Bottom-fishing by Blackbaud

Brenon Daly

In almost four years of going head-to-head on the Nasdaq, Kintera never challenged Blackbaud’s stock performance. In fact, it never even came close. An internally funded and smaller rival, Kintera actually jumped ahead of Blackbaud’s IPO by about six months. The company had to trim its offer price in late 2003 to get the IPO out the door, but shares nearly doubled shortly after they hit the market.

Once Blackbaud hit the market in summer 2004, however, Kintera had started a slide from which it would never recover. Blackbaud put Kintera out of its misery last Thursday, shelling out $46m for the struggling company. Kintera was actually in danger of getting delisted from the Nasdaq. (Evercore Partners once again banked Blackbaud, a mandate that we noted last year that has its roots in Redmond, Washington.)

The price values Kintera at basically 1x trailing 12-month sales, while Blackbaud trades at nearly four times that level. Even though Blackbaud didn’t overpay for Kintera, the market has expressed some concern about buying a damaged rival in a deal that will lower Blackbaud earnings this year. Blackbaud shares are down about 7% since announcing the deal.

Kintera is run as a public company, and its paltry exit price certainly won’t help rival Convio get its offering to market. The Austin, Texas-based company filed its S-1 in September and has amended it three times since then. So, it may well be getting ready to price. However, we would note that the income statement of Kintera matches up fairly closely with Convio – both posted revenue of about $45m in 2007, but had negative operating margins. Let’s just hope that the market doesn’t value Convio the same as it did Kintera. 

Recent Blackbaud acquisitions

Date Target Price
May 29, 2008 Kintera $46m
Aug. 6, 2007 eTapestry $25m
Jan. 16, 2007 Target Software $60m

Source: The 451 M&A KnowledgeBase

NetQoS: a small buy on the way to a sale

Brenon Daly2 Comments

On its way to a probable public offering next year, NetQoS has acquired a startup that will boost the company’s offering to the financial services industry. On Tuesday, NetQoS said it’ll pay a small amount of cash for Helium Systems, which makes trade monitoring software. (Helium isn’t expected to add much revenue to NetQos, which has been tracking to $60m this year, up from $45m in 2007.)

Indeed, organic growth has been the story at NetQoS, since the Helium acquisition is the first by the company in nearly two-and-a-half years. But the pace may be about to pick up. The reason? As it gets ready to put together an underwriting ticket for an IPO down the road, NetQoS has found (surprise, surprise) that bankers are also pitching other deals. Meanwhile, for its part, the company has started to look at ways to fill up its corporate coffers if it finds a deal that’s too good to pass up.

Thus far, NetQoS has been remarkably conservative in its capitalization, raising just $21m total. (Liberty Partners, a New York PE firm that typically invests in midmarket companies, is the majority owner of NetQoS and the company’s only institutional investor.) NetQoS, which has been cash-flow positive since 2005, hasn’t taken any outside money in a half-decade. But with an IPO payday likely in 2009, we’re guessing NetQoS wouldn’t have any trouble lining up funds, either from its current backer or even a new partner. 

NetQoS acquisitions

Date Target Rationale
June 2008 Helium Systems Trade monitoring
Dec. 2005 Pine Mountain Group Services
April 2005 RedPoint Network Systems Device management

Source: The 451 M&A KnowledgeBase

Taking stock

Brenon Daly

Pocketing equity as currency always makes a deal a little more dicey than a straight cash transaction. (Just ask Ted Turner, or any other shareholders – public or private – who got burned on post-sale stock distributions in the early part of this decade.) Those bitter memories – along with concerns about diluting existing shareholders – have pushed companies to hold on to their shares, rather than hand them out in acquisitions. Besides, many large tech companies are now on the other side of steep cost-reduction plans, which allows them to throw off hundreds of millions of dollars in free cash flow every quarter. That has swollen corporate treasuries to near record levels, in some cases.

Nonetheless, a few tech companies have been paying at least a part of their M&A bills with their own shares. In the three deals Omniture inked last year, the online business optimization vendor used its shares to cover more than half the cost of each deal. (The largest chunk of stock – $342m of equity to cover its $394m total purchase of Visual Sciences – is basically flat with the level where shares traded when Omniture closed the deal in mid-January.) Additionally, Ariba paid for half of its $101m purchase of Procuri with its stock. (Taking Ariba shares turned out to be a good bet for Procuri, since the stock has jumped 40% since the deal closed in mid-December.)

