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  1. 1. ABOUT OUR FIRM Software Equity Group is an investment bank and M&A advisory serving the software and technology sectors. Founded in 1992, our firm has guided and advised companies on five continents, including privately-held software and technology companies in the United States, Canada, Europe, Asia Pacific, Africa and Israel. We have represented public companies listed on the NASDAQ, NYSE, American, Toronto, London and Euronext exchanges. Software Equity Group also advises several of the world's leading private equity firms. We are ranked among the top ten investment banks worldwide for application software mergers and acquisitions. Our value proposition is unique and compelling. We are skilled and accomplished investment bankers with extraordinary software, internet and technology domain expertise. Our industry knowledge and experience span virtually every software product category, technology, market and delivery model, including Software-as-a Service (SaaS), software on-demand and perpetual license. We have profound understanding of software company finances, operations and valuation. We monitor and analyze every publicly disclosed software M&A transaction, as well as the market, economy and technology trends that impact these deals. We're formidable negotiators and savvy dealmakers who facilitate strategic combinations that enhance shareholder value. Perhaps most important are the relationships we've built and the industry reputation we enjoy. Software Equity Group is known and respected by publicly traded and privately owned software and technology companies worldwide, and we speak with them often. Our Quarterly and Annual Software Industry Equity Reports are read and relied upon by more than eighteen thousand industry executives, entrepreneurs and equity investors in sixty-one countries, and we have been quoted widely in such leading publications as The Wall Street Journal, Barrons, Information Week, The Daily Deal, The Street.com, U.S. News & World Report, Reuters, Mergers & Acquisitions, USA Today, Arizona Republic, Detroit Free Press, Entrepreneur Magazine, Softletter, Software Success, Software CEO Online and Software Business Magazine. Software Equity Group’s senior bankers have keynoted and spoken at more than one hundred software industry conferences and seminars, including Software Business, SoftExpo, Culpepper, VAR Conference, ACETECH, and the Arizona, Colorado, Chicago, Southern California, Denver, San Diego, Washington State and Boulder Software Associations. Software Equity Group, LLC 12220 El Camino Real, Suite 320 San Diego, CA 92130 www.softwareequity.com p: (858) 509-2800 f: (858) 509-2818
  2. 2. Software Equity Group, L.L.C. 1Q 2010 Software Industry Equity Report Contents U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS........................................................................ 1 IT SPENDING............................................................................................................................................................ 2 PUBLIC SOFTWARE COMPANY STOCK PERFORMANCE ................................................................................. 2 PUBLIC SOFTWARE COMPANY MARKET VALUATIONS ................................................................................... 2 PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE .......................................................................... 4 PUBLIC SOFTWARE COMPANY PERFORMANCE BY PRODUCT CATEGORY ................................................ 5 PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE....................................................................................................................................................... 6 PUBLIC INTERNET COMPANY MARKET VALUATIONS AND FINANCIAL PERFORMANCE ........................... 7 INITIAL PUBLIC OFFERINGS.................................................................................................................................. 9 MERGERS AND ACQUISITIONS: THE NUMBERS.............................................................................................. 10 M&A DEAL VOLUME AND SPENDING: ALL INDUSTRY SECTORS ............................................................................... 10 SOFTWARE M&A DEAL VOLUME AND SPENDING ..................................................................................................... 10 SOFTWARE M&A DEAL CURRENCY ........................................................................................................................ 11 PRIVATE VS. PUBLIC BUYERS ................................................................................................................................. 12 SOFTWARE M&A VALUATIONS ............................................................................................................................... 12 M&A EXIT VALUATIONS BY SOFTWARE CATEGORY ................................................................................................. 15 SAAS .................................................................................................................................................................... 16 APPENDIX A: 1Q10 PUBLIC MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY........... 18 APPENDIX B: 1Q10 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS.................. 21 APPENDIX C: 1Q10 MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS ............................................. 22 APPENDIX D: 1Q10 MERGERS AND ACQUISITIONS, SOFTWARE INDUSTRY MEGA-DEALS..................... 23 APPENDIX E: 1Q10 MERGERS AND ACQUISITIONS, SELECT SOFTWARE-AS-A-SERVICE SELLERS...... 24 APPENDIX F: 1Q10 MERGERS AND ACQUISITIONS – DEAL INSIGHT ........................................................... 25 APPENDIX G: SELECT 1Q10 SOFTWARE INDUSTRY MERGERS AND ACQUISITIONS................................ 27 This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights. Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  3. 3. