Buying a dried-up Riverbed

-by Brenon Daly, Christian Renaud

Announcing its largest-ever acquisition, private equity (PE) firm Thoma Bravo says it will pay $3.6bn for Riverbed. The take-private of the WAN optimization vendor comes after more than a year of pressure from activist hedge fund Elliott Management. Under terms, Thoma, which has a history of profitably acquiring infrastructure software providers, will hand over $21 for each of the roughly 170 million fully diluted Riverbed shares.

Thoma Bravo is valuing Riverbed at 3.4x the $1bn that the company has put up over the past year. (Sales growth has been underwhelming so far in 2014. Through the first three quarters of the year, Riverbed inched up its top line by 6% – just one-quarter the growth rate from full-year 2013.) The valuation is roughly in line with other recent significant take-privates such as Thoma’s leveraged buyout of Compuware and Vista Equity Partners’ LBO of TIBCO Software.

The primary reason why Riverbed’s growth has stalled – which precipitated the initial unsolicited approach from Elliott – is the considerable changes in market requirements (greater demand for traffic analysis and grooming) and enterprise networking (evolution to cloud-delivered services). A study by TheInfoPro, a service of 451 Research, earlier this year indicated that more customers were planning to cut their spending with Riverbed in 2014 than increase their spending with the vendor. We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

RVBD spend plan


Can tech companies wearing sensible shoes be nimble?

Contact: Brenon Daly

As the tech giants get more and more gray hair on their heads, they all seem to desperately want to be young again. How else to explain the impetuous plan by the sensible shoe-wearing Hewlett-Packard to separate its enterprise and consumer businesses, with the stated goal of making the two independent companies more ‘nimble?’ Do the architects of the plan somehow think that cutting in half a 75-year-old company will create two businesses in their late 30s?

Remember, too, that about three years ago, HP initially dismissed a similar (but smaller-scale) plan to spin off just its PC business. At the time, executives said HP was ‘better together,’ citing low supply costs, improved distribution and easier cross-selling from the broad HP portfolio.

So why the change of heart that will result in a messy disentanglement taking about a year to implement, costing billions of dollars and resulting in as many as 10,000 additional job cuts? We suspect the fact that HP sales are now 10% lower than when it dismissed that spinoff plan may have something to do with it. (As we noted earlier, HP is basically splitting itself into two companies roughly the size of Dell, which itself had a massive and contested change in corporate structure last year as it sought a ‘fresh start’ through a $24bn leveraged buyout (LBO).)

In addition to HP – Silicon Valley’s original startup – a number of other tech industry standard-bearers have found (or likely will find) themselves under pressure to radically overhaul their corporate structure in pursuit of growth. Some of these have already been targeted by activist hedge funds, while others are still on a watch-list:

  • CA Technologies: Revenue is declining at the 38-year-old company, but it still throws off a ton of cash, trading at less than 10 times EBITDA. Its size and financial profile make it a textbook LBO candidate.
  • EMC: Already under pressure by an activist shareholder to ‘de-federate’ its business, EMC has staunchly resisted calls for change with a variation on the ‘better together’ theme. (But then, so did eBay until recently.) With VMware, it owns one of the most valuable pieces of the IT vendor landscape.
  • Symantec: After a decade of trying to marry enterprise storage and security, a corporate divorce seems likely at some point. (The three CEOs the company has had in the past two years have all kicked around such a separation.) Meanwhile, the topline is flat and Symantec trades at a discount to the overall tech market at just 2.5 times sales.
  • Citrix Systems: In business for a quarter-century, Citrix rode the wave of client-server software to a multibillion-dollar market value. However, despite numerous acquisitions and focus, it has yet to fully capitalize on the next wave of software delivery, SaaS. That business currently generates about 25% of total revenue at Citrix but is only slightly outpacing overall growth, despite industry trends. Citrix stock has been flat for the past four years, while the Nasdaq has nearly doubled during that period.

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

Common Yahoo M&A gossip lacks context

Contact: Scott Denne

There’s no shortage of breathless ideas floating around about what Yahoo should do with its new-found Alibaba cash. The two most commonly touted are a $4bn purchase of AOL – an idea that now has the backing of an activist hedge fund – and buying Yelp (current market cap $5bn). While not impossible, there’s a common thread in both these ideas: they ignore Yahoo’s stated growth strategy and its past behavior.

Yes, Yahoo now has about $5-6bn in additional cash (half of which it said will be returned to shareholders), but it wasn’t strapped for capital before this. Over the last two years, its stock price rose 2.5x, giving it a $40bn market cap to spend with, and it ended last quarter with $2.7bn in cash. So, it has plenty of currency to make a big purchase, but hasn’t. In fact, CEO Marissa Mayer has only one major purchase in her tenure: the $1.1bn purchase of social media company Tumblr. Aside from that deal, the company hasn’t spent more than $500m on a deal since 2007, when it bought Right Media.