However, one deal that’s set to close at the end of business Thursday offers a reminder of the risks. Although Blue Coat Systems used all cash to buy Packeteer in its $268m purchase, it would have undoubtedly heard grumblings from Packeteer shareholders if it had done a stock swap. The reason? Just a month after announcing the deal, Blue Coat posted weak quarterly results and offered a tepid outlook for its business. That knocked the stock down 20% in one trading session. In this kind of uncertain market, cash may well be king. 

Recent all-cash strategic deals

Date Acquirer Target Amount of cash
May 2007 Thomson Reuters $17.2bn
Jan. 2008 Oracle BEA Systems $8.5bn
Oct. 2007 Nokia Navteq $8.1bn
Oct. 2007 SAP Business Objects $6.8bn
May 2007 Microsoft aQuantive $6.4bn
Nov. 2007 IBM Cognos $5bn

Source: The 451 M&A KnowledgeBase

Wire buys wireless

Brenon Daly

Two weeks ago, we noted Trapeze Networks had been sold without indicating what company had been sitting across the table from the wireless LAN (WLAN) infrastructure vendor. The buyer can now be named: Belden. The St. Louis-based company is more known for its wiring and cable products. (Indeed, before inking the Trapeze deal, Belden’s previous deal had been the $195m purchase of a Hong Kong cable company.) We’ll have a full report on this transaction – and the implications for the sector – in tonight’s Daily 451.

While the pairing of a wireless company with a company known for its wires may seem odd, there are actually a fair number of points that make sense for Belden-Trapeze. For starters, Belden is viewed in the WLAN market as a neutral vendor, which means that Trapeze’s sales arrangements shouldn’t be threatened by the acquisition. We would contrast that with the fallout from Cisco’s early 2005 purchase of Airespace, which forced Airespace partners Alcatel and Nortel Networks to scramble to find a replacement supplier of WLAN technology after the deal. Also, Trapeze had decent sales in Europe and Asia, markets that Belden has targeted.

In the end, however, it all comes back to money. In that sense, the Trapeze deal shows how steeply the valuations of the WLAN infrastructure vendors have come down. The multiple in this deal was two-thirds lower than the level that Cisco paid three years ago in its purchase to get into this market. (Granted, Cisco has a reputation of skewing the market with top-dollar bids.) Still, Trapeze exited for $133m after raising about $100m in venture funding. We understand that rival Meru Networks is currently out raising another round. The company already counts Lehman Brothers, Clearstone Venture Partners, Sierra Ventures and DE Shaw among its investors. While Meru may well land an up round, we’re guessing Trapeze’s valuation – combined with Aruba Networks’ rough ride on the Nasdaq – certainly haven’t helped those conversations. 

WLAN vendor valuations

Company Acquirer Price Price-to-TTM sales ratio
Airespace Cisco $450m 7.5x*  
Trapeze Belden $133m 2.3x  
Aruba NA $467m market cap 2.7x  

*estimated, Source: The 451 M&A KnowledgeBase

Creative destruction and its discontents

Brenon Daly

In a February 2007 report, we asked an egghead question about valuations in a sector that had been ‘creatively destroyed,’ to borrow Joseph Schumpeter’s oft-used phrase. At the time, we weren’t asking for purely academic reasons. Rather, we were trying to put a price on Tumbleweed Communications following Cisco’s purchase of rival anti-spam appliance vendor IronPort Systems. (Rumors had private equity firms looking at Tumbleweed.)

It turns out we weren’t far off in our valuation. We slapped a $150m price tag on Tumbleweed; last Friday, French IT consulting firm Sopra Group said it would pay $138m in cash for the company. The deal is expected to close in the third quarter. While the companies see a bright future for the combination, we have some reservations. Specifically, we wonder how Sopra, which is making the acquisition through its Axway subsidiary, will hit its target of 12-15% operating margins for the combined company next year. (Tumbleweed has run at negative operating margins for years, piling up an accumulated deficit of $300m in its history.)

