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  • (first we need to understand what is actually going on)
  • The number is the number, but it is not the direction we want it to go.
  • The most comon SaaS application is CRM.
  • Saugatuck believes that the focus of SaaS is shifting from cost-effective delivery of stand-alone application services (Wave I), to integrated business solutions enabled by web services APIs and Enterprise Services Busses (ESBs and X-ESBs) (Wave II), to workflow-and collaboration-enabled business transformation (Wave III). Mainstream Adoption is characterized by SaaS business solutions increasingly integrated with on-premise applications in the IT business portfolio, the emergence of SaaS Integration Platforms (SIPs) enabling not only business portfolio integration, but also SaaS ecosystems and business marketplaces. These SaaS 2.0 solutions are characterized by increasing customization capabilities at the user interface, data structure and process layer, and the introduction of web services APIs.

presentation (see page 17) presentation (see page 17) Presentation Transcript

  • Corum Group Ltd. www.corumgroup.com SIIA - On-demand Europe 2008 Software Industry M&A Market Update June 10, 2008 SaaS in the Economic Storm Bellevue Boston Houston London Mexico City Munich Oslo Paris Philadelphia Phoenix Portland Santa Clara Toronto Zurich
  • Middle Market Software M&A Specialists
    • M&A specialists since 1985
    • Software and IT experts – mostly former CEOs
    • Publisher of industry-leading M&A research
    • Host of Selling Up Selling Out conferences / M&A workshop series
    • Dominant North American and European presence
    • 60%+ cross-border transactions
    • Platinum sponsor of World Financial Symposiums – Silicon Valley, Boston, London
    • $6 billion in wealth created
    • 200+ transactions completed
  • Headlines Tell the Story “ Can M&A’s Best Times Get Better?” Wall Street Journal, January 2007 “ Money is Everywhere – But for How Long?” Wall Street Journal, January 2007 “ Stock Surge + Bond Boom = M&A Magic” Wall Street Journal, April 2007 “ As Deal Barriers Fall, Takeover Bids Multiply” Wall Street Journal, May 2007 “ M&A – The Best Investment Game in Town” Moneyextra.com UK, May 2007 “ Market Pressures Test Resilience of Buyout Boom” Wall Street Journal, June 2007 “ Dry-Up in Debt Won’t Deter Tech Deals” Barron’s, September 2007 “ Time to Celebrate; 2007 Breaks M&A Record” Wall Street Journal, October 2007 “ M&A Seen on the Brink After Record 2007” Reuters, December 2007 “ Tech Cos Seen Going M&A Route, Not IPO in 2008” Reuters, December 2007 “ IT Spending Growth Expected to Slow in 08” InformationWeek, December 2007 “ Bear Stearns’ No. 1 Foe: Fear Itself” CNN Money, March 2008 “ Deal Making: It Shall Return” Wall Street Journal, May 2008 “ Let’s Still Make a Deal” Business Week, June 2008
  • Current Market Conditions
    • Global economic infrastructure in disarray
    • Difficultly borrowing money
    • IPO markets are dead
    • Many are struggling
    • Worries about depth of recession
    • Concern over inflation
    • Price of oil up
    • Troubled housing market
    • Consumer confidence low
    • Unemployment up
    • Cost of food and consumer goods rising
  • The Silver Lining
    • On the plus side:
    • Technology revenues remain strong
    • Earnings remain positive
    • Forward analyst estimates look good
    • Lending requirements loosening
    • PE buyers see opportunity in the coming months
    • PE and VC investors raising new funds
    • International markets remain strong
    • No buyers saying “we’re pulling back”
    • Large cap stocks up
    • Strong cash reserves
    • M&A has become operational
  • Large Cap Tech Stocks Company Stock Price 6/01/2007 Stock Price 6/0/2008 % Change Year Ago Cash Current Period Cash Sun $5.18 $12.94 149.81% $4,114 $3,027 Apple $118.40 $186.10 57.18% $12,557 $19,448 IBM $106.54 $127.36 19.54% $11,935 $12,134 Oracle $19.66 $22.68 15.36% $9,085 $10,366 Google $500.40 $575.00 14.91% $10,782 $12,027 SAP $49.05 $53.80 9.68% $6,445 $10,506 EMC $16.83 $17.30 2.79% $10,363 $9,976 HP $45.81 $46.25 0.96% $2,987 $2,426 Nokia $28.19 $27.90 -1.03% $4,284 $5,613 Cisco $26.86 $26.35 -1.90% $3,832 $2,416 Symantec $19.97 $19.34 -3.15% $20,681 $22,693 Yahoo $28.78 $26.40 -8.27% $28,873 $21,076 Microsoft $30.59 $27.80 -9.12% $2,345 $2,608
  • Reality Check
    • Don’t take the current market for granted.
