Busy day as NICE bolsters leadership in financial compliance arena and tucks in location based services

On August 31, 2009, NICE Systems announced a $73.5 m all cash acquisition of Fortent analytics based compliance and risk management business. Transaction expected to be accretive in 1Q 2010 is valued at 5x EV/Forward revenue, in line with NICE’s acquisition of Actimize in July 2007. Positions Actimize, wholly owned subsidiary of NICE, to be the one-stop shop for all banks in their compliance and financial crime prevention efforts. Fortent provides analytics based Anti-Money Laundering (AML), Know-Your-Customer (KYC) and other financial crime prevention software for financial services industry

NICE also announced a $11 million Hexagon System Engineering tuck-in which provides cellular location tracking technology for law enforcement, intelligence and security groups. Acquisition enhances security offerings to government agencies, aka homeland security and enhances NICE’s position in communication interception market as highlighted by Israel Digital News

Xora Gearworks combine as mobile software is overcrowded w few carrier partners

On Aug 12^th, Xora announced the acquisition of Gearworks following in the footsteps of Antenna/Dexterra, continuing the consolidation in Enterprise mobility. Phillipe Winthrop spoke with Jim Hemmer, CEO of Antenna, on the consolidating nature of enterprise mobility pure-play vendors and the need for platform vendors to provide robust end-to-end solutions to enterprise customers.

Both Xora and Gearworks partner with wireless carriers to provide location-based field force management tools on mobile devices. The combination creates a larger player to better compete in the crowded Mobile Workforce Applications space as vendors seek the attention of fewer wireless carriers. The transaction also enables Xora to offer customizable apps to its mostly out-of-the-box solutions.

The Xora management team will run the combined entity and the VC backers have agreed to invest $8.5 m which is over the combined $50 m previously invested. Investors include Downtreader, BlueStream, Split Rock and Rho.

VMware enters app development stack w $420 m SpringSource; largest VMW deal yet

On August 10th VMware announced a $420mm cash & stock acquisition of open-source Java development framework vendor SpringSource. The purchase price which marks the largest VMware transaction, includes $331 m in cash, $31 m in stock for vested unexercised SpringSource options and $58 m of unvested SpringSource stock. In addition VMware is setting aside a $60 m stock retention bonus pool.

SpringSource has 150 employees, $20 m in trailing revenues, with cash flow positive expected in 1H 2010 and $25 m in funding from Accel and Benchmark. The premium price, a nice exit for the VCs, represents a 21x EV/TTM Revenue multiple. The premium is justified when you consider the need for VMware to diversify away from its core market and the scarcity of the target. Red Hat's $350 m acquisition of JBoss and Citrix's $500 m acquisition of XenSource serve as examples of platform vendors moving into development and deployment stack and paying a significant premium. The acquisition will also help draw some of the unwanted attention away from the recent ousting of founder-CEO Diane Greene.

VMW plans to use SpringSource to jointly develop Platform-as-a-Service (PaaS) solutions for data centers and for cloud service providers. TechCrunch's Cameron Christoffers highlights the benefit of "lean software" that SpringSource would bring to VMware, enabling faster delivery of business applications in the cloud. For a detailed rationale here is what VMW CTO Steve Herrod and SpringSource CEO Ron Johnson have to say. This acquisition is in line with the consolidation trend highlighted by Oracle's intention to own the entire hardware/software stack with SUN.

A particularly interesting fact about the deal is that no advisors were used in this scant tech M&A environment; a missed $5-$10 m fee opportunity. Dare I say that with all the lay-offs, perhaps there are not enough bankers left to cover the likes of VMware...

Google “on to” more video with acquisition of On2 Technologies

On Aug 5, 2009, Google announced its acquisition of video-compression software maker, On2 Technologies , for $106.5 million in stock. The deal value represents a 58% premium to prior day’s close and represents a 6x Enterprise Value to LTM Revenue multiple.

With the acquisition, Google is expecting On2's technology to advance its efforts of increasing the amount and quality of the video it brings to consumers either via its YouTube video-sharing site, it's new mobile-device operating system, Android, or other ways to bring video over the Internet to consumers.

Google continues to expand into other non-search related businesses such as operating systems, mobile and video, positioning itself squarely against the likes of Microsoft and Apple. Eric Schmidt’s resignation from Apple’s board tops the latest signs that Google wants to be the enabler and the hub of the digital infotainment lifestyle.