Whatever the performance of Tumbleweed under its new owners, we have to say that Sopra certainly didn’t overpay for the company, which should double its sales here in North America. At just two times trailing sales, Tumbleweed was valued at less than half the price-to-sales multiple found in comparable transactions.

Anti-spam shopping

Acquirer Target Date Price Target TTM sales
Sopra/Axway Tumbleweed June 2008 $138m $58m
Google Postini July 2007 $625m $70m*
Cisco IronPort Jan. 2007 $830m $100m
Secure Computing CipherTrust July 2006 $264m $48m
Symantec Brightmail May 2004 $370m $26m

*estimated, Source: The 451 M&A KnowledgeBase

Deal-making in a desert

Brenon Daly

Exactly a year ago, SonicWall handed over $25m in cash for Aventail. The deal looked like a ‘last-gasp’ transaction in a number of ways, not the least of which was that Aventail’s purchase price was less than one-quarter of the venture funding the company had raised over the years. Beyond the money-in/money-out gulf at Aventail, we would note that in the year that has passed, not a single significant SSL VPN deal has been reached.

Since the big-name consolidation in this market began in mid-2003, most of the large security acquirers have gone shopping here. SSL VPN deal flow hit its high point early on, with NetScreen shelling out $265m, mostly in stock, for Neoteris. (A half-year later, Juniper Networks threw $4bn in stock at NetScreen, in a deal that Juniper has yet to recognize much of a return on.) Other tech giants quickly inked deals of their own, including Cisco, Citrix and Microsoft.

In contrast, the handful of companies that have acquired SSL VPN technology since mid-2007 have been tiny outfits, with a number of consulting shops doing the buying. That hardly suggests top-dollar acquisitions. The SSL VPN vendors that missed out when the big buyers came through the market may need to scale back their exit expectations. We would drop PortWise and Array Networks, among others, into that bucket. 

Significant SSL VPN deals

Acquirer Target Date Price
F5 Networks uRoam July 2003 $25m
NetScreen Neoteris Oct. 2003 $265m
Cisco Twingo March 2004 $5m
Citrix Net6 Nov. 2004 $50m
Microsoft Whale Communications May 2006 $75m*
SonicWall Aventail June 2007 $25m

*estimated, Source: The 451 M&A KnowledgeBase

Come on, Google, buy Salesforce.com already

Brenon Daly

Companies looking to get into new markets typically run the clichéd ‘buy, build or partner’ calculus on how to get the highest return on the lowest investment. Invariably, the answer is ‘yes’ to all of the options, as significant strategic moves require broad efforts to take the company in new directions.

Consider the case of Google and its still-emerging Apps business. (Like so much at the search engine company, there seems to be a ‘beta’ tag hanging on this division.) It has inked three deals for both technology and a sales channel, unleashed hundreds of engineers on the would-be ‘Office killer’ and, just recently, put together a distribution deal with Salesforce.com.

And yet, Apps still isn’t where Google needs it to be. Even more of a concern is that, in our opinion, the moves aren’t even enough to get Google Apps in a position to begin to challenge Microsoft Office. Google needs something more. In the end, a successful partnership isn’t simply about access. It’s about efficacy. In order for Google to control the Salesforce.com distribution channel, it has to control Salesforce.com. Read full report.

Barracuda bares its teeth

Brenon Daly

Never known as a shy or retiring competitor, Barracuda Networks has lobbed an unsolicited bid to acquire Sourcefire for $7.50 per share in cash. (Full report.) That works out to a slight 13% premium on Sourcefire’s closing price ahead of the bid, and essentially where the shares began 2008.

We look at Barracuda’s bid as setting a ‘floor price’ for Sourcefire. It is certainly an opportunistic offer, as Sourcefire has been burned on Wall Street. (The company didn’t help itself when it came up short of investors’ expectations in its first quarter as a public company a year ago.) To get this deal closed, however, we suspect Barracuda will have to raise its bid. Investors have already pushed Sourcefire shares above the offer price.

