How Best to Position Your Company for a Strategic Exit: Insights from IMPACT 2012

November 14, 2012

The IMPACT 2012 Conference was held last week in Philadephia, PA.  The conference, organized by PACT, the Greater Philadelphia Alliance for Capital and Technologies, brought together a group of venture investors, private equity sponsors, CEOs of small technology businesses as well as advisors to these three groups.  Signal Hill co-sponsored a Corporate Development Panel along with Silicon Valley Bank; Signal Hill Chairman & CEO Scott Wieler moderated the event.  Panelists included Rob Thomas, VP of Business Development at IBM, Cherie Whitney, Senior Director of Corporate Development at EMC and Bob Pick, Senior VP of Corporate Development at Comcast.  While many important themes and insights resulted from the panel, we thought it would be valuable to aggregate recommendations for companies looking to make a strategic exit.

ImageNon-Deal Roadshows.  When preparing for a strategic exit, relationships are the stepping stones to getting deals done; they lead the way into a company’s portfolio.  Non-deal roadshows, which are basically introductions of your management team to the acquirer’s management team and/or relevant business unit heads, are most effective if started as early as 18 months to 2 years before you plan to exit; while you’re sowing the seeds for partnership and potential acquisition, you also make your company available for funding from the VC/strategic investment arms of the strategic acquirer.

Market Your Company to the Business Unit.  Catching the eye of the corporate development division at a strategic acquirer is key since it is often the gatekeeper, but that’s just the first step.  When feasible, it’s important to market your company to the operating group or business division that will be sponsoring or “championing” the acquisition; the group that will ultimately be managing the day-to-day operations of your business.  Business unit buy-in is integral to moving a deal forward.  Of potential deals with business unit buy-in, it is roughly estimated that only 10 to 15 percent get done, meaning that without buy-in, the chances of closing your deal dwindle drastically.

Make the Case for Cross-Selling.  Strategic acquirers are always looking for synergy between businesses – that synergy isn’t limited to offering a complementary product or service.  It’s important to make the case that your product will sell to their customers and that their product will sell to your customers.  The opportunity to cross-sell makes your company a good fit, an essential part of the greater business.

Make Your Passion Palpable. Most strategic acquirers claim they can tell within the first 30 minutes of a management presentation how excited you are about your business and your people, versus just being in it for the money.  Dedication level and passion for your business is often easy to gauge, especially for large companies who see management presentations every week.  If you genuinely want to stay with your business, see it grow and become an integral part of a greater entity, conveying passion is fundamental (and should be easy).

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Deal Focus: Insight Venture Partners to Acquire Quest Software

March 15, 2012

Insight Venture Partners, a leading New York-based private equity and venture capital firm focused on the software and internet sectors, recently announced plans to take private Quest Software, a California-based provider of database management software, for $23 a share or about $2 billion dollars. Insight’s offer comes at a 14.4% premium over the 30-day trading price and, according to recent SEC filings, values the company at 2.2x trailing revenues and 13.1x EBITDA.

Quest Software’s technology is designed to develop, monitor and protect software applications, databases and servers. The Company’s Tool for Oracle Applications Developers (“TOAD”) solution, provides productivity software for database developers, DBAs, and analysts. TOAD validates code performance, automates SQL optimization, and provides performance management tools to simplify the management of Oracle, SQL Server and DB2 systems. In addition to TOAD, Quest provides a wide range of other solutions for performance management, data protection and virtualization, including ChangeBase, NetVault and ChangeAuditor.

The transaction has been structured as a management buyout and will allow Quest to entertain alternative bids over the next 60 days in a “go-shop” period designed to identify alternative opportunities for shareholders. Upon news of the offer, Quest’s stock price rose 24% to $24.07, and it would not be surprising to see alternative offers come through during the “go-shop” period.

Insight’s offer comes on the heels of an exceedingly acquisitive 2011, in which the Quest closed seven deals, such as its acquisition of Smarsh, Inc. and BiTKOO, LLC in November and December, respectively. Vinny Smith, who was reappointed CEO in February after serving in the position from 1997 to 2008, will be rolling his shares forward with the new ownership. In the near term, Smith has suggested the company will be less aggressive in the M&A market, instead focusing on integrating its numerous recent acquisitions and executing its strategy.