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 1: U.S. Gross Domestic Product and Unemployment Rate 10% GDP % Growth 8% 7.5% Unemployment Rate 5.6% 6% 4.8% 3.5% 3.6% 3.9% 4% 3.5% 3.6% 3.0% 3.0% 3.2% 3.0% 2.7% 2.6% 2.7% 2.5% 2.2% 2.1% 2.1% 2% 1.2% 1.3% 1.1% 1.2% 1.5% 0% 2003 2004 2005 2006 2007 2008 2009 -0.7% -0.7% -2% -2.7% -4% -5.4% -6% -6.4% -8% U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS We begin our analysis, as always, with a brief bit closer at the Conference Board’s LEI, only four synopsis of recent U.S. Gross Domestic Product of ten indicators increased in February. The (GDP) behavior during the prior quarter. GDP is positive contributors, beginning with the largest best defined as the total market value of all final positive contributor, were interest rate spread, real goods and services produced in a country in a money supply, index of supplier deliveries (vendor given year, equal to total consumer, investment performance) and manufacturers’ new orders for and government spending, plus the value of consumer goods and materials. The negative exports, minus the value of imports. contributors, beginning with the largest negative contributor, were average weekly manufacturing When we published our 1Q09 Report a year ago, hours, stock prices, the index of consumer GDP contracted 6.4%, following 2.7% and 5.4% expectations, building permits, manufacturers’ declines in 3Q08 and 4Q08, respectively (Figure new orders for nondefense capital goods and 1). These significant and continuing declines, average weekly initial claims for unemployment equating to $490 billion, officially put the U.S. in a insurance (inverted). recession for the first time since 1990. In February 2009, President Obama signed the $787 Despite the GDP’s modest but sustained billion stimulus package into law. Although the improvement, jobs remained in relatively scarce impact of this legislation is the subject of ongoing supply, dampening hopes for a rapid recovery. debate, the GDP’s rate of decline slowed in 2Q09 The U.S. unemployment rate improved slightly to 0.7% and GDP actually grew by 2.2% in 3Q09 from its 4Q09 high of 10.1% (Figure 1). Nonfarm and an encouraging 5.6% in the fourth quarter. payroll employment increased by 162,000 jobs in As we went to press, the Bureau of Economic 1Q10, with most new jobs created in the Analysis (BEA) is predicting GDP will rise a temporary help services and healthcare sectors. modest but encouraging 3.0% in 1Q10 (Figure 1). Federal government employment also rose, reflecting the hiring of temporary workers for The 1Q10 forecast seems a bit optimistic in light Census 2010. While the current unemployment of recently released economic data. The U.S. rate of 9.7% is no cause for celebration, serious Conference Board’s Leading Economic Index job cutting appears to have subsided, and we (LEI) inched up 0.1% in February, marking the believe 2010 will continue to see signs of 11th consecutive month of LEI growth. Looking a stabilization and measured improvement. 1| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  4. 4. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions IT SPENDING billing, human capital management and security/compliance. CIOs reined back hard on spending for software, hardware and IT services in 2009. Following IT All that said, we remain convinced that spending increases of 9% in 2007 and 6% in widespread enterprise adoption of mission critical 2008, most IT spending surveys are estimating SaaS solutions will not occur until CIOs/CTOs are domestic IT capital spending declined 10% - 12% no longer concerned with SaaS security and the in 2009. To provide some perspective, we viability of integrating SaaS applications with on- estimate every percentage increase/decrease in premise applications. We do, however, anticipate IT spending equates to approximately $5 billion. markedly increased spending on SaaS solutions by Small/Medium Businesses (SMBs) during the It appears the worst is over. Extrapolating from remainder of 2010 if the economic recovery three different IT spending surveys we’ve continues, particularly ERP, CRM, supply chain analyzed, it’s likely CIO purse strings will continue and financial applications. to loosen in 2010, if the economy doesn’t backslide. In its March 2010 survey, Goldman PUBLIC SOFTWARE COMPANY STOCK Sachs revised its IT spending forecast to +5% in PERFORMANCE 2010, an encouraging improvement over its +2% projection in July 2009. According to the After racking up losses in January and February, Goldman Sachs Survey, internal IT staffing is now the public markets recovered in March. The Dow, the area of greatest pent-up demand, which S&P 500 and NASDAQ closed the quarter up should help shrink the unemployment rate if the 3.1%, 3.2% and 4.4%, respectively, from the first budget priority translates into new hires. Among trading day of 2010 (Figure 2). By comparison, other IT spending priorities surveyed, hardware the software industry consistently outperformed remains in the top spot, suggesting a notable the major stock market indices in 1Q10 (Figure 2). desktop/server/storage refresh in 2H10. As of March 31, the median stock price of the SEG Software Index, our tracking survey of 173 Although prior IT spending surveys underscored publicly traded software companies, gained 6.3% the reluctance of most enterprise CIOs to invest over the January 2 opening price. Investors, once heavily in SaaS applications, receptivity to SaaS again, took relative comfort in the software appears to be slowly growing. While SaaS industry’s unique ability to maintain healthy adoption rates of enterprise CIOs remain much operating margins despite flat or declining lower than SMB CIOs, Goldman’s latest survey revenue and a very difficult economy. suggests enterprise CIO acceptance of SaaS may be shifting from “edge” to “core” applications. Indeed, 161 out of the 249 (64.7%) public While only 11% of respondents stated they companies comprising our Software, SaaS and preferred SaaS, 13% said they’d always consider Internet indices reported higher year-to-date SaaS, and 23% identified themselves as delivery (YTD) stock prices at the close of 1Q10. Eight method (SaaS vs. on-premise) agnostic. Just achieved YTD market returns greater than 40% 19% reported an unwillingness to use a SaaS (Figure 3). model.1 PUBLIC SOFTWARE COMPANY MARKET The Goldman Sachs survey also included VALUATIONS interesting data on the breadth of SaaS applications currently deployed – and currently Enterprise valuations of public software companies planned for deployment – by enterprise CIOs. continued to rebound in 1Q10. The median Salesforce automation, web conferencing, email, enterprise value (EV) to revenue multiple of public expense management, e-recruiting and companies in our SEG Software Index increased for collaboration, the standard bearers of enterprise the fourth consecutive quarter, rising from 1.2x in SaaS applications, continue to make inroads. 