    • Volatile public markets
    • “ Long, deep recession,” Warren Buffet
    • Price of oil continues to rise
    • Political change
    • Global conflicts
    • The need to buy is stronger than ever
    • Acquisitions add more growth
    • Counter takeover attempts
    • Consolidation
    • Speed time to market
    • Buy talent and domain expertise
    • Fill product gaps
    • Get ahead of a technology curve
    • Tap into emerging consumer markets
    • Cost of being public and complying with SOX
    • Need for international presence
    • Only true liquidity event for managing shareholders
    Why Does M&A Prevail?
  • Global M&A Activity
    • Cross-border transaction levels remain strong while international M&A activity contributed over 40% to the
    • total of announced deals for 2007
    • Europe and Asia both set records for deal volume in 2007
    • U.S. sellers continue to look overseas for buyers
    • Weak dollar attracting non-U.S. buyers
    • Strong € makes European targets attractive to acquisitive international buyers looking to increase revenues and profits based in stronger currency
    • 67 international tech co’s on BusinessWeek’s InfoTech 100 list up from 25 in 1998
  • Emerging International Markets
    • Regions to watch:
      • China
      • Brazil
      • Israel
      • India
      • Eastern Europe
      • Russia
  • Sectors 2008 sector stats looking good… Sector Public Val. Deal Volume Outlook Horizontal Applications Neutral Vertical Applications Positive Consumer Applications Neutral Infrastructure Positive Internet Positive IT Services Positive
  • Public Valuation Revenue Multiples TTM EV/S Multiples N/A Decreased Increased Sector Q1:07 Q2:07 Q3:07 Q4:07 Q1:08 Yr on Yr Digital Media 1.92 x 2.07 x 2.12 x 1.61 x 1.06 x   Enterprise Applications 3.87 x 3.98 x 4.14 x 3.67 x 3.15 x   Business Intelligence 3.13 x 3.25 x 2.98 x 4.12 x 2.72 x   Enterprise Content Management 2.07 x 2.37 x 2.40 x 2.08 x 1.57 x   Supply Chain Management 2.10 x 2.29 x 2.23 x 2.25 x 1.40 x   Enterprise Infrastructure 2.86 x 2.88 x 2.51 x 3.04 x 2.34 x   Legacy Extension / SOA 2.18 x 2.56 x 2.47 x 2.42 x 2.69 x   Software Development Tools 2.00 x 2.22 x 1.66 x 1.83 x 1.43 x   Storage 3.68 x 3.29 x 2.68 x 2.49 x 1.99 x   Gaming 2.54 x 2.24 x 2.20 x 1.75 x 1.98 x   Internet Infrastructure 3.83 x 3.91 x 4.60 x 4.04 x 2.85 x   Internet Pure Play 3.41 x 3.23 x 2.99 x 2.93 x 2.15 x   IT Services 0.80 x 0.89 x 0.96 x 0.83 x 0.85 x   Security 3.15 x 3.69 x 3.43 x 3.62 x 3.52 x   Wireless 1.46 x 1.75 x 1.55 x 0.99 x 0.51 x   Vert Market - Energy & Environment N/A N/A 4.94 x 4.46 x 4.02 x Vert Market - Engineering 3.40 x 3.29 x 3.73 x 2.73 x 1.99 x   Vert Market - Financial Services 3.28 x 3.12 x 3.05 x 2.73 x 2.70 x   Vert Market - Government 1.16 x 1.15 x 1.21 x 1.24 x 1.21 x   Vert Market - Healthcare 2.28 x 2.53 x 3.16 x 2.62 x 1.93 x   Vert Market - Other 1.19 x 2.71 x 2.81 x 2.14 x 2.05 x   Vert Market - Telecom 1.33 x 1.52 x 1.50 x 1.44 x 1.26 x  
  • Looking Back – Valuation Multiples M&A Transaction Revenue Multiples – Software Industry 2008 is starting off stronger than 2007 finished Q1 P/S multiple of 2.6x
  • SaaS is Mainstream 40% surveyed use hosted CRM (AMR) 49% will expand use of SaaS (AMR) 25% of business software revenue by 2011 (Gartner) 29% annual growth (IDC) 70% plan to use SaaS (Aberdeen Group) 5% to 55% cost savings (Springboard Research) 30%+ new soft licenses will be deployed as SaaS by 2012 (Saugatuck) 50%+ software revenues from subscription by 2015 (Needham)
  • Waves of SaaS Evolution
      • A platform for mission-critical application workloads
    Source : Saugatuck Technology Early Adoption Stand-alone Apps Multi-tenancy Limited Configurability Focus on TCO / rapid deployment Mainstream Adoption Integrated w/ Business Portfolio SaaS Integration Platforms Business Marketplaces and SaaS ecosystems Ubiquitous Adoption Optimized Bus. Ecosystems IT-targeted Ecosystems Inter-enterprise Collaboration IT Utility / SaaS Infrastructure Customized, Personalized Workflow Focus on Business Transformation SaaS 1.0 SaaS 2.0 Wave I: 2001-2006 Cost-effective Software Delivery Wave II: 2005-2010 Integrated Business Solutions Wave III: 2008-2014 Workflow-enabled Business Transformation High Low 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Adoption SaaS Tipping-Point