- Andrew Dunfee, Financial Analyst

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Deal Focus: Dell acquires SonicWall

March 15, 2012

Dell announced this week that it plans to acquire security vendor SonicWall, a provider of unified threat management (UTM) solutions. While deal size was not disclosed, the transaction is estimated to be valued at around $1.2 billion and about 4.6x trailing revenue — well above the $717 million and 2.4x revenue that private equity owner Thoma Bravo paid for the company two years ago. This transaction is a testament to the rebound in the market and supports our observations that strategics have tremendous appetite for security assets.

Founded in 1991, SonicWall has 300,000 customers in 50 countries, 950 employees and a channel program with 15,000 retailers, which Dell plans to integrate into its own PartnerDirect program. SonicWall has over 130 patent apps, with 64 issued to date, which also adds value to the transaction. The acquisition will help Dell round out its security solutions portfolio with the addition of SonicWall’s firewalls, network security and data protection solutions. Dell’s security portfolio is already quite robust with its SecureWorks security services – which it acquired in January 2011 for $615 million and 5.1x revenue – as well as various other cloud security, data encryption, vulnerability and patch management solutions. UTM also complements SecureWorks by creating an opportunity to remotely manage on-presence SonicWall devices, a hybrid cloud-product converged approach which we believe is where security is heading.

The SonicWall transaction continues consolidation of the UTM market.  Last year UK-based security software maker Sophos acquired Astaro, a provider of network security solutions for $170 million and 3.8x trailing revenue. Research from Gartner suggests UTM will continue to grow faster than many other security markets; worldwide revenue for the UTM market totaled approximately $1.28 billion in 2011 and is estimated to grow at approximately 15% CAGR through 2017.

SonicWall represents the latest in a string of purchases by Dell in an effort to expand beyond personal computers to grow its product lineup, as well as its potential profit margins by being a one-stop-shop for customers. The deal also highlights the growing role of PE firms in the security M&A landscape. Over the last year Thoma Bravo acquired Blue Coat Systems ($916 million) and Tripwire ($225 million), while  other firms acquired companies including Clearswift ($46 million), Persistent Sentinel and Aladdin Knowledge Systems.

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Deal Focus: Juniper Networks Acquires Mykonos Software

March 2, 2012

Juniper Networks, a networking equipment provider, announced last week that it acquired Mykonos Software, a San Francisco-based provider of intrusion deception systems that protect Web sites and Web applications. Juniper paid approximately $80 million for the company, a valuation well above the median deal size the IT Security sector has witnessed over the past year (see our upcoming IT Security Sector Update). According to SEC filings, Mykonos earned less than $1 million in revenue last year, making this a very highly valued deal in any regard.

Mykonos’ technology is designed to secure websites and web applications from advanced hacker attacks. The software employs “deception-based technology” that uses a trap to detect and divert attacks. It also provides device-level tracking beyond the IP address, which allows for attackers to be uniquely identified, monitored and/or blocked – a clear benefit over traditional web security appliances and Web Application Firewalls (WAFs).

The acquisition not only complements Juniper’s existing security offerings, such as firewalls and protective systems for a corporate network, but allows Juniper the ability to provide both its enterprise and service provider customers with a new tool to detect an attack before it is in progress. Juniper will be able to sell the technology as both a standalone and as an integrated solution, allowing customers the benefit of a proactive security approach that stops hackers in real time.

This is not Juniper’s first IT security purchase, let alone its first transaction with an extremely high multiple. In 2010, Juniper paid $70 million for SMobile, a provider of security software for smartphones and tablets; a few months later, the company paid $95 million to acquire Altor, a virtualization security company. At the time of the acquisitions, both SMobile and Altor were reporting less than $5 million in sales, according to data from the 451 Group. These transactions demonstrate Juniper’s strategic shift to higher software content and offerings and the fact that they are not afraid to pay big for coveted assets. Our discussions with Juniper at RSA suggest further acquisitions down the road as the company builds out its mobile (Pulse) and cloud security and management vision.

- Patrick Chang, Associate

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Deal Focus: Oracle Acquires Taleo

February 16, 2012

Oracle announced last week that it acquired Taleo, a cloud-based talent management solutions provider, following in the footsteps of the industry’s largest SaaS acquisition ever – SuccessFactors/SAP. Taleo’s solutions help organizations attract, motivate and retain human capital. Founded in 1999, Taleo boasts 5,000 client companies, including names such as JP Morgan Chase, Starbucks, Best Buy, United Airlines, Dell and HP, and services nearly 16 billion transactions per year.

