Buying a lot, selling a little

by Brenon Daly

Less than two months ago, we speculated that Broadcom would be cleaning out the closet at CA Technologies once it owned the enterprise software company. On cue, the semiconductor giant announced Monday that it had closed its $19bn purchase of CA and, in virtually the same breath, said it had divested one of the just-acquired businesses. The unwinding of Veracode almost certainly won’t be the last pruning of the CA portfolio done by the financial hawks at Broadcom.

But first, on the announced deal: Thoma Bravo said it will spend $950m to carve application security provider Veracode out of the now-Broadcom-owned CA. The transaction effectively unwinds CA’s pickup of Veracode two and a half years ago. In a reversal from most of these moves, CA’s exit price is significantly richer – nearly 50% higher – than its entry price. (451 Research subscribers can look for our full report on the deal on our website tomorrow.)

While not unexpected, Broadcom’s divestiture nonetheless comes at a time when corporate castoffs are running at a multiyear low. According to 451 Research’s M&A KnowledgeBase, publicly traded tech companies like Broadcom are on pace in 2018 to print the second-fewest divestitures of any year since the recent recession. Further, our database indicates that this year will see listed tech vendors shed roughly one-quarter fewer business than the average year over the past decade.

Broadly speaking, the surge in earnings this year at tech giants and, until recently, their record-high equity prices has blunted the need for most companies to radically overhaul their businesses. Growth masks a lot of flaws. In any downturn, we would expect the pace of divestitures to pick up.

In the case of Broadcom, however, its move wasn’t so much macro-driven as it was just a case of hitting an internal target. Specifically, the chipmaker, which runs a tight ship, laid out the goal of ‘long-term adjusted EBITDA margins’ above 55% once it fully integrated CA.

There’s a fair amount of wiggle room in both the timing and financial measure of that target. But it suggests that more divestitures are coming. Most of CA’s enterprise software business doesn’t run anywhere close to the margins Broadcom has modeled. In contrast, CA’s mainframe business, which is roughly half of total revenue, throws off a ton of cash.

If we had to guess at another acquired business that Broadcom is likely taking a hard look at right now, we wonder if CA’s mid-2015 acquisition of Rally Software Development might also get unwound. (The business is now known as Agile Central.) The Agile software development shop relied on a fair amount of professional services (mid-teens percent of total revenue), which pressured margins and kept the business running in the red. Unless CA has dramatically improved the business, Rally may not make the cut.

Telco buys and sells

by Scott Denne

M&A activity among telcos is surging as phone, internet and wireless service providers increase both their buying and selling amid a general, though not complete, movement back toward their core markets after a streak of investments in ancillary tech sectors. Just this month alone, three carriers have unwound deals and scaled back their venture units. Still, acquisitions by carriers have hit their highest level since 2015.

According to 451 Research’s M&A KnowledgeBase, telcos have spent a collective $96bn on tech M&A this year, nearly four times the total spending among those acquirers in all of 2017. At the same time, publicly traded telcos have sold assets worth a combined $19.5bn, or twice the amount they sold in 2016 and 2017 combined.

Telstra is among the most recent sellers as it shed its $270m bet on Ooyala, a video streaming software vendor, in a sale to the company’s management. Alongside that transaction, it announced a restructuring of its venture arm, a move that reflects the recent decision by Rogers Communications to do the same. Telstra’s decision is part of a broader restructuring plan to cut costs and focus on customer service to return to growth (the Australia-based carrier’s topline declined 5% in each of the past two quarters).

Similarly, Sprint decided to divest its Pinsight Media unit in a sale to ad network InMobi. Like Telstra, Sprint is doubling down on telecom services – although in Sprint’s case, that’s taking the form of a $26.5bn sale to T-Mobile, a carrier that’s shown little appetite for moving beyond communications services. But that’s not to say that all carriers are sticking to the markets they know best.

Most notably, AT&T, following its massive $85bn pickup of Time Warner, has increased its acquisitions in digital media, ad-tech and even network security – its purchases of AppNexus and AlienVault account for more than half of the $3.6bn that telcos have spent this year on ancillary technologies. Given the recent failures of its competitors, not to mention the many abandoned forays into datacenters earlier in the decade, it’s tempting to take a dim view of bets in media and advertising.

