Macrovision makes small buy for big ambitions

In spite of a 40% drop in its stock since plunking down $2.8bn for Gemstar-TV Guide in December 2007, Macrovision continued its push into online TV distribution markets with the asset purchase of ThoughtWorthy Media last Friday. Without giving too many details on its plans, the digital content protection company said the deal will provide its TVGuide.com property with a more advanced search and metadata platform. It also vaguely hinted that the technology acquired would improve its current mobile search, which is rather limited. Macrovision also launched a new video search widget earlier this month.

Macrovision (now known as Macrovision Solutions Corporation) has been busy repositioning itself as an online media company since the beginning of 2007. In this time, it has shelled out $3bn on five deals for online content and the technology to deliver it. The company has also been selling off units unrelated to this online strategy. This year, it sold off its software business to Thoma Cressey Bravo for $200m, as well as its digital rights management assets for disk-related games from its Trymedia unit to RealNetworks for $4m (Macrovision paid $31m for the company three years ago).

Even though the online content provider has seen an increase of TVGuide.com users and Wall Street is becoming less skeptical of the Gemstar combination, shareholders still need to be sold on the company’s current strategies. Through its acquisition of ThoughtWorthy’s metadata platform, Macrovision plans to create a video tagging service that will allow users to find and buy songs from within TV shows. Although small, the addition of this potential revenue stream to its current advertising-based business model could nonetheless bump up the standing of Macrovision on Wall Street.

SanDisk amps up its music player offerings

With its $6.5m tuck-in acquisition of MusicGremlin last week, SanDisk is bulking up its digital music player business. MusicGremlin, with just eight employees and about $5m in revenue, will obviously not have a material effect on SanDisk’s business. Nonetheless, the importance is not so much the size or scope of the company, but more the technology it has developed during its four years in operation. Specifically, MusicGremlin gives SanDisk the ability to effectively stream music wirelessly to its products. We have learned that SanDisk was very eager to acquire the startup, with the large company initiating talks and sealing a deal within a few weeks. Given SanDisk’s recent effort to build its product offerings through strategic acquisitions, what other acquisitions might the company be considering?

From our perspective, SanDisk needs to do some shopping. It currently ranks a distant second place to Apple in the digital music player market, but also faces stiff competition from the likes of Microsoft, Sony and Panasonic. Perhaps the biggest hole in SanDisk’s offerings is the lack of an in-house music and video content provider, like Apple has with its iTunes and Microsoft has with its Zune Marketplace. To date, SanDisk has relied exclusively on partnerships, but learned the downside of that strategy the hard way in February, when Yahoo suddenly shuttered its Music Unlimited service. The disappearance of the service, which was the very foundation of SanDisk’s Sansa Connect player, left users understandably sour.

As to where SanDisk might look for a music service, two names come to mind: Rhapsody (owned by RealNetworks) and Napster. Despite taking in about $150m and $130m last year, respectively, both are consistently running at a loss. Clearly they could be had for a steal. More importantly, they are both proven and established music services with mobile offerings that would make integrating MusicGremlin’s technology an easy task. Using Napster as a comparable, we believe either company can be had for just under $100m, representing a 40% premium over Napster’s current price on Nasdaq. With $1.22bn in cash and a market cap of $5.2bn, SanDisk could certainly afford a few deals to shore up its defenses for the inevitable battle of the titans.

Lessons from a big Yahoo

Brenon Daly

Talk about being thrown straight into the shark tank (or more accurately a barracuda tank): John Burris has agreed to step from the board to the CEO spot at Sourcefire. The appointment comes just two weeks after Barracuda Networks made an unsolicited offer for the network security vendor. We noted that the low-ball bid of $7.50 per share from Barracuda – an aggressive company that lives up to its name – will likely set the ‘floor price’ for any sale of Sourcefire. (Since the bared-teeth bid was revealed, Sourcefire’s long-suffering shares have closed above the offer price in every trading session, finishing Wednesday at $7.92. The $0.42 difference equates to about a $10m gulf between what the market says Sourcefire is worth and what Barracuda says the company is worth.)