Oracle is paying $46 per share, valuing the deal at $1.9 billion, with a revenue multiple of 5.0x EV/C2012 and 4.3x EV/C2013, and a 30% premium over the 30-day trading price. The deal follows SAP’s December acquisition of employee performance management software provider SuccessFactors. SAP paid $3.4 billion for the company and 7.5x EV/2012 revenue, making it the largest SaaS acquisition to date.

Oracle expects Taleo’s portfolio of products to complement its existing offerings as the need for human capital management has become a strategic initiative for organizations. The acquisition will expand Oracle’s cloud capabilities by adding a large base of customers running Taleo’s cloud solutions and will also fill a recruiting functionality gap within Oracle’s Human Capital Management Fusion offering.

The acquisition represents Oracle’s second recent major purchase of a Web-based software provider, after acquiring RightNow Technologies in October 2011. Oracle already commands a suite of on-premise human capital management solutions, but the popularity of SuccessFactors, Taleo, Kenexa, Cornerstone and SumTotal Systems help validate the sector.

Oracle’s acquisition of Taleo and SAP’s acquisition of SuccessFactors may have positive implications for other SaaS companies as the acquisitions show continued interest by larger players in acquiring their smaller, faster growing SaaS competitors. Large legacy enterprise software players see the need to strengthen their cloud capabilities and vertical industry focus. Simultaneously, fast growing SaaS companies are facing margin pressure from having to increase their sales and distribution capacity to effectively market their solutions. Recent acquisitions at premium prices emphasize the urgency that the major enterprise application vendors feel for getting a handle on cloud applications.

 – Ethan Cao, Associate

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Posted by Signal Hill

Deal Focus: Apple Acquires Anobit for $390 million

January 20, 2012

Apple confirmed this week that it acquired flash-memory and storage provider Anobit for a rumored $390 million. Israeli-based Anobit uses proprietary signal-processing algorithms to improve the performance of flash-memory chips. In addition to flash memory, the company also sells enterprise storage solutions. The company had raised $76 million from investors, including Battery Ventures and Pitango Venture Capital.

The acquisition, Apple’s first in Israel, is a prime example of the company vertically integrating. Apple now owns a supplier of a key component for its top-selling devices, as Anobit’s flash memory technology is used in iPhones and iPads. Apple is the largest buyer of flash memory in the world and Anobit will now provide in-house chip procurement for the company, significantly reducing costs going forward. It also throws a wrench into the procurement process of one of Apple’s fastest growing competitors in the smartphone market – Samsung. Anobit has been a main supplier to Samsung and as a result of the acquisition may stop supplying chips to the company, which would strengthen Apple’s position in the smartphone market.

The rumored acquisition price of Anobit makes it Apple’s second largest acquisition to date – behind only its 1996 $404 million acquisition of NeXT, a computer company that developed and manufactured a series of computer workstations intended for the higher education and business markets. More recently, Apple paid big for its acquisition of PA Semi in 2008 ($278 million) and Quattro Wireless in 2010 ($275 million). Anobit is also only Apple’s third hardware acquisition in its history (P.A. Semi in 2008 and Intrinsity in 2010 for $278 million and $121 million, respectively).

Apple’s acquisition of Anobit is not a big surprise to industry analysts, who noted that flash controller acquisitions have been a trend recently. Last year, solid-state-drive-maker OCZ Technology Group agreed to acquire privately-held Indilinx, a maker of popular NAND flash controllers for $32 million, while fabless semiconductor maker LSI Corp. announced it would acquire flash controller maker SandForce. Apple isn’t necessarily one to follow trends, however. With Apple’s new CEO Tim Cook serious about not hoarding cash, and with $8 billion already on the books, we may start to see a number of bigger, trend-setting acquisitions by the company over the next year.

– Jane Santini, Associate

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Deal Focus: IBM To Acquire Green Hat

January 4, 2012

IBM is back to its usual acquisitive pace, with the announcement it plans to acquire application testing software maker Green Hat. The purchase marks IBM’s first acquisition of 2012 and sixth acquisition since October. Privately-held Green Hat makes technology that allows developers to test their product in the cloud, rather than setting up an actual testing lab of hardware and software. Terms of the acquisition were not disclosed.