Still, AT&T, as well as Comcast and Verizon – which made similar, earlier acquisitions in media and advertising – haven’t been the best stewards of their core businesses. There’s scant evidence to suggest that focusing strictly on their legacy business would be without its own risks. Multiple surveys by 451 Research’s VoCUL show consistently low levels of customer satisfaction among phone and TV service providers. For example, mobile services from Sprint and Verizon have trended down over the decade while AT&T has demonstrated little growth, with just 24% of customers saying they’re satisfied with the current service (only T-Mobile has posted long-term gains on that front).

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Apple goes back to its old ways for a new reality

by Scott Denne

Despite its massive market cap, Apple rarely makes large acquisitions. With the $300m purchase of Dialog Semiconductor’s power management assets, the company inks its largest disclosed acquisition since the $3bn pickup of headphone maker Beats back in 2014. Yet today’s deal doesn’t imply the start of a new phase for Apple’s M&A program as much as a return to its old ways.

For $300m, Apple is obtaining a license to Dialog’s power management chip technology, along with 300 employees and four facilities in Europe. (As part of the transaction, it’s spending another $300m to preorder certain other products from Dialog.) Prior to buying Beats, some of Apple’s largest purchases were for suppliers, according to 451 Research’s M&A KnowledgeBase. For example, it paid $356m for biometric sensor provider AuthenTec in 2012 and $278m for microprocessor designer P.A. Semi in early 2008.

Reaching for hardware suppliers isn’t the only way Apple’s dealmaking activity is regressing. According to the M&A KnowledgeBase, it wasn’t until 2013 that the Cupertino-based computing company printed more than six transactions in a single year, although in all but one full year since then it’s done at least 10 acquisitions (in 2016, it printed eight). This year, it’s made just five.

Still, the return to the old strategy reflects a new reality for Apple – smartphones are a fully mature market, so it’s logical for Apple to turn to acquisitions that stabilize its supply chain and expand its gross margins. The most recent smartphone survey from 451 Research’s VoCUL shows that just 9.9% of respondents plan to buy a smartphone in the next 90 days, nearing the lowest second-quarter reading on record and part of a continuing downward slope in smartphone demand.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Lenovo nabs another PC biz 

Contact:Scott Denne

Fujitsu spun off its PC business into a separate subsidiary almost two years ago in anticipation of a sale to Lenovo. The terms don’t appear to have improved with age. With the ¥17.9bn ($157.4m) purchase of a 51% stake in Fujitsu’s PC business, the always-thrifty Lenovo hits a new low on price.

With this deal, which will also see Development Bank of Japan take a 5% stake in the spinoff, the target fetches an enterprise value of $309m, or just a hair under 0.1x trailing revenue. In its 2004 pickup of IBM’s PC business, which until today stood as the lowest valuation for a Lenovo acquisition, the Beijing-based company paid slightly more than 0.1x. According to 451 Research’s M&A KnowledgeBase, Lenovo has never spent more than 0.6x trailing 12-month revenue.

Lenovo frequently buys unwanted business units, as it did with IBM’s PC business and Google’s Motorola Mobility a decade later. Although the rationale for those deals was North American growth, at the time of each of those transactions, Lenovo’s PC and smartphone businesses, respectively, had little footprint in the US. With Fujitsu, it obtains an asset with only limited sales outside of Japan. Instead, the ability to add scale and drive down component prices motivated today’s acquisition.

Through the first half of its fiscal year, Lenovo’s profit margin dropped by one-quarter. Lenovo must increase those margins as top-line growth isn’t available. According to 451 Research’s VoCUL service, only 7% of North American consumers planned to buy a laptop in the next six months, an all-time low. Corporate business isn’t likely to make up the difference. A separate VoCUL survey of business buyers shows anticipated purchases of desktops and laptops diving to record lows.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Synchronoss’ planned ‘pivot’ turns into a face-plant

Contact: Brenon Daly

With its attempt at a pivot having turned into face-plant, Synchronoss will unwind its massive, bet-the-company acquisition of Intralinks by divesting the collaboration software vendor to private equity (PE) firm Siris Capital Group. The buyout shop will pay about $1bn for Intralinks, which Synchronoss acquired last December for $821m.

