indian tech enterprise is thriving

7/31/2019 Indian Tech Enterprise is Thriving

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Indian tech enterprise is thriving; LinkedIn told us why

May 5, 2012

Naren Gupta, Silicon Valley entrepreneur and founder of leading venture capital firm NexusVenture Partners, believes some of the greatest technology companies of the future will comeout of India. Gupta should know, having helped some Indian ventures scale up and sell out tosome of the largest names in the world.

Gupta, whose firm was instrumental in the sale of Hitesh Chellani and Anand BabuPeriasamy-founded open source storage solutions company Gluster to Red Hat for $136million in late 2011, says Indian enterprise is particularly active in the technology space, andthe capability to build companies of global scale exists.

Fridays announcement that global networking site LinkedIn has bought the worlds largest

slide sharing site SlideShare for a hefty $119 million (Rs 640 crore) is another example ofhow Indian entrepreneurs are powering some of the biggest global enteprises. SlideShare wasstarted by Rashmi Sinha and her brother Amit Ranjan, who hail from Allahabad.

A LinkedIn property. Image courtesy SlideShare

The move by LinkedIn to pick up SlideShare is strategically significant, sincepresentationswhich are SlideShares businesshelp connect professionals with severalothers globally who are in interested in the sector or are in similar lines of business andtherefore fits like a glove with LinkedIns business objectives. In fact, the SlideShare deal ispart of a long list of companies which have been founded by technology entrepreneurs of

Indian origin and then acquired by global powerhouses.

The Economic Timesof 5 May quotes similar deals like the Tagtile one only last month,where Facebook acquired the company which was set up by two IIT graduates. The paperalso cites the example of the Junglee sale to Amazon in 1998 and the acquisition by Wal-Mart of data analytics firm Kosmix set up by the same tech entrepreneurs.

Says Gupta: If you look at Silicon Valley, the number of startups with Indian founders, thenumber of companies like Intel where half the engineers are of Indian originI think its avery unique situation for India.

The SlideShare-LinkedIn deal will doubtless inspire several other tech entrepreneurs workingon various business modelsinternet-based or otherwiseto consider scaling up their firmsand then looking at exiting once they are on the radar of global giants. As global internet andtech giants aim at expanding their footprint and enter related areas, analysts say there will bemore cases where they will want a foothold in related areas and will look at the acquisitionsroute to reduce the time taken to reach the next level of growth.

SlideShare has nearly 7.4 million presentations hosted on it, and therefore is a good fit for asite like LinkedIn. It has nearly 16 million registered users. Of late, Indian techentrepreneusparticularly those in the e-commerce spacehave been scaling up, even asglobal giants come calling. In order to acquire greater scale, e-tailing company Flipkartrecently acquired Letsbuy in a well-hyped deal, signalling consolidation in a market which,
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several venture funds and private equity players say, is getting a bit too crowded for comfort.The Flipkart deal comes just as Amazon has entered India via Junglee.

In many cases, some of these entrepreneurs will be in a position to sell out to global giantswho want a firmer foothold in the growing Indian market, particularly in consumer-facing

technology businesses.

5 Tough Sells in the Tech Sector

Technology M&A has surged in the last twelve months, even as many of the largest rumoreddeals failed to catch a bid, signaling that those trying to profit off of merger activity have tocheck their thinking.

Oracle(ORCL),Intel(INTC) andIBM(IBM) played a key role in driving the M&A marketin the last year, but rumored mega deals never materialized. The gap in expected deals and

actual mergers is a sign of wider disconnect in what investors may see as cheap companiesand what C-suite executives see as ones that can offer innovation and drive profitability.

As tech titans like IBM,Apple(AAPL) andGoogle(GOOG) drive near or past record highs,competitors like Yahoo! (YHOO), Hewlett Packard (HPQ), Research In Motion (RIMM)spent 2011 at or near post-crisis lows. In a past age, such valuation gaps would have pavedthe way for an all-stock mega merger boom embodied by HPs $25 billion acquisition ofCompaq in 2001.

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For tech giants that have found hard luck and falling shares, it may be time to questionwhether lower prospective takeover prices justify a recent flurry of deal rumors. Withdeclining market shares or waning earnings, struggling tech companies may not look asattractive as many would expect, regardless of how far their stocks fall. A look at recent largedeals shows tech acquirers are more interested in buying even premium priced growthopportunities over opportunistic value plays.

In the second half of 2011 and early 2012, the industrys most deal hungry minds spent theirprecious cash to buy premium-priced, high growth companies like SuccessFactors (SFSF),DemandTec (DMAN) and RightNow Technologies (RNOW).

