HP-Autonomy acquisition under US Government Investigation - the Adventure Continues

The investigation over the $11.1 billion 2011 Autonomy (founded by Mike Lynch)  acquisition by Hewlett Packard   is growing into an even  larger  legal soap opera. The  US Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), and the Serious Fraud Office are  all now involved.  Accounting firm  Deloitte, one of the advisors in the deal, is going to be quite busy responding to inquiries. KPMG may have to get involved, as well. Meg Whitman and the rest of the Hewlett Packard board will be having chats, as well. 

There are a number of ways to value an acquisition.  One of the most rigorous methods is using discounted cash flow analysis. Doing revenue multiple based on similar companies is another way.  However, revenues are fuzzy.  You can sign a 10-year contract, and depending on the deal, recognize the revenue at one time, or spread the revenue over a 10-year period.  Ditto with the costs associated with the sale.  There are hard dollars associated with determining profitability, as well as soft dollars.   

Much  of the value of an acquisition rests on the discounted cash flows from future revenues based on projections.  If the projection drops, the value of the acquisition drops. And if the drop is material, it has to be reflected on the acquiring company’s (HP’s) books. Hence, the $8.8 billion write-down.

In a December 28 article ZD Net article,    “HP-Autonomy acquisition under US govt investigation”, ZD quoted from a blog posted by founder and former Autonomy CEO Mike Lynch. 

Lynch said HP had failed again to provide detailed calculation on its US$5 billion write-down of Autonomy or publish an explanation of the allegations it made against his former management team. 

"Furthermore, it is now less clear how much of the $5 billion write-down is in fact being attributed to the alleged accounting issues, and how much to other changes in business performance and earnings projections.  This appears to be a material change in HP's allegations," he said. 

Lynch again dismissed any claims of impropriety and pledged to cooperate with the DOJ investigation.  "We continue to reject these allegations in the strongest possible terms.  Autonomy's financial accounts were properly maintained id in accordance with applicable regulations, fully audited by Deloitte, and available to HP during the due diligence process."

It has already been written how Autonomy was sloppy in where they assigned revenues and costs between the hardware and software in some of their deals.  This is going to cost them  if it is determined in the investigation  that they ignored US generally accepted accounting principles  (GAAP).  The IRS does not like to be shortchanged. 

However,   Hewlett Packard (CEO Meg Whitman and the HP Board) would have to approve of  this adjusted valuation.  If it was largely based on  adjusting the  forecast  of future revenues downward, and this was then used this in calculating the $8.8 billion  write-down of the deal, HP should be willing to share this information.

The firm, Robbins Geller Rudman & Dowd LLP filed a class action suit against Hewlett-Packard last week in November. They’re probably enjoying this.

http://kensek.blogspot.com/2012/12/another-look-at-hewlett-packard.html

 

Avast Thursday Initial Public Offering Postponed

 From the Original Post - Updates at End of Blog

Antivirus software company Avast will have their Initial Public Offering (IPO) Thursday.  The ticker symbol will be AVST. The roadshow is about at an end! Palo Alto Networks' successful IPO Friday suggests that the IPO  market may be open again.

Avast plans to offer 9 million shares at between $9 and $11 each with this IPO. The price  may be tweaked on Wednesday. The lead underwriters for the IPO are UBS Investment Bank, Deutsche Bank Securities and Jefferies & Co.  Avast uses the freemium strategy for their antivirus software. Avast  develops anti-virus software, specializing in a free version of its product used by consumers. They then offer  upgrades that can be purchased.  Avast is number one in OPSWAT’s most recent world wide industry market share analysis for antivirus software. www.opswat.com

 

James Krapfel of Morningstar said Avast is going public at a time when “the company’s software is installed on 20% of the worldwide consumer and small business PCs.” Krapfel called Avast “a higher quality peer” to rival AVG Technologies AVG  with sales growing at twice AVG’s annual rate.

  

Below is a summary of some of their financial data, revenue, income, etc. Click on it to enlarge.

Avast’s freemium competitors include Avira, AVG Technologies, PC Tools, and Panda.  Microsoft offers a free version of antivirus but no paid versions.  The Avast current installed base in about 159 million. They most recently had 1.72 million downloads on www.download.cnet.com   last week.  

 July 29 updates - Avast was the most popular free  antivirus download on CNET  for the week ending July 29, with 1.69 million downloads.


Updates


 July 30 update - Avast was the most downloaded free AV product on download.com for the week ending July 29 with 1.69 million downloads.

July 25 update - Avast Software  postponed its IPO on Wednesday evening, citing poor conditions. 

AVG Technologies executive JR Smith told  the Financial Times on Thursday that the  IPO situation for CEE tech companies is likely to get worse before it gets any better. “We are a European software company and we are pretty close to what is going on here, and start-ups and those companies looking for additional capital investment will find it tougher for sure over the next 12 to 18 months.”

