Cavium Networks Signs Definitive Agreement to Acquire MontaVista Software: Part 2

 

Linux at the Core (or Multicore) of another Acquisition

 

 

What Happened?

Cavium Networks (NASDAQ: CAVM) announced that it has signed a definitive agreement to acquire MontaVista Software for $50 million. The acquisition is expected to close in December 2009 and is comprised of approximately $16 million in cash and approximately $34 million in Cavium Networks common stock.

 

Why…

Did Cavium buy MontaVista Software?

Cavium has maintained a significant growth rate in recent years, surpassing $86M in revenue after being founded just nine years ago.  However, Cavium’s business to date remains focused around the networking space.  Although there is a substantial customer overlap in this industry with MontaVista, MontaVista also provides Cavium with customer relationships in the mobile, consumer electronics, industrial automation, and automotive industries, among others. 

The acquisition of a software company also allows Cavium to diversify cash flow and recognize revenue beginning at the time of a design win, as opposed to just at semiconductor product shipment.  Additionally, the acquisition provides Cavium a way to earn revenue from projects even if they are not selected or in competition for the socket.

Access to a commercial grade distribution of Carrier Grade Linux (CGL) is critical to Cavium’s strategic plans to grow their business within the networking space.  We also expect that this acquisition is a defensive move on the part of Cavium  given that an acquisition of MontaVista Software by another company, semiconductor or otherwise, and a change in access to an Intel/Wind River CGL distribution could present serious risk around Cavium’s long-term ability to provide tightly integrated HW/SW solutions to their customers.

The importance of this relationship is amplified when comparing Cavium’s R+D resources to that of some of the much larger silicon companies.  As such, there is a much larger onus on Cavium to differentiate their solutions through software and integrations.  MontaVista provides Cavium with this opportunity, without applying the time and resources internally to ramp up their own software enablement products and services.

Did MontaVista sell itself to Cavium?

Although it was no secret that MontaVista has been up for sale, ever since rumors first emerged about a potential Sun Microsystems’s acquisition, the ultimate suitor and - even more so - the timing of the deal surprised many embedded market participants.

MontaVista was the uncontested pioneer in the commercial embedded Linux market.  However, over the course of the past four years, Wind River went from an assailant to a proponent of Linux, ultimately eclipsing MontaVista’s once dominant market share.  Over that same time period, VDC estimates that MontaVista was unable to capitalize on overall market growth and achieve profitability, even ten years after its founding.

That said, we thought MontaVista would emerge as one of the big winners following Intel’s acquisition of Wind River and convert the uncertainty in the market into increased revenue (perhaps to inflate a subsequent acquisition price tag).  Instead, Cavium’s acquisition registered in at less than 1.5x 2008 revenues (by VDC’s estimates).

In VDC’s opinion, MontaVista could not afford to shun another offer.  Their investors had shelled out more than $100 million over the years and were likely unwilling to miss another window to sell.  Perhaps more importantly, this is not Jim Ready’s first rodeo.  He previously steered Ready Systems of VRTX fame to merge with Microtec in 1993 and then to an acquisition by Mentor Graphics in 1995.  It is clear that Cavium provides an environment where MontaVista can enhance its financial stability, bolster its access to R+D resources, and can still materially contribute to the larger company’s bottom line.

 

 

Reaction and Analysis

 

Overall, the reaction to this acquisition was rather tempered compared to that after Intel’s acquisition of Wind River in June.  This sentiment is not surprising since MontaVista was less than 1/10^th Wind River’s over size from a revenue perspective. First off, the WinDTel announcement sent enough of a shock wave through the marketplace, that both Intel and Wind River have committed significant time and effort to ensuring their customers and partners understand and believe that they have every intention of maintaining the autonomy and neutrality between the two companies.  As a result, the spirit of much of the messaging that a Cavium/MontaVista is now delivering has already been heard in recent memory.

 

Cavium’s position as licensee of semiconductor IP from both MIPS and now ARM (after its acquisition of Star Semiconductor last year) also reinforces the need for it to maintain a strong ecosystem of partners with other software and hardware providers.  In addition, Linux is, by its nature, open, which ultimately compels similar advocacy and business development tactics by those companies trying to commercialize it.

 

So what can we take away from this continued consolidation and industry shake-up? 

 

Many semiconductor companies were more or less surprised by the emergence of Cavium as the final purchaser – but also more or less happy it wasn’t a larger market participant.  At least to date, companies we spoke with also reinforced their satisfaction with Wind River’s concerted efforts at ambassadorship and partnership since their acquisition and have similarly been pleased by the initial outbound communication and reassurances by MontaVista.  In addition, the acquisition also validates current and necessitates further investment in the software enablement strategies by semiconductor market participants

 

In the eyes of many software and tools providers, this consolidation presents, if nothing else, further incentive to strengthen partnerships with other embedded solution providers.  It also offers an opportunity for software and tool companies to expand or (regain) market share in the telecom/datacom market (not only from a Linux perspective, but also with respect to the RTOS and standalone development tools markets). 

 

It may be many more months or even years before the dust settles and we can judge the success these – and likely additional acquisitions occurring on the heels of this recent recession.  However, it is already clear that the days of standalone, best-of-breed solutions are waning – more than ever, as OEMs are looking for tightly integrated development solutions and platforms that can offer accretive benefits to their overall cost of development and improve time-to-market.  It is up to all market participants to react to this changing environment. 

 

 

One question remains: When the dust settles, who will be left standing?

 

 

Click here to read Part 1 of our analysis.