We wrote about the shift of application testing to the cloud last summer and noted IDC expects global testing services spend to grow to more than $19 billion by 2015 — so it is no surprise that IBM is taking advantage of the market’s growth opportunities. Green Hat’s software creates a virtual environment for software testing that simulates a wide range of IT infrastructure elements, without the constraints of hardware or software services. Green Hat will join IBM’s Rational Software business, and will offer users greater efficiencies when combined with its Rational Solution for Collaborative Lifecycle Management. It will also be offered through IBM Global Business Services’ Application Management Services (AMS).

The typical benefits of a cloud solution apply here — by using Green Hat’s solutions, a virtual test environment can be set up in a matter of minutes versus the weeks it generally takes for traditional set ups, and for a fraction of the cost. The acquisition extends IBM’s offerings for business agility and software quality, ultimately changing the way enterprises manage software development cost, test cycle time and risk.

While IBM’s acquisition pace petered off at the end of 2010 and beginning of 2011 (ironically, a particularly active period for the M&A market), the company managed to eek out eight acquisitions for all of 2011, totaling approximately $2.4 billion. It paid healthy sums and multiples for a number of these companies including DemandTec ($438.5 million; 5.0x revenue); Q1 Labs ($575.0 million; 8.8x revenue) and i2 Inc. ($500 milion; 5.9x revenue). Chances are IBM will resume its regular appetite for acquisitions in 2012: the company has said it plans to spend $20 billion on acquisitions by 2015.

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Deal Focus: SAP acquires SuccessFactors

December 7, 2011

SAP announced this week its American subsidiary will acquire SuccessFactors, a SaaS human capital management provider, in a major play to become relevant in the ever-expanding cloud computing space. SuccessFactors, which will remain an independently run unit, provides software which is used by firms to review employee performance. It has more than 3,500 customers and a total of 15 million paying users and expects its 2011 revenue to jump by about 59%.

SAP is paying an enterprise value of $3.3 billion for the company, a massive 11.4x trailing revenue and 7.9x forward revenue, making it one of the most highly valued enterprise software transactions of the year. It trails only HP’s acquisition of Autonomy for 11.7x revenue (EV $10.9 billion and 8.7x forward revenue), and is the largest SaaS-related acquisition ever tracked by Signal Hill. At $40 per share, SAP is paying a 66.7% premium over the 30-day trading price.

The acquisition is a major move for SAP into web-based software. Forrester estimates the cloud computing market, including SaaS products, will grow from $40.7 billion in 2011 to more than $241 billion in 2020. While SAP has been marketing its own Business ByDesign suite of SaaS products over the past several years, it has struggled to make the product a gamer changer in the SME space. The SuccessFactors acquisition will help propel the company into the midst of the cloud revolution and keeps it in direct competition with rivals such as Oracle, which purchased SaaS CRM provider RightNow Technologies for $1.5 billion EV and 7.1x trailing revenue (5.7x forward revenue) in October.

SuccessFactors is SAP’s fourth acquisition this year and seventh since the beginning of 2010, among transactions spanning security, systems integration, mobile technology and GRC. Most recently, SAP acquired Crossgate AG, a provider of EDI SaaS for use in SCM applications integrating with SAP ERP, in September for an undisclosed price. SuccessFactors announced its own acquisition this week as well; it is paying $110 million for Jobs2web, a recruiting marketing platform, which will complement existing recruiting solutions to create a comprehensive Recruiting Execution Platform as part of the SuccessFactors Business Execution Suite (BizX).

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Deal Focus: Pearson acquires Global Education, expands Chinese test prep network

November 28, 2011

Pearson announced last week that it will acquire Beijing-based English language test preparation service provider Global Education and Technology Group (NASDAQ:GEDU) at a $155 million enterprise value. With over 800,000 course enrollments during the past twelve months and 450 learning centers across 60 cities, Global Education is one of the leading test preparation providers in China. It has an additional one million registered users on its online course content delivery platform. Global Education focuses primarily on providing preparation products and services for secondary school English language learning (ELL) students taking high-stakes English language assessments for entrance into foreign universities; it has diversified its offerings beyond ELL test-prep products to include after-school tutoring and coursework and career consulting that can apply to the entire educational lifecycle. It has also expanded into K-12 services for primary level students and into professional certification test preparation services.