  • The SaaS Value Chain – Drivers Customer Satisfaction Margin Solve customer business needs Enterprises ISV – SaaS Prov. Buyers (M&A) Competition is next door, stay focus Keep the customer, stay closer Strengthen position, consolidate
    • Allocation of resources on business ops & innovation
    • IT more accountable
    • Leverage investments and lower the risk
    • Productivity
    • Solve business needs
    • It’s all about services
    • IT is not the customer, business is
    • Add-on strategy and standardization
    • Shorter sale cycles
    • Longer term and « healthier » relationships
    • SaaS across business and functions
    • Stable predictable revenue
    • More sustainable margins
    • Platform approach
    • Create value vs growth
  • Valuation over 9 months
    • Multiples
    • In September 07
      • EV / Sales : 6.33 ; forward multiples : 4.19 (12months later)
    • In January 08
      • EV / Sales : 3.69 ; forward multiples : 2.65
    • In May 08
      • EV / Sales : 3.14 ; forward multiples : 2.35
    • Relevant M&A Transactions
  • SaaS – Public Valuation Multiples
  • SaaS transaction multiple
    • Unified communications
      • NGNetworks, IPT, SIP Presence, conferencing
    • Devices
      • What devices is right for particular application / activity
    • Datacenters
      • Virtualized and distributed architectures ; multithreading
    • SOA achitectures
      • Matching IT to business process ; core apps easy tailored
    • Application delivery
      • SaaS business model
    • All of them are interelated !!
    SaaS in the heart of the 5 revolutions* * John Chapman – IT Europa
  • Investors / Acquirers Attracted to:
    • SaaS is not only a matter of business model : part of a wider vision
    • SaaS is “reccession proof” : cutting costs and increasing flexibility
    • Predictable recurring cash flow
    • Revenue visibility this year and beyond
    • Low churn / high user satisfaction
    • Solves cutomer business needs or they’ll leave
    • Easier to plan and manage growth / scalability
    • Higher margins at scale
    • Cash flow is what gives a company value
    • License models are difficult to project
    • If it is not predictable it may be more volatile
    • Markets doesn’t like what’s volatile
  • Seller Motivation
    • Timing – personal, business, market
    • Have been approached
    • Need a larger partner to achieve vision
    • Capitalize on current success
    • Investors want out
    • Running out of cash
    • Founder age
    • Facing a build vs. sell decision
    • Tough to compete with larger players
    • Lacking resources to expand internationally
    • Lack of liquidity
    • Time for change
    • Vision
    • Research
    • Management
    • Business Model
    • Planning R&D Process
    • Patents
    • Documentation
    • Pricing
    • Support
    • Market Share
    • Staff
    • User Base
    What Do Buyers Really Buy?
    • Marketing Channels
    • Alliances
    • Competitive Position
    • Technology
    • Sales Process
    • Capital Structure
    • Growth
    • Profitability
    • Domain Expertise
  • Buyers – Prioritize Acquisition Opportunities
    • Target Size
    • Product prioritization – which new products / markets do they want to own?
    • Product leadership – compared to competition
    • Market size – addressable market large / expandable?
    • Can product port into other verticals, market segments?
    • Cultural and technical compatibility
    • Management team
  • Will the Numbers Pencil?
    • Financial Considerations: Will the acquisition improve financial performance?
    • Return on Equity
    • EBITDA multiples
    • Impact of deal on revenue growth rate and EBITDA
    • Recurring revenue
    • Accretion / dilution to GAAP Earnings Per Share (public buyer); cash flow (private buyer)
    • Don’t forget -- third party analysts and / or lenders need to bless the deal
  • Corum’s Weekly M&A Update Weekly M&A Update Complete list of week’s deals (Registration)
  • Contact Information www.corumgroup.com Corum Group Ltd . 10500 NE 8th Street, Suite 1500 Bellevue, WA 98004 USA +1 425-455-8281 For full research and conference registration Corum Group International S.à.r.l. Beim Paradeplatz Basteiplatz 7 8001 Zurich Switzerland +41 44 251 82 65