1Q09 to 2.1x in 1Q10 (Figure 4). What’s more, the Noteworthy, though, is the modest growth in median EV/Revenue multiple for the SEG Software enterprise SaaS applications for accounting and Index remained at or above 2.0x for two consecutive quarters for the first time in two years – 1 4Q07 to 1Q08 being the last. This encouraging Goldman Sachs March 7, 2010 IT Spending Survey 2| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  5. 5. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 2: Major Market Indices Compared to the SEG Software, Internet and SaaS Indices DOW S&P 500 NASDAQ SEG SaaS Index SEG S/W Index SEG Internet Index 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% January February March trend line is primarily driven by a median 64.3% to a median EV/Revenue multiple of 1.2x for stock price gain of companies comprising the SEG software companies with revenue less than $100 Software Index during the same period. million (Figure 5). Investors, once again, favored the largest (annual While most of the listed companies in our tracking revenue) public software companies in 1Q10, indices saw improved EV/Revenue multiples year- believing they are far better positioned to weather over-year, ten public software, SaaS and Internet a long storm and best positioned to recover companies excelled at boosting their market quickly. SEG Software Index companies with valuations (Figure 6). Overall, these revenues greater than $1 billion posted a median overachievers reported a TTM median revenue EV/Revenue multiple of 2.9x in 1Q10, compared growth rate of 23.9% and an impressive TTM median EBITDA margin of 37.7%. Figure 3: High Flyers – YTD Stock Market Return 2010 High Flyers - Stock Market Return The ultimate overachiever is still Baidu, often 2010 Company Ticker Category Stock referred to as “China’s Google”. Baidu’s median Return 1Q10 EV/Revenue of 25.1x once again catapulted InsWeb Corp. INSW Internet - eCommerce & 59% the company to the top spot on our EV/Revenue Portals valuation list. Its valuation is boosted by year- TheStreet.com, Inc. TSCM Internet - New Media 54% Internet - eCommerce & Figure 4: SEG Software Index Key Statistics OpenTable OPEN 50% Portals SEG - Software: Median Metrics Radware Ltd. RDWR Networking & Connectivity 46% Measure 1Q09 2Q09 3Q09 4Q09 1Q10 EV/Revenue 1.2x 1.4x 1.8x 2.0x 2.1x CRM, Sales & Marketing Constant Contact CTCT 45% EV/EBITDA 8.2x 9.5x 11.1x 12.9x 13.8x Software EV/Earnings 14.2x 18.9x 24.7x 29.3x 27.8x Baidu, Inc. BIDU Internet - Search Engine 45% Current Ratio 1.9 1.9 1.9 2.0 2.0 Renaissance Learning, Education & Computer Based Cash & Eq ($M) $76.8 $78.9 $92.1 $93.9 $97.0 RLRN 43% Gross Profit Margin 67.4% 67.1% 67.2% 67.5% 68.5% Inc. Training Engineering, PLM & EBITDA Margin 14.3% 15.3% 15.8% 15.3% 15.9% Stratasys, Inc. SSYS 42% CAD/CAM Software Net Income Margin 5.2% 4.5% 4.7% 5.6% 6.6% Multimedia, Graphics, Digital TTM Revenue Growth 11.1% 5.6% 1.7% -1.6% -0.1% MakeMusic! Inc. MMUS 39% Media TTM Total Revenue ($M) $220.1 $225.5 $231.2 $221.9 $215.2 TTM Total EBITDA ($M) $28.1 $27.8 $30.0 $29.7 $32.6 THQ Inc. THQI Entertainment 39% Debt / Equity Ratio 22.7% 23.3% 26.4% 24.6% 26.1% 3| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  6. 6. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 5: SEG Software Valuation and Financial Performance by Size of Buyer (TTM Revenue) SEG Software Index Companies EV/Revenue EV/EBITDA 1Q10 1Q10 TTM EBITDA 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 Rev Growth Margin Revenue Greater Than $1 billion 1.8x 2.2x 2.6x 2.8x 2.9x 7.3x 8.6x 10.5x 10.7x 11.9x -1.9% 24.5% Revenue Between $200 million and $1 billion 1.6x 1.8x 2.0x 2.1x 2.2x 10.1x 11.4x 11.4x 12.6x 12.5x 2.2% 18.6% Revenue Between $100 million and $200 million 1.2x 1.4x 2.0x 2.1x 2.3x 9.4x 13.7x 14.1x 15.5x 15.8x 4.1% 13.6% Revenue Less Than $100 million 0.6x 0.8x 0.8x 1.0x 1.2x 5.2x 7.7x 11.2x 12.9x 14.7x -9.2% 5.0% over-year (YoY) revenue growth of 39.1% and an PUBLIC SOFTWARE COMPANY FINANCIAL EBITDA margin of 43.2%. Baidu also stands to PERFORMANCE reap additional benefits given Google’s recent departure from China. Even before Google’s Predictably, reduced IT spending by large pullout, Baidu led Google in China with double the enterprises had a devastating impact on the top market share and was showing no signs of line growth of public software companies. The slowing down. Baidu is now the third largest median trailing twelve month revenue growth rate search site in the world and is rapidly closing on of companies comprising the SEG Software Index Yahoo! to become number two. was in relative free fall during most of 2009, declining from +11.1% in 1Q09 to -1.6% in 4Q09 Public software company valuations measured by (Figure 4). median EV/EBITDA improved markedly, as well, increasing from 8.2x in 1Q09 to 13.8x in 1Q10 However, 1Q10’s median TTM revenue growth (Figure 4). In 1Q10, software companies with rate of -0.1% may indicate the worst is behind us. revenue greater than $1 billion posted a median As we’ve noted in prior reports, there’s typically a EV/EBITDA multiple of 11.9x, while software six to nine month lag between material changes in companies with revenue between $100 million IT spending and the concomitant impact on public and $200 million were valued at 15.8x software company financial performance. That EV/EBITDA (Figure 5). The smallest companies held true during the 2008 – 2009 economic (<$100 million revenue) in the SEG Software downturn, and we expect it will also prove true to Index could muster neither revenue growth or form during the recovery. Thus far, we see significant profitability, setting the stage for further positive signs: According to our random sample industry consolidation in 2010. of recent earnings calls of 28 public software companies (Figure 7), seventeen (61%) exceeded their most recent revenue projections. Should the Figure 6: High Flyers – Enterprise Value/Revenue IT spending forecasts prove accurate, look for 2010 High Flyers - Enterprise Value/Revenue markedly improved public software company Company Ticker Category EV/R revenue growth in 2H10. Baidu, Inc. BIDU Internet - Search Engine 25.1x Archipelago Learning, ARCL Education & Computer Based 11.7x Until then, expect software companies to remain Inc. Training squarely focused on profitability, as they were SolarWinds, Inc. SWI Networking & Connectivity 10.8x throughout 2009 and in 1Q10 (Figure 4). Though Internet - eCommerce & many have begun to rehire and ramp up in Mercadolibre, Inc. MELI 10.6x Portals anticipation of a sustained recovery, it has not Longtop Financial LFT Financial Services Software 10.3x been at the expense of operating profit. The Technologies median TTM EBITDA margin of SEG Software OpenTable OPEN OpenTable 9.4x Index companies increased in 1Q10 to 15.9% Storage & Systems from 14.3% in 1Q09. It hasn’t been easy. Of the VMWare VMW 8.6x Management Software 28 public software companies in our random ANSYS, Inc. ANSS Engineering, PLM & 7.4x sample, only four (14%) beat their EPS guidance CAD/CAM Software to the Street. Internet - eCommerce & NetEase.com, Inc. NTES 7.1x Portals Most public software companies generated cash Concur CNQR Accounting & Finance 6.9x and maintained strong balance sheets in 1Q10, 4| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  7. 7. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions no small feat after a major recession, restructuring ecosystem. By analyzing how public software costs, and little or no revenue growth. SEG companies in discrete product categories are Software Index companies increased their year- performing, we increase our understanding of over-year cash and cash equivalents by a median market trends, product category lifecycles, M&A 26.3% in 1Q10, while maintaining a healthy trends, IT spending priorities and stock market median current ratio of 2.0, historically consistent behavior. with previous years and quarters (Figure 4). The significant cash reserves and strong balance As we’ve noted in past reports, public software sheets of most public software companies, company valuations vary widely each quarter by particularly the industry’s largest players, bode product category, and median multiples for the well for small and mid-cap software companies, same category often fluctuate wildly from quarter- especially those that enable buyers to extend their to-quarter. That axiom held true, once again, in product offerings and capture new turf. 1Q10 (Figure 8). Figure 7: Expected vs. Delivered Revenue and Security software led all other software categories EPS Results (as of March 31) in terms of market valuation during the first quarter. The median 3.3x EV/Revenue multiple of Company Revenue EPS Microsoft Corporation publicly listed security software providers was Cisco Systems, Inc. buoyed by stellar valuations for Check Point Company Oracle Corporation Revenues: Software (6.6x), Sourcefire (5.4x), Commtouch Google Inc. Greater than Software (5.0x) and Cogent (4.8x). By contrast, Adobe Systems Incorporated Electronic Arts Inc. $1 billion traditional (i.e., perpetual license, non-SaaS) BMC Software, Inc. CRM companies bore the stigma of the lowest Mentor Graphics Corporation EV/Revenue multiple (0.8x) of any software Lawson Software, Inc. product category. The median valuations of these Company Jack Henry & Associates, Inc. Revenues: traditional CRM providers have been well below TIBCO Software Inc. $500 million the software industry median EV/Revenue for Avid Technology Inc. Open Text Corporation to $1 billion more than two years, signaling a distinct lack of NICE Systems Ltd. investor enthusiasm for providers in this category. CSG Systems International, Inc. QAD Inc. Still, the median EV/Revenue multiples for this Company Websense, Inc. Revenues: and all other software product categories we track MicroStrategy Incorporated $100 - $500 have increased year-over-year. Quest Software Inc. million Blackboard Inc. Rovi Corporation Interestingly, there seemed to be little correlation American Software, Inc. in 1Q10 between a product category’s median Rainmaker Systems Inc. EBITDA or revenue growth and its year-to-date Company PDF Solutions, Inc. Revenues: stock return. Publicly listed Wireless software Chordiant Software, Inc. Less than companies grew median TTM EBITDA SourceForge, Inc. $100 million Pervasive Software Inc. aggressively (89.7% YoY), but reported a median NetSol Technologies Inc. 1Q10 stock gain of only 0.9% over their January 2 opening prices. Conversely, public software : Exceeded or Met Expectations : Did Not Meet Expectations companies comprising the Engineering, PLM & CAD/CAM category saw median TTM EBITDA decline 6.1% in 1Q10 from 1Q09, yet saw their PUBLIC SOFTWARE COMPANY PERFORMANCE BY median 1Q10 stock return increase 12.0% from January 2. Public Education & eLearning PRODUCT CATEGORY software companies grew TTM revenue 18.1% in 1Q10 and reported a median 1Q10 stock gain of While median financial performance metrics are 9.1% from January 2. Traditional CRM providers’ useful for assessing the overall health of the median TTM revenue growth rate declined to - software industry and making comparisons to 16.1% in 1Q10, yet their median 1Q10 stock other economic sectors, a deeper analysis of return was +14.7% over their January 2 opening. these key metrics by software product category provides much more insight about the software 5| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  8. 8. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 8: SEG Software Categories SEG - Software: Median Metrics by Category Revenue EBITDA EBITDA YTD Stock EV/Revenue EV/EBITDA Growth Growth Margin Return Category 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q10 (TTM) 1Q10 (TTM) 1Q10 (TTM) 2010 Infrastructure Software Database & File Management 1.3x 1.4x 1.6x 2.1x 1.9x 7.1x 7.7x 7.6x 8.6x 8.8x 2.1% 12.7% 22.9% 3.9% Development Tools, Operating Systems & 0.8x 1.2x 1.4x 1.3x 1.6x 5.6x 8.3x 9.7x 12.8x 9.4x -2.4% -3.0% 17.5% 1.8% Application Testing Software eCommerce Software 2.4x 3.0x 3.0x 2.6x 3.0x 16.5x 20.4x 19.4x 18.4x 18.8x 7.9% 42.7% 14.5% 7.3% Enterprise Application Integration 1.1x 1.4x 2.1x 2.1x 2.1x 6.8x 7.6x 11.4x 9.5x 9.4x 1.9% 16.6% 21.3% 7.4% Messaging, Conferencing & Communications 0.7x 1.1x 1.7x 1.8x 1.8x 5.8x 9.6x 10.7x 10.6x 14.1x 4.6% 21.6% 10.2% 9.9% Networking & Connectivity 1.9x 1.7x 2.0x 2.2x 2.4x 8.1x 8.0x 10.8x 13.7x 16.1x -0.1% 26.3% 21.3% 16.3% Security 2.0x 2.4x 3.4x 3.3x 3.3x 11.6x 11.3x 12.8x 13.8x 14.4x 8.3% 49.6% 16.1% 8.1% Storage & Systems Management Software 1.8x 1.6x 2.1x 2.4x 2.5x 8.5x 9.8x 11.0x 13.8x 11.8x 1.7% -8.6% 16.8% -1.0% Wireless 1.4x 1.3x 1.2x 1.3x 1.7x 11.0x 11.7x 13.6x 14.8x 11.8x -3.7% 89.7% 11.9% 0.9% Application Software Billing & Service Management 0.9x 1.1x 1.3x 1.5x 2.2x 4.7x 5.5x 6.6x 7.4x 10.9x 6.1% 10.7% 20.5% 5.5% Business Intelligence 1.1x 1.5x 1.9x 2.4x 2.3x 7.1x 8.5x 10.6x 12.9x 13.7x -2.0% 23.5% 17.1% -0.3% Content/Document Management 1.6x 1.6x 1.7x 1.7x 2.0x 5.2x 6.5x 6.8x 7.4x 8.2x -9.4% 18.1% 22.5% -3.8% Customer Relationship Management, Marketing & 0.4x 0.5x 0.7x 0.6x 0.8x 23.2x 51.0x 15.5x 17.1x 16.9x -16.1% 25.3% -1.8% 14.7% Sales Software Education & eLearning 1.2x 2.2x 1.9x 1.8x 1.7x 13.7x 14.6x 17.5x 16.9x 14.5x 18.1% 64.6% 11.6% 9.1% Electronic Design Automation 0.8x 0.9x 1.1x 1.4x 1.5x 15.5x 9.1x 9.8x 9.6x 21.3x -9.3% 11.4% 3.9% 11.4% Engineering, PLM & CAD/CAM Software 1.1x 1.4x 1.6x 1.7x 1.8x 5.7x 7.8x 11.5x 12.4x 14.9x -10.6% -6.1% 13.7% 12.0% Enterprise Resource Planning 1.0x 1.1x 1.4x 1.5x 1.7x 8.7x 9.0x 9.9x 9.7x 10.8x -8.1% 13.8% 18.4% 3.5% Entertainment 0.7x 1.0x 1.0x 1.0x 1.0x 4.4x 6.5x 7.3x 7.2x 9.0x -11.6% -13.3% 13.8% -1.8% Financial Services Software 1.8x 2.1x 2.3x 2.5x 2.5x 8.2x 9.1x 10.1x 10.1x 11.3x 2.2% 9.4% 19.3% 4.3% Healthcare 1.7x 2.4x 2.4x 2.6x 2.4x 11.9x 14.1x 15.2x 17.7x 16.4x 6.8% 12.3% 19.7% 3.0% Multimedia, Graphics, Digital Media 1.4x 1.7x 1.9x 2.5x 2.8x 9.0x 10.1x 13.1x 17.8x 18.2x -10.3% -1.8% 10.6% 7.6% Supply Chain Management & Logistics 0.9x 1.1x 1.3x 1.6x 1.6x 9.9x 10.3x 10.7x 13.0x 12.6x -10.9% 79.4% 10.6% 7.5% PUBLIC SOFTWARE AS A SERVICE (SAAS) (Figure 9). It was the tenth consecutive quarterly COMPANY MARKET VALUATIONS AND FINANCIAL decline in SaaS revenue growth since 3Q07. PERFORMANCE Only four of seventeen SaaS companies (Constant Contact, Athenahealth, SuccessFactors The economic downturn had a devastating impact and Medidata Solutions) achieved greater than on SMBs, the market segment most responsible 25% TTM revenue growth in 1Q10 (Figure 10). for the stellar growth rates of many SaaS providers during the preceding three years. The Nevertheless, investors remained optimistic about resulting pullback in SMB spending on IT, the prospects of an economic recovery and what combined with slower than anticipated enterprise it portends for SaaS providers. Companies adoption of SaaS, continued to take their toll on comprising the SEG SaaS Index saw their 1Q10 public SaaS providers in 1Q10. By the close of median stock price soar a median 107.1% year- the quarter, the annual median TTM revenue over year. As a result, the median EV/ Revenue growth rate of public SaaS companies had multiple of public companies in our SEG SaaS plummeted to 14.1% from 33.5% a year earlier Index jumped from 2.0x in 1Q09 to 3.3x in 1Q10 (Figure 9). Figure 9: SEG SaaS Index Key Statistics SEG - SaaS: Median Metrics Still, public SaaS company valuations remain well Measure 1Q09 2Q09 3Q09 4Q09 1Q10 below pre-Recession levels and no longer dwarf EV/Revenue 2.0x 2.5x 2.7x 3.1x 3.3x EV/EBITDA 26.4x 38.8x 36.9x 38.8x 33.1x the valuations of their on-premise counterparts. EV/Earnings 45.4x 44.4x 83.4x 98.9x 74.7x To provide historical perspective, at the close of Current Ratio 1.4 1.4 1.6 1.6 2.1 2007, public SaaS companies traded at a median Cash & Eq ($M) $85.8 $88.0 $90.9 $93.0 $96.4 EV/ Revenue multiple of 6.4x, compared to 2.7x Gross Profit Margin 68.1% 68.0% 67.4% 67.8% 67.6% EBITDA Margin 2.7% 3.3% 6.1% 6.7% 7.8% for on-premise software providers - a 137% SaaS Net Income Margin -4.8% -3.5% -3.1% -2.1% -1.0% valuation premium. By 1Q10, the median SaaS TTM Revenue Growth 33.5% 29.6% 21.3% 14.9% 14.1% EV/Revenue multiple had dropped to 3.3x vs. 2.1x TTM Total Revenue ($M) $136.3 $143.6 $144.7 $147.2 $153.1 for on-premise software companies, narrowing the TTM Total EBITDA ($M) $4.2 $4.6 $6.5 $10.5 $11.8 Debt / Equity Ratio 1.1% 0.8% 0.8% 0.8% 1.6% differential valuation premium to 57%. 6| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  9. 9. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 10: Public SaaS Companies SEG SaaS Index EV/Revenue EV/EBITDA TTM Revenue Growth EBITDA Margin Company Category 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 Athenahealth (ATHN) Health Care Mgmt 7.7x 6.5x 7.2x 7.4x 6.7x 85.3x 50.4x 54.1x 56.0x 52.4x 39.6% 39.9% 41.5% 41.6% 38.3% 9.0% 12.8% 13.3% 13.2% 12.9% Concur (CNQR) Accounting & Finance 4.0x 5.0x 6.2x 6.6x 6.9x 17.6x 20.9x 25.0x 26.3x 27.6x 50.6% 35.5% 24.1% 14.9% 14.2% 22.5% 23.8% 24.7% 25.0% 25.1% Constant Contact (CTCT) CRM 3.4x 3.9x 4.6x 3.3x 3.3x 392.8x 335.4x 177.8x 66.8x 70.4x 72.8% 64.9% 57.2% 52.0% 47.9% 0.9% 1.2% 2.6% 4.9% 4.7% DealerTrack (TRAK) Vertical - Automotive 1.1x 1.7x 2.6x 2.5x 2.3x 6.4x 12.6x 25.0x 21.9x 21.0x 3.8% -5.0% -8.9% -8.7% -7.0% 17.2% 13.8% 10.2% 11.2% 10.9% DemandTec (DMAN) SCM 2.0x 2.0x 2.4x 2.3x 1.7x - - - - - 22.4% 15.8% 10.9% 7.8% 7.8% -2.4% -4.0% -5.0% -5.3% -5.3% Kenexa (KNXA) Workforce Mgmt 0.5x 0.9x 1.4x 1.4x 1.3x 2.9x 5.9x 10.7x 13.0x 13.9x 12.0% 3.4% -11.0% -20.7% -22.6% 17.3% 15.1% 12.6% 10.6% 9.5% LivePerson (LPSN) CRM 0.9x 1.5x 2.2x 3.1x 3.5x 11.6x 13.1x 15.3x 17.3x 17.0x 42.9% 32.8% 21.7% 14.6% 17.2% 7.5% 11.4% 14.3% 17.8% 20.7% Medidata Solutions (MDSO) Clinical Mgmt - - 2.5x 2.1x 2.0x - - 32.1x 16.6x 14.4x 67.9% - - 78.3% 32.8% -6.0% 3.3% 7.9% 12.6% 13.8% Netsuite (N) ERP 2.6x 3.8x 4.4x 5.1x 4.8x - - - - - 40.5% 33.9% 25.5% 15.5% 9.2% -7.7% -7.0% -6.9% -6.3% -6.6% RightNow (RNOW) CRM 1.1x 1.3x 2.1x 2.6x 2.9x - 63.4x 49.7x 38.8x 37.0x 25.3% 20.4% 13.0% 9.0% 8.7% -1.5% 2.1% 4.3% 6.7% 7.8% Salary.com (SLRY) Workforce Mgmt 0.3x 0.5x 0.8x 0.8x 0.7x - - - - - 28.1% 23.0% 20.8% 17.2% 14.1% -43.1% -43.9% -37.9% -31.9% -28.1% Salesforce.com (CRM) CRM 2.8x 3.8x 4.5x 6.0x 6.2x 32.0x 38.8x 41.7x 51.3x 51.4x 43.8% 36.0% 29.0% 23.6% 21.3% 8.6% 9.8% 10.7% 11.8% 12.1% SoundBite Communications CRM - - 0.3x 0.3x 0.2x - - - 63.1x - 9.4% 1.6% -6.8% -8.3% -7.0% -2.7% -1.2% -1.0% 0.5% -3.4% (SDBT) SuccessFactors (SFSF) Workforce Mgmt 2.1x 2.9x 3.9x 7.0x 7.0x - - - - - 76.7% 66.2% 58.5% 46.7% 36.8% -56.3% -39.3% -23.6% -10.4% -5.3% Taleo (TLEO) Workforce Mgmt 1.2x 2.2x 2.7x 3.6x 3.8x 20.8x 31.1x 30.9x 31.5x 29.2x 31.5% 33.7% 35.0% 26.0% 17.8% 6.0% 7.1% 8.6% 11.3% 13.1% The Ultimate Software Group Workforce Mgmt 1.8x 2.5x 3.3x 3.4x 3.7x 68.9x 94.6x 94.8x 63.5x 73.2x 17.9% 16.1% 15.0% 13.4% 10.1% 2.7% 2.6% 3.4% 5.4% 5.0% (ULTI) Vocus (VOCS) CRM 2.7x 3.2x 2.9x 3.0x 2.6x 49.3x 56.0x 48.2x 50.0x 54.9x 33.5% 26.4% 20.1% 13.5% 9.1% 5.5% 5.8% 6.1% 6.1% 4.7% Median: 2.0x 2.5x 2.7x 3.1x 3.3x 26.4x 38.8x 36.9x 38.8x 33.1x 33.5% 29.6% 21.3% 14.9% 14.1% 2.7% 3.3% 6.1% 6.7% 7.8% Should there still be any doubt about whether the to escape a good number of public SaaS public markets value SaaS providers more on the companies, others seem to have turned the basis of revenue growth than profitability, it should corner, reaping the benefits of subscription be noted that SaaS companies with TTM revenue renewals, operational improvements and reduced growth rates higher than the group median infrastructure spending. The median TTM commanded a median 5.0x EV/Revenue multiple, EBITDA margin