It was a pairing that faced skepticism from the very start, because the business models and client base for the two companies had virtually nothing in common. The combination also ladled a hefty amount of debt onto Synchronoss, which then compounded problems around servicing that debt by having to restate its financials due to accounting errors. Shares of Synchronoss have lost two-thirds of their value since the acquisition announcement.

As Synchronoss stock cratered, Siris Capital began buying equity, ultimately becoming the company’s largest shareholder. Siris used that position to agitate during the company’s review of ‘strategic alternatives’ announced in early July. Not unexpectedly for the beleaguered company, the process proved fitful. Siris Capital initially offered to acquire all of Synchronoss but then pulled its bid as the company, which was advised by Goldman Sachs & Co and PJT Partners, continued to look for another buyer.

Instead of an outright acquisition of Synchronoss, Siris will carve out the Intralinks division and add that to its portfolio. The transaction is expected to close in mid-November. Further, the buyout firm will invest $185m into the remaining Synchronoss business, which will continue trading on the Nasdaq.

With the divestiture, 17-year-old Synchronoss effectively abandons its attempt to become a broad provider of enterprise software, and retreats back to servicing its long-standing client base of communications and media companies. The move is a reminder that software can be hard. Just ask Dell Technologies and Lexmark. Both of those tech companies also retreated from their M&A-driven effort to become software vendors, divesting their software portfolio to PE shops in billion-dollar deals over the past year.

Dealing with the dragon

Contact: Brenon Daly

A little more than a year after a Chinese consortium acquired slumping printer maker Lexmark, the group has sold off the company’s software business to Thoma Bravo. The enterprise software unit had basically been for sale since the Chinese buyout group, which is led by a hardware-focused firm, closed its $2.5bn take-private of Lexmark. Although terms of the sale of the software division weren’t formally released, media reports put the price at $1.5bn.

Assuming that price is more or less accurate (we haven’t been able to independently verify it), the deal would stand as the largest inbound acquisition of a Chinese technology asset, according to 451 Research’s M&A KnowledgeBase. Obviously, there have been larger transactions involving Chinese targets. But all 16 of those deals listed in our M&A KnowledgeBase have seen fellow Chinese companies as the buyer. Overall, our data indicates that slightly more than half of all China-based tech vendors sell to Chinese acquirers, although the top end of the market is unanimously weighted toward domestic transactions.

Clearly, although owned by a Chinese group, the Lexmark software division is hardly a ‘Chinese company,’ in the sense of a domestically headquartered operation that does the majority of business in its home market. Lexmark had cobbled together its software unit from roughly a dozen acquisitions of enterprise software providers based in North America and Europe. (451 Research will have a full report later today on how the acquired software business will fit into Thoma Bravo’s portfolio and what impact the deal will have on the broader business process and content management markets.)

Nonetheless, this landmark transaction comes at a difficult time in US-Sino relationships. President Donald Trump has blasted the currency and trade policies of China, although he did tone down his criticism during last month’s meeting with his counterpart, Xi Jinping. Despite the apparent thaw, the relationship between the world’s two largest economies remains chilly. That’s having an impact on M&A, which is a form of ‘international trade’ of its own. In a survey last month of 150 tech M&A professionals, more than half of the respondents (55%) predicted that US acquisitions of Chinese companies would decline because of President Trump’s trade policies. Just 7% forecast an uptick, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.

For a more in-depth look at the trends and concerns around doing deals in China, be sure to join our webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. The webinar is open to everyone, and you can register here.

 

Extreme’s not horsing around, buys Brocade’s datacenter networking assets 

Contact: Jim Duffy 

As it stalks one horse, acquisition-hungry Extreme Networks has saddled up another. The suddenly feisty enterprise networking vendor has picked up Brocade’s datacenter business – another piece of Brocade that acquirer Broadcom is not interested in owning. Extreme is benefiting from that lack of interest, paying just a fraction of the asset’s annual revenue.