The fact that Sourcefire – which had been looking for a chief executive replacement since February – stayed in-house to fill the top spot makes us wonder if the company hasn’t resigned itself to a sale. Don’t forget that Sourcefire was supposed to be sold to Check Point Software Technologies more than two years ago – at a higher price than its current valuation, no less. And although we are far from experts in employment contracts, we saw nothing in Burris’ agreement that would make an acquisition of Sourcefire prohibitively expensive. Certainly nothing like the employee severance plan at Yahoo, which is effectively a poison pill.

Indeed, Burris may well look at the tenure of Yahoo’s Jerry Yang during Microsoft’s unsolicited approach to the search engine as a quick executive lesson in how not to handle M&A. On the no-no list: refusing to talk to a suitor, erecting all sorts of obstacles to consolidation and, above all, continuing to insist that you know best in creating value at a company – even when all evidence points to the contrary. “I bleed purple,” Yang said at one point, using Yahoo’s signature color to demonstrate his closeness to the company he helped found. Yang may see it that way, but Carl Icahn and other Yahoo shareholders don’t particularly care. They’re very clear that blood is red, just as money is green. We think Burris – whose connection to Sourcefire only dates back to March and who previously headed up sales at Citrix Systems – won’t suffer a similar case of color blindness.

A chippy deal

Brenon Daly

After more than two months of discussions, Cadence Design Systems put a bear hug on Mentor Graphics on Tuesday, June 17, offering roughly $1.6bn in cash for the smaller chip-design vendor. Under terms of the unsolicited offer, Cadence would pay $16 for each of the roughly 91 million Cadence shares. Cadence said it would cover roughly one-third of the purchase with its available cash, while borrowing an additional $1.1bn. Deutsche Bank Securities is advising Cadence.

The deal – if it gets approved by Mentor shareholders and survives regulatory review – would combine two of the three largest electronic design automation (EDA) companies. Cadence and rival Synopsys are roughly the same size at about $1.6bn in sales last year, which is twice as big as Mentor. (Various pairings of these three players have been discussed over the years.) However, Mentor said later Tuesday that it was not interested in a pairing with Cadence.

Cadence’s approach, which we would characterize as ‘opportunistic consolidation,’ continues a recent trend toward unsolicited offers for underperforming rivals made in a very public way. (Although Mentor has recently trimmed its rather bloated cost structure, the company’s operating margins are less than half the level at Cadence.) The outcome of these ‘bear hugs’ has spanned the possibilities: Iomega recently accepted a raised offer from EMC; Microsoft walked away from its unsolicited bid for Yahoo; and Electronic Arts took its bid for Take-Two Interactive hostile.

EDA deal flow, by year

Year Deal volume Deal value
2005 5 $298m
2006 6 $888m
2007 13 $225m
YTD 2008* 11 $2.7bn

*includes announced Cadence-Mentor transaction. Source: The 451 M&A KnowledgeBase

Emerald Isle M&A

Brenon Daly

Given that today is Bloomsday, we’ve given ourselves literary license to take a look at deal flow between the US and Ireland. (Don’t worry, if you’re like us and have never actually managed to get through James Joyce’s ‘Ulysses’ – despite taking more than a few cracks at the tome – this Insight will still make sense. Quick show of hands: Who’s actually read all the way to “…and yes I said yes I will Yes”?)

In any case, deal-flow between the two countries has been remarkably stable during the past four years, clipping along at about 30 deals each year. M&A spending in the most-recent year, however, has fallen to its lowest level, just half the previous year and one-quarter the level in the year before that. (Note: In three weeks, we’ll publish our annual Trans-Atlantic Tech M&A Banking Review. Obviously, the steady decline of the US dollar has had a big influence in deal-making. So far, we’ve seen European acquirers be even more active than the previous year, while US buyers have only spent about half as much as the same period last year. You can request a copy of last year’s report here.)

One company that may very well figure into the US-Ireland M&A tally very shortly is Iona Technologies. We noted in February that the Dublin-based company had attracted an unsolicited bid from an unknown company, which turned out to be Germany’s Software AG. Iona has retained Lehman Brothers, which led its IPO in the late-1990s, to advise it. At the time, we tapped SAP and Sun Microsystems as the most-logical buyers of Iona. More recently, an Irish newspaper reported that Progress Software or Red Hat is Iona’s ‘preferred’ buyer. Meantime, Software AG now says it’s out of the running. So it looks like we could very well be seeing an American company pick up another piece of the Old Sod. 

