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.

Tech M&A this summer is a really big deal

Contact: Brenon Daly Kenji Yonemoto

It’s been a blockbuster summer for blockbuster deals. Since July, tech acquirers have announced more transactions valued at $1bn+ than any quarter since the recent recession. 451 Research’s M&A KnowledgeBase has tallied a record 33 ‘three-comma deals’ here in Q3, significantly above the average of roughly 20 transactions per quarter over the past two years. Overall, big-ticket purchases, which had a median value of $2.2bn, account for a staggering $130bn of the roughly $150bn in total spending on tech M&A this quarter.

The billion-dollar prints this summer came from across the IT landscape, according to the M&A KnowledgeBase, with three semiconductor deals valued at more than $1bn, the largest SaaS transaction in history and the biggest exit for a VC-backed startup in two and a half years. Another source that has (rather unexpectedly) contributed to deal flow at the top end of the market recently has been divestitures. Fully one-quarter of the $1bn+ deals in Q3 involved the sale of divisions of larger companies, such as Hewlett Packard Enterprise shedding its software unit and Intel divesting a majority stake of McAfee. (Several of the billion-dollar transactions announced in Q3, such as the HP Software and McAfee deals, effectively involve unwinding previous billion-dollar acquisitions.)

451 Research will publish a full report on M&A activity in Q3 early next week. But the headline for the quarter is certainly the record number of big prints, which helped push spending to the third-highest quarterly total since the end of the recession, according to the M&A KnowledgeBase.

1bn-deal-quarterly

Source: 451 Research’s M&A KnowledgeBase

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

Baking in security isn’t a good recipe for Intel

Contact: Brenon Daly

Intel’s multibillion-dollar experiment in bringing security in-house and baking it into its silicon is over. The chipmaker announced plans to mostly unwind its six-year-old acquisition of McAfee, which stands as the largest information security (infosec) transaction in history. However, Intel’s divestiture of a majority stake of its infosec division is being done at a substantial discount to the original purchase.

Under terms, Intel will retain a 49% stake in the infosec business, which will revert to the McAfee name, with private equity firm TPG Capital acquiring a 51% stake. The buyout shop will pay $1.1bn in cash and assume $1bn in debt. (The co-owners of McAfee plan to raise a total of $2bn in debt, with $1bn of that held by TPG and $1bn held by Intel.) Altogether, the transaction gives McAfee an enterprise value of $4.2bn, compared with an enterprise value of $7bn for McAfee in Intel’s mid-2010 puzzling purchase.

Sales at Intel’s infosec unit totaled $1.1bn in the first half of this year, according to the company. Annualizing that amount would put revenue at $2.2bn, meaning McAfee is valued at less than two times sales in its divestiture. That’s a relatively low multiple for infosec companies. In its 2010 purchase, for instance, Intel paid roughly 3.5 times sales for McAfee. Furthermore, rival Symantec currently trades at roughly the same 3.5x multiple.

Intel’s divestiture of McAfee, which had been rumored for some time, underscores the fact that infosec is an industry in transition. The move means that two of the largest and longest-standing security companies have undergone dramatic corporate overhauls since just the start of the year. Back in January, Symantec sheared off its Veritas storage business so that it could focus entirely on security. It then followed that up in summer by announcing the second-largest infosec transaction, according to 451 Research’s M&A KnowledgeBase. Symantec paid $4.65bn for Blue Coat Systems, an acquisition that, unusually, installed Blue Coat executives into the top three spots at the acquiring company.

Dell-EMC closes, but there’s still dealing to be done

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.

LogMeIn goes to GoTo

by Brenon Daly

Eight months after Citrix announced plans to spin off its GoTo business, the company has significantly bulked up the unit with the consolidation of rival online communications and support provider LogMeIn. The deal, which is structured as a tax-advantaged merger that values LogMeIn at $1.8bn, would increase GoTo’s revenue by about 50% to $1bn. It is expected to close early next year.

Terms of the Reverse Morris Trust transaction call for Citrix to own slightly more than half of the combined entity, holding 50.1% of the company with LogMeIn retaining the remaining 49.9%. Ownership notwithstanding, LogMeIn will have an outsized role in charting the future course of the $1bn SaaS giant.

Both the current CEO and CFO at LogMeIn will hold those respective roles at the combined firm, which will take LogMeIn’s current headquarters as its own. Further, LogMeIn will have five directors on the company’s board, with four coming from Citrix. We would attribute that weighting to the fact that LogMeIn has significantly outgrown the larger GoTo unit. In the just-completed second quarter, for instance, LogMeIn increased revenue about 28%, roughly twice the rate at GoTo.

At $1.8bn, the deal values LogMeIn at its highest-ever level. Over the past year, LogMeIn has generated $309m in sales, meaning it is being valued at 6x trailing sales. That’s a bit shy of the average of 7.5x trailing revenue paid for SaaS vendors in transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. For instance, two months ago, Vista Equity Partners paid 8x trailing sales for Marketo, a smaller but slightly faster-growing marketing automation provider that, unlike LogMeIn, runs in the red.

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

Dell’s discounted divestiture

Contact: Brenon Daly

Continuing its efforts to slim down before it gets massively bigger, Dell has announced plans to divest its software business to a buyout group led by Francisco Partners. The sale essentially unwinds Dell’s previous acquisitions of Quest Software and SonicWALL, which cost the company some $3.5bn. Although terms weren’t revealed, we understand that Dell will pocket $2.2bn from the deal.

The discount divestiture of the Dell Software Group (DSG), which generated some $1.3bn in trailing sales, comes less than three months after the company likewise sold its IT services unit, Perot Systems, for less than it originally paid. Dell’s portfolio pruning serves two purposes as it prepares to close its pending $63.1bn purchase of EMC. Divesting the software unit will not only raise some much-needed cash for Dell to cover the largest-ever tech acquisition, but will also clear out some software offerings that would overlap with the assets it is set to pick up from EMC/VMware, notably in the identity and IT management markets. EMC shareholders are set to vote on the sale to Dell next month, with the close of the transaction expected shortly after that. Similarly, Dell expects to complete the DSG divestiture in the late summer or fall.

Deferring to VMware as the software specialist for the combined entity makes financial sense for Dell. By and large, Dell’s software business has been a lackluster performer, unable to grow and running at single-digit operating margins. In comparison, VMware continues to increase its revenue (although at a lower rate than it once had) and operates twice as profitably as Dell’s software unit. And then there’s the matter of scale: VMware alone is five times as large as DSG.

Dell was a relative latecomer to M&A, only really starting to buy companies in 2007. While Dell was on the sidelines, for instance, EMC picked up more than 40 businesses, including RSA and, of course, VMware. Further, we would argue that if EMC hadn’t made the acquisitions it did during the early 2000s, Dell probably wouldn’t have bought the company. It certainly wouldn’t have had to pay anywhere close to the $63.1bn that it is set to hand over for EMC if the target hadn’t used M&A to expand beyond its core storage products.

DSG will be purchased by Francisco Partners, with participation from Elliott Management, a hedge fund better known for pushing businesses to sell than it is for buying them. (Indeed, Elliott took a small stake in EMC and then agitated for a sale of that company.) Francisco says this is its largest-ever deal. The DSG transaction comes as buyout shops are becoming increasingly busy with big prints. Including DSG, private equity buyers have now announced 14 acquisitions valued at more than $1bn since last June, according to 451 Research’s M&A KnowledgeBase.

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