Even for a bargain shopper like Extreme, the deal comes at a steep discount. According to 451 Research’s M&A KnowledgeBase, Extreme has made just five acquisitions in the past 15 years. Three of them have come in the past seven months. The company recently bought Avaya’s networking business ($100m) and Zebra Technologies’ WLAN unit ($55m). In both transactions, it valued the target at about 0.5x revenue, the same multiple it paid in its 2013 purchase of Enterasys.

Extreme will pay $35m upfront and $20m in deferred payments for Brocade’s VDX, MLX and SLX routing and switching assets, plus its analytics software. Although revenue from the Brocade assets have declined amid the uncertainty over who might ultimately own them, the unit is expected to add $230m to Extreme’s top line in its next fiscal year. This deal, combined with its weeks-old stalking-horse bid for Avaya’s assets, could push its annual revenue beyond $1bn and make Extreme the third-largest wired and wireless enterprise networking equipment provider behind Cisco and HPE.

The divestiture comes as Broadcom is looking to close its acquisition of Brocade’s Fibre Channel business, while shedding the target’s networking equipment assets – Brocade’s Ruckus Wireless WLAN unit was snagged by ARRIS a few weeks ago. Today’s transaction is contingent upon the close of Broadcom’s purchase of Brocade, which is expected in July. Finalization of Extreme’s buy is expected 60 days after that. In addition to the cash consideration, Broadcom is already Extreme’s largest supplier and the acquirer says it will increase its current $100m annual spending with Broadcom.

Customer overlap was minimal, as Brocade’s datacenter business was targeting large enterprise core datacenters with more than 2,000 physical servers, while Extreme was concentrating on the campus edge (WLAN and access switching, and fewer than 2,000 servers). The two have joint customers, for example, that use Brocade in the datacenter and Extreme at the WLAN edge. Nonetheless, Extreme says it will obtain 6,000 customers using Brocade’s VDX, MLX and new SLX routers and switches.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Divestitures hit record levels

Contact: Scott Denne

Buyers seeking growth sent tech M&A surging to near-record levels last year. Many sellers were of a similar mindset as enterprise technology companies shed lagging units with an eye on expanding the topline of their core businesses. That trend pushed divestitures to record levels in 2016. According to 451 Research’s M&A KnowledgeBase, divestitures by public companies hit $70bn, capping off five consecutive years of growth in the category.

Sales of Hewlett Packard Enterprise business units (software and IT services) captured the top two spots for the year as it divested those shrinking assets to focus on expanding its IT infrastructure business. HPE wasn’t alone. EMC sold its content software business to OpenText, which itself bought a pair of software assets from HP Inc. Strategics weren’t the only buyers – private equity (PE) firms played a considerable role in bolstering the amount of divestitures.

PE shops enabled Intel to shed its unfortunate McAfee purchase, helped HPE sell another, smaller subsidiary and assisted SunGard in divesting its government and education business in the wake of its own sale to FIS. Those deals and others drove PE spending on public company divestitures past $16bn, a 59% jump from the previous record set a year earlier. Much like overall PE spending last year, firms were more willing to ink large transactions when buying struggling business units. There were five such PE acquisitions valued at or above $500m, surpassing the previous record of three.

The divestitures announced last month (by PE firms or otherwise) don’t indicate that the record levels of such deals will continue – there was $1.6bn worth of public company divestitures in January. However, there’s still a willing pool of buyers, should more tech businesses look to unload underperforming and non-core assets. The 451 Research Tech Banking Outlook Survey anticipates abnormally high levels of PE activity coming in 2017. In that December survey, 54% of bankers said the value of their PE pipelines has increased, beating out the number (51%) who said their overall pipelines grew – the first time in that survey when more respondents anticipated growth in PE deals than in overall M&A.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Synchronoss: Can middle-aged companies pivot, too?

Contact: Brenon Daly

Announcing the most significant overhaul of its 16-year-old company, Synchronoss has shed a large portion of its legacy telecom business and made an $821m acquisition of collaboration software provider Intralinks in an effort to evolve more fully into an enterprise software vendor. Synchronoss began its enterprise push last year, using smaller purchases to add identity management and enterprise mobility management technology to its portfolio. However, sales to businesses currently generate only a small slice of its overall revenue. With the divestiture and the addition of Intralinks, roughly 40% of the company’s total sales will come from enterprises.