Overall, premiums in U.S. Technology M&A deals increased to 32.6% on $60.6 billion ofdeals in the last 12 months, according toBloomberg data, a lift from $46.9 billion of techdeals cut at a 21.6% premium a year prior. Thats a larger gain than the 14% b oost to theTechnology Sector SPDR (XLK), as a 2012 tech rally has pushed the sector to a 20% indexweighting in the S&P 500 ($INX).

The conflict between what is and what looks like a takeover candidate has to do a lot with thecompanies looking to make acquisitions. Industry heavyweights in IT services, mobile
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hardware and Web advertising have strong cash generating abilities and presence in theirrespective markets. In a deal, companies like Oracle, are trying to plug the holes that theyhave and foresee in the future, says Sachin Shah, a special situations analyst with TulletPrebon.

For instance, Intel was the most active acquirer in the last 12 months, cutting 23 separatedeals according toBloombergdata. But the worlds largest chip maker disappointed investorshoping it would cut a mega-deal like going after NVIDIA (NVDA). The company spent$26.3 million on average in its deals, putting its total at just $605 million.

Whether its business service companies like IBM and Oracle or consumer-oriented nameslike Google and Apple, tech leaders are looking at M&A as a way to add an innovation orservice to make their existing businesses worth more.

They cant risk missing some opportunity because they have to offer more and more servicefor every client dollar, says Shah. If you have to provide more services every day, why

would you acquire a peer when all you get are cost synergies.

5. Juniper Networks

A long rumored large-cap deal play, Juniper Networks (JNPR) may be a more likelyacquirer than a takeover target, as information technology companies look to profit fromvirtualized servers, switches, routers, storage and security hardware.

Juniper is second to Cisco (CSCO) in the networking-equipment industry, where it earnsmore than 60% of its revenue from phone, cable companies and Internet service providers.While the shares are off nearly 50% in the past year, the company may still be too big andoffer too little value for a large acquirer. In January, Juniper posted a fourth-quarter profitthat fell 49% from year-ago levels on weak router sales and it forecast a continued drop in thefirst quarter of 2012.

Juniper shares are up nearly 10% year-to date, recovering somewhat from a 2011 stockswoon that put its shares near post-crisis lows. At current levels, the stock is trading at aforward price-to-earnings multiple of 17.7X.

As far back as March 2009, UBS analysts noted that Oracle or Cisco could make a move forJuniper Networks among a range of 16 M&A targets for the two firms that included McAfee,

Salesforce.com (CRM), TIBCO Software (TIBX) and VMware (VMW).

Oracle has since cut large deals buying Sun Microsystems in 2010 for over $7 billion. In thelast year, Larry Ellison set his sights on catching up in cloud-based services paying $1.5billion and $1.9 billion for cloud business software companies RightNow and Taleo. Ciscocut its own deal earlier in February, when it bought optical network company Lightwire for$271 million.

In an April 2010 articleBloomberg noted bankers and analysts who said that a Juniper-sizedacquisition by IBM could add up to $3 billion in sales to Big Blue and plug a hole in itsproduct offerings, especially in its cloud services and virtualization businesses.


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But in its 2015 roadmap, IBM is looking to spend just $20 billion on M&A to grow revenuesby $2 billion as it returns roughly $50 billion in capital to shareholders via stock repurchases.

So far, deals like its DemandTec and Algorithmics acquisitions and previous buys ofSterlingCommerce, Netezza and Unicaare midsized acquisitions targeted at the companys cloud,

analytics and smarter planet initiatives. At a market cap of $12 billion and with a hardwarebent, a Juniper deal would be IBMs largest deal since successfully transitioning to an ITservices powerhouse. It makes Juniper likely beyond IBMs deal appetite.

A bigger question may be whether Juniper Networks will double down on its networkingvirtualization business with a potential deal for Riverbed Technology (RVBD), AcmePacket (APKT) or Fortinet (FTNT), among other players, after a late-2011 $1 billion privateequity buyout of networking specialist Bluecoat Systems.

In November, Juniper senior vice president Mark Burrows indicated that the company wouldlookto make further software acquisitions to round out its networking strategy. Youve

certainly seen M&A activity in the software business and well certainly look for goodopportunities in the future, said Burrows at a Morgan Stanley event, according to

Bloomberg.

While continued acquisitions by Juniper may prove timely in the long-term, they would likelydisappoint some investors who may be hoping for a large deal in 2012.

Analysts polled byBloomberg have a 12-month median price target of $22.37 for Juniper,just slightly higher than Fridays close at $21.99. The company is expected to see its revenuegrow 1% to $4.5 billion, while profits are expected to drop nearly 25% to $341 million in2012, according to consensus estimates.