Under Mayer, Yahoo’s clear focus has been on expanding video and editorial content while transitioning to a mobile-first company, and the deals it has done this year reflect that. According to the 451 M&A KnowledgeBase, Yahoo bought nine, mostly mobile, companies in the first half of this year. And for that, it laid out an inconsequential $21m of its cash, according to its most recent quarterly report. Making one of the biggest deals in its history – to pair up with a company such as AOL or Yelp that is rooted in Web content and display advertising – would be an about-face.

Tech companies find it hard to bid against Wall Street

Contact: Brenon Daly

Tech companies are increasingly being outbid for the startups they want to acquire by a deep-pocketed rival that hasn’t been heard from in a while: Wall Street. In our recent survey of corporate development executives, nearly half of the respondents (46%) reported that they expected the IPO market to offer more competition in 2014 for target companies. In the seven-year history of the 451 Research Tech Corporate Development Outlook Survey, the threat of dual tracking has never been ranked that high.

A quick look at some of the platinum valuations being lavished on recent IPOs certainly helps explain why startups are looking to exit to the public market rather than sell out. By our count, roughly a dozen tech companies that went public this year – representing, astoundingly, about half of the entire IPO class of 2013 – currently trade at a valuation of greater than 10 times trailing sales. A few recent debutants have been bid up by public investors to the point where they are trading at more than 30x trailing sales.

Looking ahead to next year, corporate development executives, who represent the main buyers in the tech M&A market, expect to see a record number of new offerings. On average, respondents guessed that 29 tech companies would go public in 2014. That’s higher than previous years, when the forecast has ranged basically from the low- to mid-20s. (You can see more on the IPO market outlook, as well as M&A activity and valuation forecast, in our full report on this year’s survey.)

Projected number of tech IPOs

Period Average forecast
December 2013 for 2014 29
December 2012 for 2013 20
December 2011 for 2012 25
December 2010 for 2011 25
December 2009 for 2010 22
December 2008 for 2009 7
December 2007 for 2008 25

Source: 451 Research Tech Corporate Development Outlook Survey

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Nuance’s not-so-nuanced response to Icahn

Contact: Brenon Daly

Even though Nuance Communications is a company that does a lot of buying, the serial shopper has made it clear that it doesn’t want to be on the other side of a transaction. The speech recognition vendor, which has spent more than $1bn on a dozen deals over the past two years, announced earlier this week that it would be putting a ‘shareholder rights plan’ in place by the end of the month. The defensive measure (also known as a ‘poison pill’) effectively scotches any unwanted M&A approaches.

In other words, exactly the type of unwanted approach the company is likely to get from its largest shareholder, who has a history of making unwanted M&A approaches to tech companies. Carl Ichan has steadily snapped up Nuance stock. His stake, according to the most recent SEC filing, is now a mountainous 51 million shares, or 16% of the company.

With Icahn unlikely to play the role of spoiler in the planned Dell LBO, we suspect that he’ll have more time to spend on his other activist investments very soon. Probably on the top of his hit list is Nuance, as the company has already put up subpar numbers in two quarters this year. Nuance stock is down about 15% in 2013.

Unlike Ichan’s earlier stirrings against BEA Systems or Lawson Software, however, there isn’t an obvious single acquirer for Nuance. The reason stems largely from the fact that the Burlington, Massachusetts-based company has four separate business units. (Collectively, those divisions should produce about $1.7bn in annual sales when Nuance wraps its fiscal year at the end of next month.)

Instead, we could imagine that Icahn might push for a breakup of Nuance, arguing that the value of the individual units – on their own – is higher than the current $7.4bn enterprise value of the company. After all, Icahn has experience in that sort of agitation too, having helped spur a breakup of tech giant Motorola at the beginning of 2011.

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

Will Sprint side with strategy?

Contact: Ben Kolada

DISH Network’s $25.5bn offer for Sprint Nextel represents a 13% premium to SoftBank’s October bid, but its lack of mobile experience may ultimately cause the company to lose the deal. Stock plays a major component of both transactions (32% for DISH versus 30% for SoftBank), meaning the future value of either deal will be dependent on which company – SoftBank or DISH – will be able to better execute in the mobile market. Arguably, the answer is SoftBank.

Without a doubt, SoftBank understands the mobile market, and therefore would understand Sprint’s business more than DISH. Mobile is an entirely new arena for DISH. SoftBank, on the other hand, generated some $22bn in mobile revenue alone last year. To put that in perspective, that’s nearly double the total revenue DISH generated over the same period.

Meanwhile, we’d also point out that DISH’s investors already have doubts about the deal. Following the announcement, the company’s shares fell more than 5% throughout the day, though they did recoup some of the losses by midday.

Although Sprint hasn’t yet provided an official response to the DISH bid, we expect that it will staunchly defend itself against DISH, much like it is defending Clearwire against a DISH takeover.