Reflecting the importance of its new focus on enterprises, Synchronoss said the combined entity would be led by current Intralinks CEO Ron Hovsepian, reversing the typical post-acquisition leadership arrangement. Additionally, Synchronoss noted that Intralinks brings a direct sales force of more than 150 sales reps to the effort. However, Intralinks had only been increasing its revenue at a high-single-digit percentage rate so far in 2016. The transaction is expected to close late in the first quarter of 2017.

Synchronoss’ divestiture of a majority portion of its carrier activation business figures into the company’s pivot, as well. The sale of 70% of the unit for $146m to existing partner Sequential Technology reduces the legacy carrier-focused portion of revenue, as well as eases customer-concentration concerns for Synchronoss. The company is still trying to sell the remaining 30% of its activation unit, a process it indicated could take 12-18 months.

A portion of the funds from the divestiture, along with some cash on hand, will go toward covering a bit of the Intralinks buy. However, Synchronoss said it will have to borrow $900m to pay for most of the purchase. (Synchronoss is spending about twice as much on Intralinks as it has spent, collectively, on its previous 11 acquisitions since 2002, according to 451 Research’s M&A KnowledgeBase.) The new debt – along with the accompanying dilution of earnings to service it – unnerved some investors. Shares dropped 12% on the announcement, but are still up about 20% for the year.

Probably more of a concern on Wall Street, however, are the challenges associated with such a dramatic shift in business model – one that has a decidedly mixed record. Already this year, we have seen a number of high-profile companies backtrack on their earlier efforts to use M&A to become enterprise software vendors. Dell, Hewlett-Packard and Lexmark, among others, have all unwound or are trying to unwind billions of dollars of deals they did over the past decade to step from their original business into the enterprise software arena.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Broadcom goes wide in $5.5bn Brocade buy

Contact: Scott Denne

Broadcom continues its strategy of buying a sustainable portfolio of semiconductors with the $5.5bn acquisition of Brocade. The target’s fiber-channel storage networking chips drew Broadcom’s interest, yet those chips account for very little of the value. Broadcom plans to recoup the difference when it sells Brocade’s IP networking business after the deal closes.

The company formerly known as Avago has run this play before. Shortly after the purchase of Broadcom last year (the transaction that gave the company its current name and much of its bulk), it divested bits of that vendor, including its Internet of Things (IoT) connectivity line. Broadcom’s strategy is to buy products that have long-term stability. IoT chips that are chasing an early-stage opportunity that’s possibly lucrative and certainly capital-intensive don’t fit. It also shed parts of LSI following its pickup of that firm at the end of 2013.

Yet today’s all-cash acquisition brings Broadcom into new – and risky – territory. In previous divestitures, it was selling semiconductor and component businesses that it wasn’t comfortable owning. The Brocade IP networking business is hardware and software. And in today’s deal, it’s not looking to unwind a secondary asset. IP networking is a major component of the target’s business.

Consider this: Broadcom shaved $1.1bn from the $6.6bn price tag on LSI by shedding two semiconductor business lines. Of the $5.5bn ($5.9bn in enterprise value) that it’s paying for Brocade, it’s presumably seeking a sale to bring back more than half of that given that the IP products unit accounts for about half of the revenue and all of the growth. That could prove to be challenging, given that Ruckus Wireless, a Wi-Fi provider that generates about one-third of Brocade’s IP sales, was on the market less than seven months ago and the top bidder in that process, Brocade, is no longer in the acquirer pool. And if Broadcom can’t find a buyer at a satisfactory price, it will be forced to retain a business that competes with many of its OEM customers.

Broadcom’s reach for Brocade values the target at 2.6x trailing revenue. According to 451 Research’s M&A KnowledgeBase, that’s the median multiple across all of its acquisitions over the past four years. On the other hand, storage networking specialists usually sell at or below 1x, making this deal look a bit pricier. Broadcom would have to divest the IP networking division for $3bn or more to get the effective multiple on today’s transaction into that range.

Evercore Partners advised Brocade on its sale. We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.