At a stated equity value of $294 million and an enterprise value of $155 million, the Global Education acquisition represents a 2.4x multiple on 2011E revenue and a 24.6x multiple on 2011E EBITDA based on consensus estimates. According to Global Education’s management, the deal represents a 105% share price premium over the pre-announcement closing price. The deal is expected to close during the fourth quarter of this year.

For Pearson, the Global Education learning center network will allow it to greatly expand its presence in the Chinese ELL market from eight cities to 60, building off the foothold it initially gained through its August 2010 acquisition of Wall Street Institute, a transaction in which Signal Hill served as an exclusive financial advisor. Pearson estimates that over 500,000 Chinese students take high-stakes English language exams each year, representing a four-fold increase over the last five years. Bloomberg reports that the number of Chinese students studying at U.S. colleges and universities grew 23% to over 157,000 students in 2011, the most of any foreign country.

With countless individual test preparation service providers competing in each major city, the related test preparation market and the general K-12 tutoring market in China remains a fragmented space with no one player controlling more than 1% market share. Potentially large swaths of market share could be up for grabs nationally through aggressive consolidation and expansion by deep-pocketed market leaders. Armed with deep resources, a commitment to growing its Chinese market and the existing Global Education geographic reach, Pearson is positioned to dominate the ELL test preparation space and could consider a move in the future to challenge New Oriental Education and Technology Services (NYSE:EDU) in the traditional college entrance exam test preparation space. Going forward, New Oriental will also be expanding rapidly and represents the biggest competitive threat to Pearson and Global Education’s growth strategy.

This deal marks Pearson’s twelfth acquisition in the past eighteen months and adds yet another notable K-12 related transaction to its 2011 activity. In September, Pearson made a $400 million acquisition of Connections Education, a provider of virtual education services for non-traditional K-12 students. It acquired Schoolnet, a provider of data-driven web-based solutions for school districts, for $230 million in April and took a majority stake in TutorVista, an Indian online tutoring provider, at a $215 million enterprise value in January.

-Justin Chang, Financial Analyst, and Chas Cook, Associate

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Posted by Signal Hill

Deal Focus: VeriFone acquires Point

November 18, 2011

In its third acquisition this year, VeriFone announced plans to purchase European e-payments provider Point from private equity group Nordic Capital. Stockholom-based Point is Northern Europe’s largest provider of payment and gateway services for retailers and merchants, handling 10 million transactions per day with a local presence in Denmark, Estonia, Finland, France, Iceland, Ireland, Latvia, Lithuania, Norway, Sweden and the UK. Its customers include some of the largest retail companies in Europe, as well as small independent stores and online merchants. Point’s offerings include point-of-sale technology and support, gateway services, card encryption services, and multi-channel e-commerce processing.

VeriFone is paying an enterprise value of just over $1 billion for Point, representing a healthy 4.0x revenue multiple. This valuation showcases not only the premium acquirers are willing to pay for strategic acquisitions but in particular, Point’s tremendous growth over the past several years. When Nordic Capital originally acquired the company in 2004, it boasted revenues of approximately $45 million – today its revenues are nearly six times that amount. The acquisition of Point is the largest in the payments sector year-to-date, trailed closely by Western Union’s $973 million acquisition of Travelex Global Business Payments, also valued at 4.0x revenue. There have been 40 payment technology acquisitions tracked by Signal Hill so far in 2011, 15 of which have reported deal values representing more than $4 billion in total enterprise value.

VeriFone plans to expand the Point platform throughout the European region and beyond, to ultimately create the world’s largest infrastructure for rapid deployment of alternative payments. Point provides VeriFone with 475,000 new merchant contracts, not to mention a high-margin recurring services business. Ultimately, the deal allows VeriFone to provide retailers with the ability to easily accept all existing payment types, including next-generation methods, such as those offered by Google and PayPal.

While this is VeriFone’s third acquisition this year — it acquired Global Bay Mobile Technologies earlier this month and Destiny Electronic Commerce in May — it is the company’s eighth acquisition since September 2010. Nearly one year ago Verifone made another big acquisition: it paid $480 million and 1.1x revenue for Hypercom Corporation, a global payment technology provider. These acquisitions have helped give the company a more balanced portfolio of offerings. Recent reports say VeriFone is willing to spend $1 billion a year on acquisitions, specifically for expansion in emerging countries and new markets, such as mobile payments. With a cash war chest and a history of being an active acquirer, we expect to see even more activity from VeriFone, and in the payments space in general, well into 2012.

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