The Avast  S-1 filed with the SEC   can be viewed at the link below.   Informative reading.

http://www.sec.gov/Archives/edgar/data/1537133/000104746912007168/a2210121zf-1a.htm

 

For more information, go to

http://kensek.blogspot.com/2012/07/avast-files-for-90-million-initial.html

 

Avast Files for $90 Million Initial Public Offering (IPO)

After first talking about going public in December, Avast filed an updated S-1   with the SEC (Securities Exchange Commission)  on July  12.  They’ll be trading on Nasdaq   under AVST.  The IPO (Initial Public Offering) will be for $90 million.  Anticipated offering price of the IPO, $9 to $11 per share.  The information in the S-1 lists  their installed base at about 159 million users.  The 190 million figures will probably be disappearing from their web site.  The definition resulting in 190 million may be different, however. When going IPO, accuracy in these docs is kind of importan. Legal people like that. 

Avast  may have wanted to go public earlier in the year.  The Facebook debacle temporarily  sucked the wind out of  the industry’s IPO sails.   The $90 million figure is down 55% from the $200 million figure that was floated earlier this year.  The bookrunners on the deal are   UBS Investment Bank, Deutsche Bank Securities, and Jefferies & Co.   

According to Renaissance Capital, by offering 9.0 million shares at a price range of $9.00 to $11.00, and at the midpoint of the proposed range, Avast Software will command a market value of $850 million.  IMHO, this sounds high.  AVG Technologies’ revenue run rate is approximately $300 million and with a more diversified revenue stream, they went public with a market capitalization of around $700 million.  Annualizing 2012 first quarter revenue of $27 million, and using a 5x multiple, gives a market cap of $540 million.  This is a crude methodology (first link at the bottom of this blog for details). Look for the pricing to result in a positive “pop”.  Facebook lost quite a few friends following the plunge in their stock following opening day.  Negative pops - bad. Unlike.

The Avast  updated S-1 filed with the SEC   can be viewed at the link below.  There must be an unwritten rule that S-1 documents have to run about 160 pages,  before attachments.  The Avast S-1 is  approximately the same length as the S-1 filed by Palo Alto Networks.  The risk factors run about 25 pages.

http://www.sec.gov/Archives/edgar/data/1537133/000104746912007168/a2210121zf-1a.htm

Like their   Prague/Netherlands based competitor, AVG Technologies, Avast will officially be headquartered in the Netherlands.  “We are incorporated under the laws of the Netherlands and on this basis are subject to Dutch tax laws as a Dutch resident taxpayer.  We believe that we are resident solely in the Netherlands for tax purposes and that we, and in certain cases, the holders of our shares, can rely on this position for purposes of the application of tax treaties concluded by the Netherlands with other jurisdictions.  Read “Double Irish with a Dutch Sandwich – Yummy Way For Corporations to Reduce Federal Taxes”.   http://kensek.blogspot.com/2012/04/double-irish-with-dutch-sandwich-yummy.html

Additional verbiage, probably standard for non US based companies listing on Nasdaq – “As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we have elected to follow certain home country corporate governance practices instead of certain NASDAQ requirements.” “We do not comply with all the provisions of the Dutch Corporate Governance Code.  This may affect your rights as a stockholder.”  These are explained in detail in the S-1.

According the June   2012 “OPSWAT Report on Worldwide Security Industry Market Share Analysis”, Avast is number one in worldwide antivirus market share.  Also in the top 5, Microsoft, Eset, Symantec, and AVG Technologies 

 http://kensek.blogspot.com/2012/06/june-2012-opswat-report-on-worldwide.html .   

The Avast  free product received 3 stars (out of 3) and finished tenth out of twenty in the March “On-demand Detection of Malicious Software” test done by AV- Comparatives  www.av-comparatives.org .

Below is a snapshot of some of Avast’s financial data (revenue, income, etc.)  for the last several years (click on it to enlarge).  Like AVG, Avira, Microsoft, and PC Tools (somewhat quietly owned by Symantec),  Avast also uses a freemium model.

Avast has a corporate office just north of Silicon Valley in San Mateo, California.  A 20 mile hike to AT&T Ballpark,  for San Francisco Giants  baseball games.  AVG Technologies California employees?  They just have to walk across the street.  Very cool.

Don’t look for any of the Avast  officers or directors to be pictured wearing hoodies during the roadshow on the day they go  public.  The major stockholders are Eduard Kucera (30%), Pavel Baudis (30%), and Summit Partners (22.6%).  Let the public roadshow begin.  Hodně štěstí.  Pivo prosím.

