took a $695m offer from Symantec to help establish Big Yellow’s on-demand security offering. We understand MessageLabs had put together its underwriting ticket, and was planning to hit the market once the IPO window opened again. The IPO track was a distinct change from the path rumored for MessageLabs for more than two years. Several sources have indicated that MessageLabs had been shopped widely, with Trend Micro considered the most serious suitor at times.
And last week, we had to take LeftHand Networks out of the ‘shadow IPO pipeline’ when Hewlett-Packard came calling with a $360m offer. For more than a year we have noted that, pending the return of the market for new offerings, LeftHand appeared set to join the IPO parade of storage vendors (a half-dozen storage companies have gone public in the past two years). Instead, LeftHand sold, in a deal banked by Merrill Lynch. Incidentally, Merrill Lynch also banked the sale of another company that had its eye on the public market: Postini, a direct rival to MessageLabs, went to Google for $625m in July 2007.
Deciphering encryption deals
Exactly a year ago, McAfee announced its $350m acquisition of SafeBoot, which in turn came about a year after Check Point Software made its own purchase of an encryption vendor, Protect Data AB. We mention this bit of history because, in what has seemingly become an annual autumn event, Sophos just closed its own big encryption purchase, the $341m deal for Utimaco.
Although the three encryption vendors shared a home market of Europe and were in the same neighborhood in terms of revenue, the three transactions are very different. For starters, the relative growth rates of the targets were all over the board. Protect Data, or Pointsec as it was more commonly known, was clipping along at 90% year-on-year growth when we spoke to them ahead of the takeout. (Although we have heard that some of that torrid growth came at the expense of margins.) Meanwhile, SafeBoot, which was preparing for a possible public offering, told us sales were likely to grow about 70% in the year leading up to its acquisition. In contrast, 20-year-old Utimaco had increased sales just 20% in its most recent fiscal year.
Also, Check Point inked its acquisition of Protect Data when it was running at about $600m in sales. McAfee was even larger, having topped $1bn in annual revenue when it reached for SafeBoot. That’s not the case for Sophos and its just-closed purchase of Utimaco. With Sophos having finished its fiscal year (ending March) with revenue of $213m, it will be looking to integrate a company that is nearly half its size.
Finally, the returns on the two acquisitions already on the books have varied quite a bit. Check Point, which has traditionally been strong on network security, has struggled to notch sales of Pointsec, which secures the endpoint. On the other hand, McAfee has kept SafeBoot rolling along, with one source indicating that the unit will do about $100m in sales this year. The reason: McAfee already had a strong presence on endpoint security, as well as a management console that has integrated SafeBoot. Of those two contrasting acquirers, Sophos lines up more closely with McAfee, which bodes well for its combination with Utimaco. That’s crucial for Sophos, since we consider its purchase of Utimaco a make-or-break deal for the company.
Significant data encryption deals
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Source: The 451 M&A KnowledgeBase *451 Group estimate
Jamba signs off
VeriSign finally washed its hands of ousted CEO Stratton Sclavos’ failed attempt to enter the consumer segment. It sold off its remaining stake in Jamba to NewsCorp for approximately $200m today. This is likely in preparation for a complete divesture of its Communications Business segment that Jamba belonged to. We expect the divesture will be announced before or at the company’s upcoming Q3 Earnings Report on November 6th.
HCM&A
-by Thomas Rasmussen, Brenon Daly
Rather than hitting the public markets, Authoria has landed in a private equity (PE) portfolio, where it is slated to serve as the initial plank in a rollup in the fragmented human capital management (HCM) market. PE shop Bedford Funding picked up Authoria last week, after checking out the market for about a year and a half. (The guys behind Bedford know a thing or two about market consolidation. Before hanging out a shingle with their $400m buyout fund, the Bedford directors and principals served as executives at ERP rollup Geac, which gobbled up dozens of companies before getting swallowed in a $1bn LBO.)