Cash is King; Sybase refinances $350m convert

On July 29 Sybase priced its $350million (with a $50 million over-allotment) 3.5% Convertible Senior Notes. Primary use of proceeds is to refinance existing 1.75% convert due 2025 which the holders could put as of July 28, 2009. In conjunction with the new offering Sybase will repurchase $50 million of its stock to support the shares. This is common practice in convert issuances as hedge fund investors typically short the underlying stock as they invest in convertible arbitrage. This strategy essentially lets the investor benefit from the cash coupon as well capitalize on inefficient pricing of the underlying stock, without being exposed to stock price volatility.

If not for the new convert, Sybase would have spent over $400 million to redeem the original convert holders. Although Sybase has close to $800 million in cash, almost half is over seas and repatriating international cash would mean paying heavy taxes. Issuing a convert was a smart use of the capital structure to maintain ample cash and liquidity; a common practice for software and tech companies in this turbulent market...afterall Cash is King

The Best Offense Is Defense: Ericsson ”wins” Nortel asset auction

Ericsson announced that it will acquire a majority of Nortel’s North American wireless assets for $1.13 billion in a bankruptcy auction (Ericsson/Nortel). The all cash bid represented a 74% premium over Nokia Siemens’ stalking horse bid of $650 million. Yes, that is 74% on top.

Why would Ericsson pay so much for an asset that will see revenues decline significantly over the next few years? Here are the highlights:

• Strengthens Ericsson’s position in North America (also boosted by the recent Sprint deal)


• Provides 400 employees focused on LTE (Long Term Evolution) R&D


• Accretive to next year’s earnings with a profitable margin structure

However these points aren’t as solid as Investor Relations would have us believe. Progress in North American and growth in the LTE engineering base (next generation high speed networks will be based on LTE) could be created organically and at lower cost. Additionally, based on Wall Street estimates, while the deal may be accretive in 2010, the decline of the CDMA market will eat into total returns on capital which will come close to double digits, especially with minimal prospects of deal synergies and limited cost cutting opportunities. I do not see returns coming in above WACC.

In the end, this acquisition was a defensive move to keep Nokia Siemens from jumping into the North American market for a bargain price of $650 million. This keeps a major competitor out of Verizon’s LTE network buildout and puts Ericsson in strong position to capture a lion’s share of that opportunity.

Also, it’s interesting to note that RIM announced that they would have bid $1.1 billion for the asset but were prevented from doing so. Ericsson’s bid would have slightly topped that. Perhaps, Nortel should thank RIM for raising the bar and the price tag.

Irony strikes though as the big winner in the auction is a company that did not even make a bid, Alcatel Lucent. A big competitor in the North American market keeps Nokia Siemens out while Ericsson pays picks up the hefty tab. Attention to the folks at Ericsson and RIM, please expect your basket of baguettes, courtesy of the kind folks at Alcatel –Lucent’s HQ in Paris. Merci!

1% Margins, 100% Fun: Why Technology Distribution is Relevant

The “canary in the coal mine,” is what my boss used to say when describing Technology Distributors like Ingram Micro, Tech Data, Avnet and Arrow Electronics. How these players fare can be a leading indicator of what is coming down the pipeline from Technology juggernauts like HP, IBM, Cisco and leading chip manufacturers; all of whom are suppliers into the Channel. But distributors are more than just channel checks, they are the often overlooked and under appreciated engine that powers the supply chain.

Distributors are the middlemen. They do the dirty work of connecting leading OEMs to end-users through a large and fragmented reseller universe. Experts will differentiate between broadline, specialty and component distributors. This classification is not important for us now. The basic facts you need to know are:

• $35 billion in annual sales (Ingram Micro hit over $35 billion in 2007)


• 1.0 - 4.0% operating margins (Tech Data and Ingram Micro have gone sub 1% in recent quarters)


• Each major distributor has issued multiple tranches of straight debt and/or convertible securities

These are big “technology” companies with razor thin margins and high capital requirements. As such, capital structure is important and debt is used often. The capital markets and the banks play a large role in funding operations and covering swings in working capital. This requires true corporate finance advisory work from investment banks; and that makes the industry not only relevant but fun.

Unfortunately for product specialists, when business slow down, these guys are cash machines. Falling revenues lower working capital needs as inventories get worked down and there is no reason to access the capital markets. But when things get going and growth is back, the cash machine will run in reverse and banks will be happy to help. There is also a fair amount of refinancing needed.

On the M&A side, while the industry has already experienced substantial consolidation, there is room for more. And some potential transformational acquisitions could be on the horizon as the industry continues to evolve. More on this to come…