For additional light reading:

http://kensek.blogspot.com/2012/01/what-would-avast-softwares-valuation-be.html

http://kensek.blogspot.com/2012/05/avast-gradually-moving-forward-with-ipo.html

 

 http://kensek.blogspot.com/2011/12/avast-software-files-for-200-million.html
 

http://kensek.blogspot.com/2012/03/march-2012-opswat-report-on-worldwide.html

Avast Gradually Moving Forward With IPO

July 12 - See an update at 

http://kensek.blogspot.com/2012/07/avast-files-for-90-million-initial.html

Avast is gradually taking the steps to undergo an IPO (Initial Public Offering) on the NASDAQ exchange as AVST.  They filed a second amendment to their F-1 with the Security Exchange Commission on May 7.  The amended F-1, 150 plus pages of reading, including 23 pages of risk factors.  Three years of financial statements are included.  2011 revenue was $82.1 million, a nice 69% increase over 2010’s $48.4 million in revenue.   Avast promotes that they have around 160 million users of their products.  According to the OPSWAT 2012 March “Security Industry Market Share Analysis”, Avast has the top spot, with 16.3% of the market.

http://www.sec.gov/Archives/edgar/data/1537133/000104746912005415/a2209210zf-1a.htm

 

Avast has also now opened a hiring req for a SEC Reporting Manager, operating  out of their San Francisco Bay Area office.  This means Avast has  to be getting serious about the IPO ;).  “The individual in this critical, hands-on position will be based in the San Francisco Bay Area, report to the CFO and have responsibility for compliance with SEC reporting requirements, including preparation of Forms 20-F and 6-K, and Sarbanes-Oxley”.

This person will be traveling to Prague occasionally.  When the financial people from Prague travel to the Bay Area, they will be able to find Czech food http://www.bayczech.com/useful/restaurants/  though there are some rather nice restaurants in the Bay Area!  Foodies are usually happy when they visit.

 No new rumors as to when the IPO will take place. No sightings of executives in hoodies on Sand Hill Road in Menlo Park, or having breakfast at Burk's in Woodside.  Rumors of sightings at mid Peninsula Starbucks.  The date (IMHO) will shift after  Avast people and their external “smartest guys in the room” make any adjustments based on   analysis of the Facebook IPO. "Pops" are nice on the first day of an offering and neither Facebook nor their Prague based competitor AVG Technologies, had these  on their first days. 

http://kensek.blogspot.com/2012/01/what-would-avast-softwares-valuation-be.html

 http://kensek.blogspot.com/2011/12/avast-software-files-for-200-million.html

http://kensek.blogspot.com/2012/03/march-2012-opswat-report-on-worldwide.html

What Would Avast Software’s Valuation be as a Public Company?

On December 20, Avast Software filed with the SEC for an initial public offering (IPO) of $200 million in common shares. UBS Limited and Deutsche Bank Securities Inc. are acting as joint bookrunning managers and Pacific Crest Securities LLC, Morgan Keegan & Company, Inc. and Macquarie Capital (USA) Inc. are acting as co-managers for the proposed IPO. Avast promotes that they are protecting over 146 million active users and 189 million registered users. Nice installed based to talk about for an initial public offering The freemium model covers a substantial number of these users.

A Quick But Often Used Valuation Methodology for an IPO

In the interest of brevity, methods of valuing a company for IPO purpses include - Book Value, Internal Rate of Return (IRR) Profit/Sales Multiple, P/E (Price/Earnings ratio), Dunn-Rankin formula, free cash flow. In the link to the attached article, the author also talks about the asset approach, the earnings approach, and the market comparison approach. Discounted cash flow analysis would be great, but does involve a fair amount of conjecturing.

So, let’s use the price multiple approach for an Avast IPO. For the six months ended June 30, Avast reported a profit of $23 million. This was an increase from $4.4 million during the same period last year. Revenue increased 87% to $37.9 million. Double that revenue to annualize it, and assume a little growth over the second half of the year. Instead of $75.8 million, let’s say $80 million. Their total 2010 revenue was $48.5 million. This is probably still conservative since their first halve 2010 revenue was $20.2 million.

From an earlier blog, Symantec paid a revenue multiple of 5x and 4.8x for PC Tools and Message Labs, respectively in 2008. In 2009, McAfee paid a revenue multiple of 4.9x for its acquisition of MX Logic. These were all security acquisitions.

Different industries have different price multiples. The risk is different. Margins are different. A software company isn’t a steel com company, nor is it an appliance company.

Intel’s acquisition of McAfee wouldn’t be a valid comparison because McAfee obtains a substantial portion of its revenue from appliances. Ditto for any multiple that could be back calculated from the Thomas Bravo December 8 $1.3 billion proposed acquisition of Blue Coat Systems. Blue Coat obtains a substantial amount of revenue from its appliances. Bravo paid a 48% premium over the previous day’s stock closing price and about 19 percent off the highs of Blue Coat’s share price in January. http://dealbook.nytimes.com/2011/12/09/thoma-bravo-acquires-blue-coat-systems-for-1-3-billion/

And the Answer is

Using the 5x figure for Avast Software, suggests a total valuation of $400 million. This may not be unreasonable give their rapid growth. The paperwork filed with the SEC lays out a number of potential risks. But that's what this paperwork is for.

Again, the above is crude. There are multiple better methods. It does provide a rough estimate. The company is generating cash. They are profitable. As of June, they had about $85 million in the bank. Let the underwriting number crunching continue.

For a May update 

http://kensek.blogspot.com/2012/05/avast-gradually-moving-forward-with-ipo.html

To view Avast’s F-1 form filed with the SEC, go to http://www.sec.gov/Archives/edgar/data/1537133/000104746911010159/a2206699zf-1.htm

http://kensek.blogspot.com/2011/12/avast-software-files-for-200-million.html