Irish-US M&A (year ending each Bloomsday)

Period Deal volume Deal value
June 16 2004-05 28 $1.2bn
June 16 2005-06 29 $3.8bn
June 16 2006-07 36 $1bn
June 16 2007-08 33 $860m

Source: The 451 M&A KnowledgeBase

Blank printing presses

Brenon Daly

Gutted by the arrival of Internet, newspaper companies have nonetheless printed very few transactions that could help them survive in the Media 2.0 era. One reason for the blank M&A pages: The currencies available to them are disappearing, according to Tim Connors, a partner at U.S. Venture Partners. Speaking on a panel at the recent IBF VC Investing Conference in San Francisco, Connors said the virtually uninterrupted slide in shares of many media company have taken a few would-be acquirers out of the market.

Indeed, we can only imagine it’s probably inconceivable for any of the newspaper companies to be shopping, at least not for an equity deal. Regional newspaper company McGannett shares are currently trading at their lowest level ever; USA Today-owner Gannett stock has sunk to a 14-year low and shares in the venerable New York Times are changing hands at levels not seen since mid-1996.

At the IBF conference, Connors noted USVP recently had an exit to an old media company. Portfolio company Adify, which runs advertising networks for some 120 vertically focused Web sites, got snapped up by Cox Enterprises for $300m. (Adify was in the midst of raising a third round of funding when Cox took them out. JP Morgan banked the deal after one of their analysts initially suggesting the two companies might strike a commercial relationship.) Incidentally, Cox paid its $300m bill for Adify in cash. 

Loopt scores at Apple’s WWDC

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As Apple’s Worldwide Developers Conference winds down, the hype for the new iPhone is only beginning. Amid all the hoopla, though, we couldn’t help but make an observation about not so much what was in Steve Job’s all-important keynote, but what wasn’t. Specifically, Kleiner Perkins Caufield & Byers’ much-touted iFund was only mentioned in passing, and none of the surprisingly few ventures were highlighted. (KPCB has written checks to just three companies, out of thousands of applicants.) In fact, a major competitor of iFund’s location-aware application Whrrl, Loopt, was a highlight of the keynote. This comes as somewhat of a surprise after Palego’s Jeff Holden and KPCB partner Matt Murphy spoke highly of their relationship with Apple in a May 27 BusinessWeek article and even speculated on the chances of being a featured app. This led many to believe they were a shoe-in for the keynote. Given Apple’s obsessive demand for radio silence prior to the event, perhaps loose lips do indeed sink ships.

Loopt is funded by KPCB competitors New Enterprise Associates and Sequoia Capital to the tune of $15m. It has a few hundred thousand paying customers, but more importantly, it is the leader in the mobile location-aware-social-networking space spanning several carriers and operating systems. This is a market that has seen a lot of interest from the likes of Google, AOL, Microsoft and even Facebook. In the aftermath of the conference, whispers and rumors of potential acquirers of this little app are all over the place.

Since Google let Plaxo go to Comcast and has failed with its in-house development (Orkut), the search engine has been itching to make headway in the sector through acquisitions. Given Google’s huge push into the mobile space, it is seen as a likely acquirer. However, we think the most probable acquirer is Facebook. The soaring social networking site has been serious about pushing into mobile-social-networking, and a pairing of Facebook’s mobile application with Loopt seems a perfect fit. Since valuations in the social networking space are like something out of the bubble era, it is not unrealistic to see a price tag of just south of $100m for Loopt, a 40-employee startup. With healthy cash reserves and an estimated $400m in revenue for 2008, Facebook has the resources. In fact, though this would only be its second acquisition, we understand Facebook has been gearing up to make more acquisitions in the coming year. If indeed Loopt is taken off the block, rivals Palego, Zyb, and Buzzd may follow in quick order.

Traditional social networking acquisition deals for more than $50m

Announced Acquirer Target Deal Value
May 14, 2008 Comcast Plaxo $160m*
March 13, 2008 AOL Bebo $850m
March 4, 2008 Demand Media Pluck $67m*
May 30, 2007 eBay StumbleUpon $75m
July 18, 2005 News Corp MySpace $580m

* official 451 Group estimate, Source: The 451 M&A KnowledgeBase

Buyout blues

Brenon Daly

Three years ago, the buyout barons shook up the technology M&A market with the $11.3bn LBO of services giant SunGard. At the time it was the largest tech buyout, equaling basically half the money spent on all LBOs in the previous year. Even as financial acquirers became more active – increasingly their spending sevenfold from 2004-07 – the SunGard buyout stood as the third-largest tech LBO.