4. NetApp

A 15% decliner in the last 12 months, even after a near 20% surge in 2012, NetApp (NTAP)may not have many able or willing buyers, even as speculation for a deal persists.

The company, which sells hardware to store data for manufacturers, resellers and businesspartners has benefited from stronger than expected third-quarter earnings announced on Feb.16 with its performance bolstered by an increase in both customers and shipments.

Still, the company is so large that its limited to acquirers the size of IBM, Dell, Oracle a ndHP, which all may have an aversion to NetApp for a host of reasons. The companys marketcap stands at over $15 billion, making a prospective deal significantly larger than anythingcut in 2011.

There are hitches with almost every potential acquirer with the cash or financial strength totake NetApp on. Cisco, EMC (EMC) and VMWare (VMW) are partners on a server, storageand virtualization venture, making a potential deal fraught with challenges. In May 2011, aCisco and NetApp partnership called FlexPod began showing promising orders, furthercomplicating an acquisition.


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After taking on Autonomy, Hewlett Packards new Chief Executive Meg Whitman said inlate 2011 that the company will be staying on the sidelines as it sorts out what to do with thebusinesses it already owns.

For NetApp, the best bet of an acquirer seems to be Dell, which is diversifying its personal

computers business into supplying data center equipment and software. A lot may be tiedhow consumers react to the launch of Microsofts Windows 8 rollout later in 2012. Afterlosing out to HP on its $2.35 billion acquisition of 3PAR, would Dell be willing to bet thefarm on networking? After all, Chairman Michael Dell has said that aside from thecompanys new diversification focus and the promise of Windows 8, Dell will benefit from adistracted HP.

Meanwhile, some are looking for NetApp to make acquisitions and boost its productofferings in data analytics and security. In a Nov. 17 note, Brian Marshall of ISI Group wrotethat with its near $5 billion in cash, the company should look at deals as bold as aSalesforce.com, Informatica (INFA) or Tibix (TIBX) acquisition within software and IT

services, or Brocade (BRCD) in the enterprise storage space.

While NetApps revenue is expected to grow to $6.2 billion in 2012, its profit is expected tofall 11% to $597 million, according to consensus estimates polled byBloomberg.

3. InterDigital

InterDigitals (IDCC) decision to move away for plans to pursue a multi-billion dollar saleof its patent portfolio likely put to rest the heated deal speculation that drove trading in thecompanys shares over the past year

The designer of hardware and network technology for mobile devices like cellphones andsmartphones finished an exploration process for the sale in January and saw its sharesplummet in the wake of the news. The move followed Eastman Kodaks filing forbankruptcy protection after it was unable to draw in funds via patent sales.

In July, InterDigital shares had surged after it hired Evercore Partners and Barclays Capital toadvise on its strategic alternatives, such as a sale of the company or its patents amidincreasing demand for wireless patents.

Names that were attached to possible bids in the months that followed included Qualcomm

(QCOM), Nokia (NOK), Intel, Samsung and Ericsson. In November, UBS analysts evenhighlighted InterDigital as a prospective leveraged buyout candidate for a private equity firm.

The optimism about a deal got an extra jolt after Google paid a hefty premium in its $12.5billion acquisition ofMotorola Mobility (MMI), making the deal mainly to snag intellectual

property rights, not the companys actual business.

Both InterDigital and Kodak may have been unable to fetch the prices they were seekingbecause their patents are encumbered by years of licensing agreements, making them harderto sell. Heavily licensed patents are difficult to value because buyers would need to see howfar partnerships travel and if infringement claims are already protected by previous

settlements.


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InterDigital shares are down 13% in 2012, and more than 18% in the last 12 months. WithoutM&A speculation injected in the stock price, InterDigital is less speculative but also moreboring.

The company trades at an earnings multiple that discounts the 30% jump in earnings to $2.40

a share that the analysts expect in 2012. On an enterprise value to 2012 revenues basis, thecompanys peer group is trading at 5X 2012 consensus revenue estimates, compared to 3.5Xfor InterDigital. The company gets a price target of $45.67 a share from analysts polled by

Bloomberg, a near 20% boost from current prices.

The current valuation may show that InterDigital, could benefit patient investors compared tothose who were looking to profit from a would-be takeout, according to Christopher VersaceofRealMoney. Esepcially if 3G and 4G LTE smartphones continue to be adopted byconsumers.

2. Brocade Communications

Since putting the company up for sale in 2009, Brocade has long been rumored as a takeovertarget for a private equity firm or strategic acquirer like NetApp, Dell, HP or Oracle, among ahost of tech players. Quatalyst Partners tech banker Frank Quattrone has reportedly beenshopping the maker of switches for data-storage networks for years, but it increasingly lookslike Brocade will have to go at it independently in the nearterm.