for the SEG SaaS Index was compared to a median 2.3x EV/Revenue multiple 7.8% in 1Q10, almost three times greater than a for SaaS companies with lower TTM revenue year ago. Only three profitable SaaS companies, growth rates in 1Q10 (Figure 11). By comparison, DealerTrack, Kenexa and Vocus, saw their TTM SaaS companies with EBITDA margins higher EBITDA margin decrease from 1Q09 (Figure 10). than the group median trade at a median 3.5x Still, the median SaaS TTM EBITDA margin as of EV/Revenue multiple vs. a median 2.9x 1Q10 is less than half the 15.9% median TTM EV/Revenue multiple for SaaS companies with EBITDA margin of the SEG Software Index. EBITDA margins lower than the group median. Clearly, revenue growth continues to trump We remain convinced enterprise adoption of EBITDA from a SaaS valuation standpoint, even SaaS will lag analyst forecasts, as CIOs continue in today’s earnings driven market. to wrestle with concerns about security and back office application integration. As a result, on However, as SaaS growth rates slow over time, premise, mission-critical applications will garner profitability will become more important to SaaS the bulk of enterprise software dollars in 2010. company valuations. While profitability continues Figure 11: 1Q10 Public SaaS Company Revenue PUBLIC INTERNET COMPANY MARKET Growth Rate and EBITDA Margin vs. Revenue VALUATIONS AND FINANCIAL PERFORMANCE Multiple 6.0x Though the software and Internet / eCommerce / Web 2.0 sectors are rapidly converging, clear 5.0x distinctions remain between the two in terms of 5.0x TTM business model, revenue model, solution revenue growth deployment and end user requirements. We've Median EV/Revenue 4.0x rate > SEG SaaS 3.5x opted to track these major categories separately Index TTM 2.9x to enable a more granular analysis of each. 3.0x Median EBITDA margin > TTM 2.3x SEG SaaS EBITDA Broadly defined, Internet companies are primarily Index 2.0x TTM revenue Median margin < SEG SaaS internet based and their solutions are primarily – growth Index often exclusively – web deployed. Our Internet rate < Median 1.0x SEG SaaS Index is comprised of companies whose principal Index Median business models fall within one or more of the 0.0x following categories: 7| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  10. 10. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions • Advertising – Companies that provide key Figure 12: SEG Internet Index Key Statistics elements in the Internet advertising arena SEG - Internet: Median Metrics such as search marketing services, software Measure 1Q09 2Q09 3Q09 4Q09 1Q10 to host and manage ads and a network of EV/Revenue 0.9x 1.2x 1.3x 1.3x 1.6x EV/EBITDA 6.2x 9.8x 11.8x 12.2x 12.9x websites that run ads. Representative EV/Earnings 12.0x 17.2x 17.7x 25.3x 22.7x companies include InfoSpace, SINA, and Current Ratio 1.9 2.1 2.4 2.6 2.6 ValueClick. Cash & Eq ($M) $67.0 $64.1 $64.2 $75.0 $84.5 Gross Profit Margin 59.3% 58.8% 59.7% 60.1% 62.2% • Communications – Companies that provide EBITDA Margin 11.3% 9.2% 11.1% 9.5% 12.6% web-based communications, products, and Net Income Margin -1.3% 0.6% 0.6% 2.4% 3.5% services. Representative companies include TTM Revenue Growth 11.5% 5.0% 2.5% -0.1% 0.4% TTM Total Revenue ($M) $140.6 $138.5 $141.7 $137.0 $145.1 Spark Networks, j2 Global Communications, TTM Total EBITDA ($M) $14.9 $13.5 $13.7 $12.9 $16.1 and EarthLink. Debt / Equity Ratio 22.2% 18.7% 14.5% 10.8% 9.2% • eCommerce & Portals – Companies whose main line of business is conducted over the (Figure 12). The median current ratio, measured web. Representative companies include 1- as current assets divided by current liabilities, an 800 FLOWERS.COM, Amazon.com, Bluefly, indication of a company’s liquidity, was 2.6 in eBay and Expedia. 1Q10, up from 1.9 in 1Q09, suggesting many • Financial – Companies that provide online Internet /eCommerce providers controlled financial services, content, and financial spending and eschewed, or couldn’t get, information resources. Representative additional debt financing. Indeed, the median companies include Banks.com, China Finance cash and equivalents of these Internet providers Online and Online Resources. increased by $17.5 million during that same • Networking & Connectivity – Companies period. which provide content sharing, testing, measurement, and other related services via Nevertheless, Internet providers were hard hit by the Internet. Representative companies the Great Recession. As a result of sharply include Internap Network Services, iPass, reduced consumer spending, the median TTM Keynote Systems, and Sify Technologies. revenue growth rate of the SEG Internet Index • New Media – Companies that provide online moved into net loss territory in 4Q09, declining to information and content. Representative -0.1% before recovering slightly to +0.4% in companies include TheStreet.com, WebMD 1Q10. The growth rate decline was almost and TechTarget. identical to that experienced by public software • Search Engine – Companies include companies. Baidu.com, LookSmart, Sohu.com and Yahoo! Enterprise valuations of companies comprising The SEG Internet Index fared similarly to the SEG the SEG Internet Index varied widely by Internet Software Index in 1Q10 (Figure 2). The median category in 1Q10 (Figure 13). Internet Search 1Q10 EV/TTM Revenue multiple for 59 public Engine companies led all other categories in companies comprising the SEG Internet Index 1Q10, posting an impressive 3.0x EV/Revenue was 1.6x, while the median 1Q10 Internet median valuation. Far less impressive were company EV/TTM EBITDA multiple was 12.9x Internet Networking and Connectivity companies, which posted a median 0.8x EV/Revenue. Figure 13: SEG Internet Index Median Metrics by Category SEG - Internet Index Revenue EBTIDA YTD EV/Revenue EV/EBITDA Growth Growth Stock Category (TTM) (TTM) Return 1Q09 2Q09 3Q09 4Q09 1Q10 1Q09 2Q09 3Q09 4Q09 1Q10 1Q10 1Q10 2010 Advertising 1.0x 0.8x 1.1x 0.9x 1.2x 6.3x 7.5x 11.3x 14.0x 21.5x -5.1% 29.6% 0.3% Communications 0.8x 0.9x 0.9x 1.3x 1.3x 4.2x 4.0x 4.9x 5.4x 6.1x -6.1% 8.8% 14.8% eCommerce & Portals 1.1x 1.6x 2.3x 1.9x 1.7x 7.1x 12.3x 15.3x 13.8x 13.3x 2.2% 12.4% 12.3% Financial 1.6x 1.8x 1.5x 1.2x 1.0x 8.8x 12.1x 12.4x 10.1x 3.7x -1.4% -2.7% 11.6% Networking & Connectivity 0.4x 0.5x 0.9x 0.8x 0.8x 3.4x 6.3x 6.5x 10.1x 9.8x 0.7% 40.8% 7.5% New Media 1.1x 1.4x 1.3x 1.4x 1.7x 5.7x 8.9x 16.4x 18.8x 20.6x 2.0% 40.5% 2.4% Search Engine 3.2x 3.2x 3.3x 3.0x 3.0x 10.3x 13.7x 11.2x 10.8x 15.3x -10.4% 14.4% 1.0% 8| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  11. 11. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Although Internet category multiples have Eyeblaster, BroadSoft and SciQuest. While fluctuated quarter to quarter, the category leader Motricity, BroadSoft and SciQuest are new filers, (Search Engine) and laggard (Networking) have both Convio and Eyeblaster wisely withdrew their been the same since 2Q07, respectively. original registrations in 2008 and filed anew in 1Q10. INITIAL PUBLIC OFFERINGS Of the companies in the IPO pipeline, we believe In the first quarter, SS&C Technologies Holdings TeleNav will be well received, given its impressive (NASDAQ: SSNC) was the sole software revenue growth and profitability. SaaS provider company IPO. SS&C Technologies Holdings SciQuest should also fare well amongst the ranks originally filed its S-1 in June 2007 on the heels of of public SaaS companies for those same 27.1% TTM revenue growth and a 40.9% TTM reasons. Conversely, IPO aspirants such as EBITDA margin. Timing being everything, the Digital Domain and Syngence will most likely have provider of investment management software to to shore up their financial performance or let their the financial services industry withdrew its filings lapse. registration in October 2008. Hoping the worst has passed and sensing pent-up demand, SS&C How will the software IPO market fare in 2010? Technologies Holdings filed a new S-1 in late Given the current economic climate and rapidly December 2009 and listed on March 31, 2010, expanding IPO pipeline, a case can be made that raising $161 million. As of the end of the first if the economy continues to recover and the quarter, SS&C Technologies Holdings reported a market indices respond in kind, pent-up investor TTM EBITDA margin of 44.0%, but a decline in demand could create a much improved TTM revenue growth of -3.2%. environment for software IPOs. In such case, we are forecasting 12 – 15 software IPOs in 2010, The IPO pipeline for U.S. software companies and a host of additional filings. swelled to nine companies in 1Q10, up from five in 4Q09 (Figure 14). Five new software companies filed S-1’s in 1Q10: Motricity, Convio, Figure 14: U.S. Software IPO Pipeline TTM Filing Offering Annual Net Company Category Revenue Date Amount Revenue Income Growth Content/Document Syngence Corporation (TBD) 11/15/07 $12,000,000 $2,703,000 -$2,253,000 -26.6% Management Multimedia, Graphics, Digital Domain (NASDAQ: DTWO) 12/11/07 $78,000,000 $77,800,000 -$19,910,000 16.1% Digital Media Mobile Resource TeleNav, Inc. (NASDAQ: TNAV) 10/30/09 $75,000,000 $110,880,000 $29,618,000 130.7% Management SPS Commerce, Inc. Supply Chain 12/3/09 $46,000,000 $37,746,000 $1,162,000 23.0% (NASDAQ: SPSC) Management Motricity, Inc. (NASDAQ: MOTR) Wireless 1/22/10 $250,000,000 $113,695,000 -$16,301,000 10.2% Customer Relationship Convio, Inc. (NASDAQ: CNVO) 1/25/10 $57,500,000 $63,086,000 -$2,095,000 10.7% Management Multimedia, Graphics, Eyeblaster, Inc. (TBD) 3/10/10 $115,000,000 $65,075,000 $9,828,000 2.0% Digital Media Messaging, Conferencing, BroadSoft, Inc. (NASDAQ: BSFT) 3/15/10 $103,500,000 $68,887,000 -$7,853,000 11.4% & Communications SciQuest, Inc. (NYSE: SCI) eProcurement 3/26/10 $75,000,000 $36,179,000 $2,628,000 21.5% *Bold denotes pure play SaaS companies. Median: $75,000,000 $65,075,000 -$2,095,000 11.4% 9| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  12. 12. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figure 15: U.S. Mergers & Acquisition Activity 16,000 $1,800 $1,679B $1,550B $1,500 12,586 $1,273B 11,769 12,000 12,000 11,254 $1,200 Number of Deals Value ($ billions) 9,941 9,585 9,296 7,762 $1,094B 8,000 7,219 $900 $905B $776B $809B $550B $525B $600 4,000 $300 0 $0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Capital IQ Deals Value MERGERS AND ACQUISITIONS: THE NUMBERS M&A Deal Volume and Spending: All Industry There were fewer U.S. leveraged buy-outs and Sectors private equity backed transactions in 1Q10 than the closing quarter of 2009, but the number of Globally, there were 9,093 M&A transactions in M&A transactions and total purchase price were 1Q10, aggregating $465 billion. By comparison, both significantly greater year-over-over. 4Q09’s 10,028 deals worldwide aggregated $501 According to Capital IQ, there were 218 leveraged billion, while 1Q09’s 6,730 acquisitions pulled in buy-outs in 1Q10, down from 277 in 4Q09, but $416 billion. well above 1Q09’s 158 deals. Aggregate dollars spent per quarter followed a similar trend; 1Q10 In the U.S., M&A volume across all industry LBOs fetched $5.8 billion, down from $11.2 billion sectors aggregated 3,000 announced transactions in 4Q09, but well above the paltry $1.1 billion in the first quarter of 2010, the fifth consecutive spent the same period a year ago. With the quarterly increase in deal activity (Figure 15). We notable easing of the credit markets, look for LBO expect the trend to continue for the balance of activity and spending to significantly ramp in 2010. The first quarter’s deal tally marks a 2H10. modest 5.3% increase over 4Q09’s 2,840 transactions, but a heartening 46% improvement Globally, it was very much the same. There were over 1Q09’s 2,049 transactions. 616 LBOs and private equity transactions worth $11.7 billion worldwide in 1Q10, compared to 728 The total spend for 1Q10’s 3,000 transactions deals worth $27.3 billion in 4Q09 and 522 was a modest $202 billion, compared to $253 transactions aggregating $3.8 billion in 1Q09. billion in 4Q09 and $271 billion in 1Q09. The disparity is primarily attributable to there being Software M&A Deal Volume and Spending only one blockbuster ($20 billion+) deal in Q1 (Novartis’ $28.8 billion acquisition of healthcare Software M&A transactions accounted for 12.6% supplies manufacturer Alcon, Inc.), compared to of all U.S. M&A activity in 1Q10, on par with five such deals in 4Q09 and three in 1Q09. 4Q09, and modestly lower than software’s 15.4% 10| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  13. 13. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions Figures 16 and 17: U.S. Software Sector M&A Activity and Dollars Spent 600 518 502 478 500 456 470 402 466 379 400 345 348 321 # of Deals 316 309 300 200 100 0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 $35.0 $32.0 $30.0 $25.0 $23.5 $22.4 ($ billions) $20.0 $15.0 $14.9 $15.0 $12.6 $13.5 $9.8 $10.0 $6.3 $7.7 $4.3 $5.0 $3.3 $2.9 $0.0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 share in 1Q09. The first quarter’s 379 software Despite steadily growing deal activity, total deals totaled $4.3 billion, compared to 348 software M&A spending in Q1 was well below the transactions aggregating $7.7 billion in 4Q09, and quarterly price tags reported in 2006, 2007 and 316 transactions totaling $2.9 billion in 1Q09 2008. From 2Q06 through 2Q08, aggregate (Figures 16 and 17). dollars spent topped $10 billion per quarter, primarily due to a robust number of mega-deals After five consecutive quarterly declines, software (transactions with enterprise value greater than M&A deal activity appears to have bottomed out $500 million). Elliot Management’s announced in 2Q09 with only 309 announced transactions. acquisition of Novell ($1.02EV billion, 1.2xEV TTM 1Q10 marks the third consecutive quarterly revenue) was the sole mega-deal announced in increase in deal activity, and the 379 announced 1Q10. transactions indicate we are beginning to approach historic norms of approximately 425 Software M&A Deal Currency transactions per quarter. 11| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  14. 14. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions The percentage of all-cash software M&A the table in search of strategic tuck-ins in 2H09, transactions declined to 67% in 1Q10 (Figure 18), accounting for 40% of all M&A deals - which while the percentage of sellers receiving stock or helped the median exit multiple to advance. a combination of cash and stock grew to 33% from 29% in both 4Q09 and 1Q09. With the credit markets rebounding and the cost of debt still relatively cheap, a good number of 1Q10 marks the first time we’ve seen all cash cash rich public software companies are transactions fall below 70% since 3Q07. This is considering debt financed acquisitions, as are likely a sign of the times. Buyers mostly refused private equity firms in search of greater leverage to use their undervalued stock as deal currency than they’ve seen in the past two years. during the downturn, but are more forthcoming now that their stock prices have rebounded. And Figure 19: Public vs. Private Software M&A sellers, less concerned about volatility in the Buyers and Sellers public markets and anxious for additional upside, are more willing to accept an offer that includes a Percentage of Software Buyers small stock component. 58% 62% 62% Figure 18: Software M&A Form of Payment 9% 13% 6% 10% 65% 17% 15% 23% 23% 38% 35% 42% 38% 74% 71% Q2 2009 Q3 2009 Q4 2009 Q1 2010 72% 67% P ublic P rivate Percentage of Software Sellers Q2 2009 Q3 2009 Q4 2009 Q1 2010 Cash Cash & Sto ck Sto ck 94% 96% 95% 95% Private vs. Public Buyers In assessing each quarter’s M&A activity, we continue to track the mix of public and private 6% 5% 5% 4% buyers because it provides useful insight about the current software M&A ecosystem and the level of interest and likely valuation range a Q2 2009 Q3 2009 Q4 2009 Q1 2010 potential sell-side candidate might attract. Low P ublic P rivate M&A deal volumes and fewer public buyers usually connote lower valuations. Conversely, higher deal volume and 40%+ public buyers mean Software M&A Valuations increased deal competition and more strategic valuations. The software industry’s benchmark median exit multiple rose sharply in 1Q10 to 2.2x TTM Public buyers accounted for 38% of all acquirers revenue, an encouraging uptick from 4Q09’s in 1Q10 (Figure 19). By comparison, public median M&A valuation of 1.9x TTM revenue, and software companies comprised only 34% of a stellar improvement over 1Q09’s median exit buyers in 1H09, but cautiously began returning to multiple of 1.3x TTM revenue (Figure 20). Q1 12| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved
  15. 15. Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions marked the first time the median exit multiple has The wide variance between public and private been greater than 2.0x since 1Q08. seller exit multiples in 1Q10 continues the reversal of a well-established trend. Over the Figure 20: Software M&A Valuation as a multiple past few years, we’ve noted a shrinking variance of revenue (Quarterly) between public and private seller exit valuations, 2.0x 2.2x with traditionally higher public company exit 1.9x 1.6x premiums declining over time as public stock market valuations dropped and many of the best performing and most valuable public companies were acquired. Q2 2009 Q3 2009 Q4 2009 Q1 2010 The trend continued in 1Q10, when several Figure 21: Public Software Company Seller devalued, underperforming public companies Valuation as a Multiple of EBITDA Figure 22: 1Q10 TTM Median Multiples – 11.8x 13.0x 11.3x Segmentation (Enterprise Value/Revenue) 8.7x Public Sellers 1.3x Median Multiple 26% Q2 2009 Q3 2009 Q4 2009 Q1 2010 74% Since very few software transactions publicly identify a private software seller’s TTM EBITDA, Private Sellers we did not have sufficient data to ascertain the 2.7x Median Multiple median EBITDA exit multiple paid them in 1Q10. We did, however, determine that Q1’s median exit Private Buyers 2.0x Median Multiple multiple for public software company sellers was 13.0x TTM EBITDA in 1Q10, up sharply from 11.8x in 4Q09, and the highest since 4Q08’s 35% 65% median exit multiple of 15.6x TTM EBITDA (Figure 21). While a variety number of factors drive an exit multiple, we’ve repeatedly demonstrated in our Public Buyers 2.5x Median Multiple prior Quarterly Reports that three of the most important determinants of exit valuation are the seller’s equity structure, financial performance Buyer Greater Buyer Less Than Than $200 million $200 million and product category (Figure 22). To determine if 2.0x Median 2.7x Median the same held true, once again, we analyzed all Multiple Multiple 1Q10 M&A transactions with ascertainable revenue multiples to determine how exit valuation was affected by ownership status (private vs. 61% 39% public company), size (revenue) of buyer and seller, and the seller’s software product category. As a first step, we sorted 1Q10’s transactions by ownership type, separating public from private software company sellers to ascertain any Seller Greater Seller Greater difference in median TTM exit multiple. Public Than $20 Than $20 company sellers received a median 1.3x TTM million: 0.8x 2.2x million: 1.5x 1.7x revenue exit valuation, while privately held Seller Less Seller Less software companies commanded a median 2.7x Than $20 Than $20 TTM revenue multiple. million: 2.0x 1.8x million: 2.4x 2.8x 13| 1Q10 SOFTWARE INDUSTRY EQUITY REPORT www.softwareequity.com Copyright © 2010 Software Equity Group, L.L.C., All Rights Reserved

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