SunGard’s brozen-medal placing seemed unlikely to hold at this time last year. There seemed to be a new multibillion-dollar LBO every week, with the targets getting bigger in every transaction. (Remember the half-serious speculation that Microsoft could be taken private?) All that changed in late summer, when debt became more expensive, sending the LBO market into a funk from which it hasn’t recovered. So far this year, LBO firms have announced 49 deals worth $10.3bn, down from 59 deals worth $97bn in the same period last year, according to The 451 Group’s M&A KnowledgeBase.

The change in climate isn’t lost on the financial deal-makers. Underscoring the difficulties in the current credit market, SilverLake’s Alan Austin said at the recent IBF VC Investing Conference in San Francisco that his firm couldn’t pull off a deal like SunGard right now. The buyout firm put in $3bn of equity and borrowed the remaining $8bn. ‘We could never do something like that today – never mind the terms (of the debt)’, Austin said at the conference.

PE deal flow

Period Deal volume Deal value
Jan. – June 2008 51 $11bn
Jan. – June 2007 59 $97bn
Jan. – June 2006  35  $17bn
Jan. – June 2005 25 $24bn

Source: The 451 M&A KnowledgeBase

Captive deal

Brenon Daly1 Comment

For many startups, the deeper a partnership is, the shallower the pool of potential acquirers. Consider the case of SwapDrive and this week’s quiet sale to Symantec. The two sides inked an OEM agreement nearly two years ago – a bit of paperwork that turned out to be a precursor to an M&A contract. With Symantec likely accounting for a majority of sales at SwapDrive, a trade sale seemed the realistic exit for SwapDrive. That became even more likely as sales of Norton 360, which is based on the technology supplied by SwapDrive, outstripped Symantec’s early projections, according to our understanding. The Norton 360/SwapDrive offering targets the consumer market, which complements the company’s enterprise-focused Symantec Protection Network.

However, perhaps because it was essentially a captive deal, SwapDrive ended up getting taken out at a significant discount to its rival Berkeley Data Systems. Just half a year ago EMC shelled out $76m for Berkeley Data, which runs the Mozy service. We understand Mozy generated about $8m in sales in the year leading up to the sale, meaning EMC paid 9.5 times sales for the online backup startup. In contrast, SwapDrive went for 5.6 times trailing sales. According to reports, Symantec paid $123m for SwapDrive, which was running at $22m.

Symantec’s purchase of SwapDrive continues a run of larger storage players snagging online backup vendors. The earlier deals – inked by Iron Mountain and Seagate Technology – got done at multiples closer to Symantec-SwapDrive, although the market has heated up a bit since those first combinations. We wonder what that will mean for the last remaining online backup vendor of note: Carbonite Inc. The company took in $20m in its series B in February and has indicated it’s looking for an IPO late next year. Who knows, maybe the window will be open by then. 

Selected online backup deals

Acquirer Target Date Price Target revenue
Symantec SwapDrive June 2008 $123m* $22m*
EMC Berkeley Data Systems [Mozy] Oct. 2007 $76m* $8m*
Seagate EVault Dec. 2006 $185m $35m*
Iron Mountain LiveVault Dec. 2005 $42m $10m

*estimated, Source: The 451 M&A KnowledgeBase

How do you say ‘Tumbleweed’ in French?

Brenon Daly

About a year and a half ago, we heard Tumbleweed Communications was being shopped hard by private equity firms. The intervening credit crises – which bumped up the price of debt and trimmed the returns on LBOs – quite likely tabled any buyout. The email security vendor has struggled since then. It came up short of Wall Street estimates in every quarter in 2007. Shares that changed hands above $3 each in early 2007 dropped in a straight line to just above $1 this March.

Rather than a PE shop, however, it turns out Tumbleweed’s buyer will be the Sopra Group, a French IT consulting firm. Sopra will make the acquisition through its Axway subsidiary, paying $2.70 in cash for each share. With about 51 million shares outstanding, Tumbleweed gets a an equity value of about $138m, only slightly more than twice the sales it is expected to record this year. Sopra also got a discount from its currency: the Euro has climbed about 18% in value since we reported on Tumbleweed in February 2007. See full report.