In recent weeks shareholding data and reports fromBloomberg andDealReportersignal thatprospective buyers are vacating Brocade as an acquisition target. Because prospective privateequity buyers like the Blackstone were reported to walk away from the bid because themarket cap had swelled above $2.5 billion.

Meanwhile, Elliott Management sold over 9 million Brocade shares between Nov. 3 andJan. 12, according to filings with the Securities and Exchange Commission, essentiallyremoving that firm as a potential acquirer

Prior to private equity takeover reports, long-rumored strategic acquirers of Brocade like Delland IBM fell by the wayside as they cut other deals in the networking space in 2011.

Nevertheless, in the most recent quarterly filings, some hedge funds piled into Brocadesstock in the fourth quarter, a sign there may still be a whiff of speculation left.

Highbridge Capital Management bought over 2.3 million Brocade shares, whileMillennium Management and Two Sigma Investments build 1 million share-plus sizedstakes in the quarter. Meanwhile, Caxton Associates, Delaware Management and PyramisGlobal added roughly 1 million shares to their holdings. For Highbridge, Brocade is now thefunds third largest holding, according to its latest filing.

Brocades shares have risen over 11% in 2011, adding to a fourth-quarter gain of more than25% as earnings recovered and sale speculation intensified. Nevertheless, Brocades sharesare still off more than 6% in the last 12 months.

In 2011, Brocade saw its profits fall by over 50% to just over $50 million, while revenue

grew over 5% to $2.1 billion. In its most recent quarter ended in January, Brocade posted a$58.6 million profit though.


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Brocade is expected to record $2.2 billion in sales and $87.9 million in profit in 2012,according to consensus estimates of analysts polled byBloomberg, who give the companysshares a price target of $6.61. Currently, 6 analyst rate Brocades stock a buy, while 22 rateit a hold and 3 give it a sell.

Other large Brocade shareholders include Franklin Resources, Fidelityand Vanguard, eachwith over 5% stakes in the companys shares.

For more on Brocade, seestocks under $10 setting up to trade higher.

1. HP

Could this Dow component be a takeover candidate?

Its a crazy notion that now seems like a remote possibility. Investors should not focus on thecompanys battered shares and relatively strong trailing sales, cash flow and profits as a

catalyst for M&A that would lift shares though. Instead, they need to watch for signs that newCEO Meg Whitman is going to steer HP toward a business model that will be competitive inSilicon Valley in the long-term.

Much ink has been spilled about the deal making at HP over the last two years. Two CEOsago, the company looked like one of techs serial post-crisis acquirers, buying 3Com, Palm,Arcsight and winning out against Dell in a heated battle for 3PAR. In August 2011, then-CEO Leo Apotheker made a giant wave when he announced the acquisition of Britishsoftware giant Autonomyfor $10.3 billion and planned a spin of the companys world-leading personal computer business.

Whitman quashed the PC spin-off plans shortly after Apothekers firing, and she is nowfocusing on leveraging Autonomy and identifying a durable strategy to combat falling PCprofit margins amid the competitive threat posed by the mobile smartphone and tablet world.

HP wont be doing much M&A anytime soon, Whitman has said, and if asked, shed likelysay they arent looking at a sale either.

Nevertheless, at a $50 billion market cap, which fell as low as $35 billion in 2011,speculation of potential buying interest from Oracle made it to the pages of theNew YorkPostback in August 2011, especially as the company was toying with the PC business spin-

off. It even gave fodder for analysts to speculate on a deal that once would have seemedunthinkable but there hasnt been much noise since then.

Maybe one day a deal will emerge. In the meantime, HP is facing a year of intense investorscrutiny and a high bar for execution. Will the company be able to successfully open sourceits WebOS mobile operating system to keep pace with competitors like Apple? Will it revisitits options for the PC business if consumers increasingly look at mobile devices as asubstitute for computers?

Meanwhile, HP needs to watch for a feisty Dell that is picking up share in some of itsbusinesses. For both companies, a big potential stabilization to their PC businesses may

finally arrive with Microsofts coming launch of Windows 8. Until then M&A speculation
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should not drive investors thoughts on HP. Rather, its wiser to stay focused on whether thecompany can start consistently meeting earnings benchmarks and stabilize profit margins.

HPs revenue and profit are expected to fall to $122 billion and $6.7 billion respectively in2012, according to consensus analyst estimates polled byBloomberg, who give the company

a $31.61 price target. The stock closed Friday at $25.32, down 40% in the past year, with itsforward price-to-earnings multiple pushed down to a measly 5.7X.

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