M&A Alert - November 10, 2009
Cavium Networks Agrees to Acquire MontaVista Software
Transaction Overview
On November 10, 2009, Cavium Networks (NASDAQ: CAVM) agreed to acquire MontaVista Software for $50mm in cash and stock.
Target Description
MontaVista Software offers its own open source build of the Linux operating system and software development tools and services for embedded devices. MontaVista is particularly known for its Carrier Grade Linux, commercial-grade Linux that has been widely adopted by telecommunications equipment vendors such as Alcatel-Lucent, Ericsson, NEC and Nokia-Siemens as the operating system for a variety of their products. MontaVista also sells MobiLinux, a Linux operating system and development platform for mobile devices ranging from wireless handsets, GPS devices, portable medical devices, wireless POS terminals and consumer electronic devices including wireless handsets and computer notebooks. MobiLinux is deployed by mobile equipment vendors such as NEC and Garmin and industrial automation vendors such as HP, Kyocera-Mita and Fuji Xerox. Most recently, MontaVista’s Montabello, an integrated netbook platform offered to hardware OEM’s, is being deployed in Dell’s latest enterprise notebook, Dell Latitude ON™. Currently Linux is the number one operating system for embedded devices, competing against Windows CE/NT, Symbian OS, QNX Software platform and Android. Direct embedded Linux competitors include Lynux Works, Timesys and Movial. MontaVista had received approximately $98mm in funding from investors from a long list of VC’s and strategic investors including IBM, Intel, Samsung and Infineon. Founded in 1999, MontaVista is based in Santa Clara, California.
Buyer Description
Cavium Networks offers semiconductors for networking, wireless, storage and video applications and devices. Products include embedded processors for 3G/4G wireless access and aggregation devices, enterprise storage and networking systems including routers, switches, embedded voice/video/data applications, and connected home and office equipment. Cavium sells its products to telecommunication carriers, wireless networking and storage vendors as well as to OEMs. Given the strategic importance of the transaction, Syed Ali, President and CEO, was the key executive sponsor of the acquisition.
The $50mm purchase price is comprised of $16mm in cash and $34mm in Cavium Networks’ common stock, representing 1.8mm or 4% of Cavium’s outstanding common stock. Comparable transactions include Intel’s acquisition of Windriver (at 2.2x revenue) and Mentor Graphics acquisition of Embedded Alley in July 2009.
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| Equity Value of Consideration: | $50mm |
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| Equity Value Multiple: | |
| Net Revenue Multiple1 | 1.7x |
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1) As disclosed during Cavium Networks’ Conference Call, revenue multiple is based on MontaVista’s annual revenue of $30mm .
Strategic Rationale
MontaVista’s well respected embedded Linux OS and its new Montabello netbook platform nicely complements Cavium’s focus on providing semiconductors to embedded device manufacturers. With MontaVista, Cavium will be able to generate a new revenue stream by expanding its software and services business which now accounts for only 5% of its revenue.
Architect Partners’ Observations
The embedded market was fundamentally altered by Intel’s purchase of Windriver announced in June 2009. Historically, semiconductor manufacturers stuck close to the knitting and simply provided appropriate integration and certification for higher level operating system software. Intel’s highly strategic decision to acquire Windriver for its Linux OS and supporting development environment and tools, created what may become an important competitive differentiator for Intel, a tightly integrated chip and OS platform offered to embedded device manufacturers. Cavium chose to compete directly by executing on a similar strategy via its acquisition of MontaVista.
Embedded devices have claimed growing importance with the market expected to grow at a compound annual rate of 16.9% to become a $1.2b market by 2013 (source: IDC). Other semiconductor vendors such as AMD, Broadcom, Marvell, TI and Qualcomm among others and even Redhat, the leading enterprise Linux provider, have important decision to make regarding how they respond competitively.