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

Is DISH desperate for spectrum?

Contact: Ben Kolada

Eager to enter the cellular market, DISH Network has announced that it is interested in acquiring Clearwire for $3.30 per share, or about $4.8bn. The deal is actually a ‘take two’ for DISH, and shows the company’s desire (desperation?) to enter the wireless market. However, the market for wireless spectrum is so tight that those with such assets aren’t likely to sell them.

With mobile bandwidth consumption exploding, wireless spectrum is among the most coveted assets by wireless carriers. Over the past two years, there have been a handful of high-priced spectrum acquisitions announced by AT&T, Verizon, T-Mobile and Sprint. The DISH proposal values Clearwire’s spectrum at $2.2bn.

DISH’s desperation to enter the wireless market is apparent in the fact that it previously tried to acquire some of Clearwire’s spectrum assets before Sprint announced that it would buy the remainder of Clearwire it didn’t already own. Obviously, the DISH-Clearwire deal never came to fruition, and the new transaction is likely to fail as well for the same reason.

This time around, spectrum is again at the top of the list of concerns. In responding to the offer, Clearwire issued a press release summarizing a list of Sprint’s objections. First and foremost, Sprint argues that its pending agreement with Clearwire prohibits the company from selling spectrum assets without Sprint’s consent.

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

A late April Fool’s

Contact: Ben Kolada, Tim Miller

Contrary to a published press release (and several media outlets that took the bait), Google is not acquiring Wi-Fi provider ICOA. A poorly written press release published Monday morning led many to initially believe the deal was being done for $400m. However, a cursory look at the announcement’s grammatical errors, as well as the 3,700x price-to-trailing sales multiple, gave clue that something was amiss.

The oddball pairing had the flavor of one of Google’s notorious April Fool’s pranks, but neither Google nor ICOA was laughing. Representatives from both companies told us the announcement was false and both denied publishing it. ICOA even went so far as to say they are not having this kind of conversation with anyone at the moment.

That’s not to say the prank didn’t have a purpose. One explanation the release was published is rooted in the volatility of penny stocks, and the relative ease of inflating a penny stock’s value. Following the announcement, shares of ICOA, which trade at less than a penny on the OTC Pink Sheets, shot up nearly five-fold on heavy trading volume. Throughout the swing, more than 300 million shares traded hands, compared with the stock’s three-month average daily trading volume of less than three million shares.

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

The campaigning continues, at least on Wall Street

Contact: Brenon Daly

The election may be over, but some campaigns are continuing. At least that’s what’s happening on Wall Street, where two would-be buyers are trying to sway the electorate (directors and shareholders) in order to close acquisitions of two Nasdaq-listed tech companies. Whether or not either of these unsolicited efforts actually comes to a vote, well, that remains to be seen.

In the newest case, j2 Global earlier this week put a bear hug on Carbonite, pitching a (nonbinding, preliminary) offer of $10.50 for each share of the consumer-focused backup vendor. (J2 already owns almost 10% of Carbonite, having picked up the stake for about $20m in the open market in recent weeks.) Carbonite, which has traded mostly lower since its August 2011 IPO, rejected j2’s bid.

Meanwhile, Actian is not giving up on its two-month-old effort to land Pervasive Software. Earlier this week, it added 50 cents per share, or about $10m, to its original bid for the data-integration vendor. The $9-per-share offer from the buyout-backed company that used to be known as Ingres values Pervasive at its highest level in more than a decade.

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

Is Sucuri for sale?

Contact: Ben Kolada

Just a month after its newfound partner VirusTotal was scooped up by Google, antimalware detection and remediation startup Sucuri may be next on the auction block. Word has it that the two-year-old company is attracting takeover attention. That shouldn’t come as too much of a surprise, given the growth potential of the website antimalware monitoring market and the strategic importance companies are placing these days on their online presences.

Sucuri provides a website malware detection product and associated remediation service meant to prevent customers’ websites from being blacklisted by search engines, namely Google. The company’s software scans websites for malware infection and alerts the customer. Sucuri then provides a cleanup service to remove the malware. As businesses continue to transition from brick-and-mortar to e-commerce models, such services will become increasingly important to growing sales, especially during the upcoming holiday season. Given its short lifespan, we suspect that the company is currently generating less than $10m in revenue.

No word yet on which companies may be looking to acquire Sucuri, but the list likely includes mass-market hosting vendors and large security firms. Like its competitors, Sucuri’s go-to-market strategy so far has been partnering with hosting companies, though it also sells directly to customers. The company lists Web host ClickHOST as a partner, as well as a half-dozen WordPress hosting and site design vendors. As for possible security suitors, the most likely acquirers that immediately come to mind are Proofpoint, Kaspersky Lab, Websense, Symantec, AVG Technologies or AVAST Software.

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