To push this deal along, Barracuda can draw on the experience of one of its two outside backers, Francisco Partners. The buyout shop took IT security appliance vendor WatchGuard Technologies private in July 2006 after a protracted and bitter campaign.

Learning Tree seeds sale

Brenon Daly

After more than 30 years in business, Learning Tree International has slapped a ‘for sale’ sign on itself. The IT training shop has retained RBC Capital Markets to guide the process, which comes as the company has only partly worked through a turnaround. It suffered through several years of stagnant revenue and negative operating margins, when the Internet bubble burst and companies cut back sharply on their IT staff members, which, at the time, were Learning Tree’s only customers. (The company has since expanded into management training as well.)

The timing of the possible sale is curious. Learning Tree has come up short of Wall Street estimates for two straight quarters, leaving the company’s stock below where it started the year. (Even with the bounce on May 28 from investors betting on an acquisition, Learning Tree shares have dropped nearly one-quarter of their value in 2008.) Learning Tree currently sports a market capitalization of about $290m, but holds $57m in cash and no debt, lowering its enterprise value to $233m. The company will likely record about $190m in sales in the current fiscal year.

Given the current valuation, maybe some of the executives should take a Learning Tree course on maximizing shareholder value. Of course, the top two executives have a distinct interest in maximizing shareholder value, given that they own nearly half of the company’s 16.6 million shares. Learning Tree cofounders David Collins and Eric Garen own 25.6% and 20.4% of the company, respectively. And if that weren’t motivation enough, we couldn’t help but notice a kicker that could put even more money into the executives’ pockets: The company approved a bonus of one year’s worth of salary for executive officers if Learning Tree gets sold before the end of next March. So, the sellers are ready, but where are the buyers?

Mapping vendor Garmin searches for direction

In a time of increasing competition and decreasing margins, the once-soaring navigation companies seem to have lost their bearings. Former Wall Street darlings Garmin and TomTom both reported lackluster quarters last month. Although overall revenue at both companies is still solid, other lines on the P&L sheet have deteriorated – notably margins. Both companies are now trading near 52-week lows, down roughly 70% from their highs for the year. (Undoubtedly, Garmin will face some investor ire when the company holds its shareholder meeting on June 6.)

With fierce consolidation and price declines, the issue facing Garmin and others is how to differentiate themselves from the new entrants that range from conglomerates Nokia and Research in Motion to small startups such as Dash Navigation. (Looming over all of this is the phenomenal success of Apple’s iPhone.) We foresee 2008 being a year of further consolidation as Garmin continues to shop in an attempt to retain its competitive edge.

Garmin’s gross margins are down to less than 50% from 70% just a few years ago and are expected to decline to below 40% this year, according to CFO Kevin Rauckman. The new competitive environment has forced a steep decline in average selling price: the company’s personal navigation device sold for $500 just a few years ago, but now the gizmo goes for half that amount. Garmin has stated that it intends to stave off the price erosion by setting up its products as a premium brand, much like what Apple did with the iPod. In order to achieve this, Garmin has been looking to make acquisitions in the content segment and will launch its first mobile phone, the Nuvifone, which looks, sounds and works eerily similar to a GPS-enabled iPhone.

So which companies might be ripe for the taking? Aside from the expected distribution acquisitions such as Garmin’s rumored purchase of Raymarine, mapping, traffic and content provider startups such as Dash, Inrix and Networks in Motion offer the kind of technology that Garmin needs. Moreover, if Garmin is serious about branching into the complex mobile phone market, a case could easily be made for an acquisition of longtime partner Palm Inc. The struggling pioneer was reportedly in play last year, but instead opted to have Elevation Partners take a 25% stake in the firm. Palm’s valuation has since been cut in half; we believe the company could surely be had for cheap as investors are eager to recoup their losses. Debt-free Garmin is cash-rich with about $600m, plus another $550m in marketable securities. So financing acquisitions is not a big issue for the company. The real question is whether Garmin can navigate a margin-boosting plan into place before it plummets off a cliff.

Signs of a consolidating industry

Announced Acquirer Target Deal value
Oct. 1, 2007 Nokia Navteq $8.1bn
July 23, 2007 TomTom Tele Atlas $2.8bn

Source: The 451 M&A KnowledgeBase