Its experience with ERP consolidation will likely come in handy for Bedford because we have noted a number of times that the current HCM market – with more than 50 startups, along with three or four large vendors – bears more than a few similarities to the ERP market earlier this decade. The ranks of ERP companies were thinned quite a bit as both strategic and financial acquirers went on shopping sprees. (Oracle, Microsoft and Lawson have all inked significant ERP acquisitions this decade, while PE-backed Infor and Consona got their ERP rollups started in 2002 and 2003, respectively.)
We suspect a similar wave of consolidation may be heading to the HCM market, which covers all the stages of hiring, from pre-employment screening to succession planning. And it’s not a bad time to be a buyer, since HCM valuations are coming down. (Authoria sold for about 1.3x its trailing sales, just half the level Vurv Technology got in its $128.8m sale to Taleo earlier this year. Granted, that’s only one data point, but we’ve heard from sources that the markdown of multiples is being seen across the sector.) Given that, along with Bedford’s stash of cash, we expect the rollup to get rolling very soon. What might it be looking for? Maybe a small vendor that could bolster Authoria’s offering around the early part of the hiring process, such as talent acquisition or screening.
Significant HCM deals since 2007
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Source: The 451 M&A KnowledgeBase *Official 451 Group estimate
Happy Anniversary, baby
With SAP shares changing hands at their lowest level in four years, it seems a bit out place to think about Champagne being uncorked in Walldorf. Yet, we would note that it is the first anniversary of SAP’s landmark $6.8bn purchase of Business Objects. Fortunately for Business Objects shareholders, SAP used cash — rather than equity — to cover the price of its largest acquisition. (If Business Objects had taken SAP stock, their company would be worth just $4.4bn, rather than $6.8bn, based on SAP’s current valuation.) For the record, SAP didn’t cite any specific problems with Business Objects, but instead pointed to a ‘very sudden drop’ in overall business as it warned that third-quarter results will be weaker than expected.
Still hot for Sourcefire?
My security colleagues, writing on their Plausible Deniability blog, recently took a look at widening spread between Barracuda Networks’ unsolicited bid and Sourcefire’s current stock price. They noted that although Sourcefire shares briefly nosed above the $8.25 bid floated by privately held Barracuda, the shares have basically retreated back to the level they were before Dean Drako came calling in late May. Well, the spread turned into a gulf Monday, as Sourcefire stock dropped a buck to just $5.97, the lowest level since the unsolicited bid surfaced. For any arb out there, we would note that’s a 27% discount to Barracuda’s bid.
Symantec ‘discovers’ Kazeon?
We hear Symantec, which has already inked five deals so far this year, may be getting close to another acquisition. Several sources have indicated that Big Yellow is planning to bolster its e-discovery offering through a purchase of startup Kazeon Systems. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. Mountain View, California-based Kazeon has raised some $51m in venture backing from a handful of firms, including Redpoint Ventures, Clearstone Venture Partners and Menlo Ventures, which led the startup’s second round.
Several large technology vendors have already made e-discovery acquisitions, running up a tab of about a half-billion dollars in the past year alone. Most recently, Interwoven snagged on-demand e-discovery startup Discovery Mining. In the past, we have speculated that NetApp, which at one point accounted for more than half of Kazeon’s revenue through an OEM arrangement, would be a logical buyer of Kazeon. (We would note, however, that NetApp’s share of total sales at Kazeon has declined in recent months.)
While the e-discovery marketplace is relatively crowded, there are also several key challenges for companies looking to sell in this space. For starters, e-discovery products don’t immediately appeal to departments that must budget to buy software, such as IT or finance. The end user of the e-discovery software, which in many cases is a company’s general counsel, may not have the authority to write a check for an offering that can run $100,000 and up. We recently spoke with a venture capitalist who pulled the plug on an e-discovery startup in his portfolio. He pointed out that e-discovery projects are still largely taken on by service providers and companies have been slow to move that work in-house with purchased software. Recognizing this last fact, Kazeon has inked a number of service partners for its e-discovery products.
Selected e-discovery deals over the past year
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Source: The 451 M&A KnowledgeBase