The document provides an overview of the software product sector M&A outlook in India. It finds that: - The number of software product companies in India has grown five-fold over the last decade to around 500 companies currently. - However, most companies are small-to-medium in size, with revenues between $0.4-10 million. The top 10 companies account for over half of total sector revenues. - Revenues from software products in India are predicted to reach $9.5 billion by 2015, representing continued growth, though many small companies currently focus only on the domestic market. - Increased global demand, technology disruption, and a more mature startup ecosystem are driving growth in software

1. Software Product sector M&A outlook
May 2011
Naufal A. Kukkady

2. Table of Contents
Page
Executive Summary 3
Indian Information Technology Industry 4
Software Product Companies in India 5
Software Product Revenue Distribution 6
Software Product Revenue Growth 7
Start-up Ecosystem 8
Software Product Start-up Trends 9
Global Software Market FY2015 10
Technology Priorities 11
Global Technology M&A FY2010 12
US Software Product M&A Q1 2011 13
Software Product Domestic Market Outlook 14
Conclusion 15
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3. Executive Summary
Indian Information Technology Industry and Software Products
 IT industry has grown at 24% CAGR over the last decade initially supported by IT services and now by BPO industry
 Software product companies have grown to ~500 FY2010
 Most of these companies are small and medium business units with a turnover in the range of $0.4mn to $10mn
 Revenue from software products is predicted to grow to $9.5bn in FY2015
Software Product Startups
 Software product startups are seeing a boom as a result of the maturing ecosystem
 Technology disruption and global demand drive software product focus
 US and cloud are key focus areas of the emerging product companies
Technology Trends
 Global software spends to grow to $537bn in FY2015
 Cloud computing emerges as the top technology priority for CIOs in India and US
 Technology M&A deals valued at ~$119bn FY2010
 Software products emerge as the single largest sector contributing to about 42% of the total value
 M&A deals involving SaaS were at a premium in US during Q1 2011
 SMB’s, Mobile and Internet penetration provide growth potential in the domestic market
Conclusion
 Increasing interest in cloud based services globally open up many avenues for small players in India
 Domestic SMB’s demand for solutions provide a huge growth potential
 Increasing Mobile and Internet penetration provide opportunities for growth and consolidation
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4. Indian Information Technology Industry
Indian IT/ITeS industry has grown at a compounded annual growth rate (CAGR) of over 24% in the last decade
Revenue 2010
Market Size
TOTAL 13%
FY 2010 36.2 14.7 12.8 9.4 73.1
18% 50%
FY 2009 34.1 13.6 12.3 9.4 69.4
20%
FY 2008 30.1 11.5 10.5 10.8 62.9
IT services BPO Software products and Eng Hardware
FY 2007 22.6 8.7 8.2 8.5 48
Market Overview and Trends
FY 2006 17.8 7.2 5.3 7.1 37.4  Exports accounted for 68% of the revenue in FY 2010
 IT services contributed to 50% of the total revenues
 BPO is the fastest growing sector over the last 5 years at a
0 20 40 60 80
CAGR of 27.5%
($bn)
 Domestic Market has grown at 18.1% CAGR over last 5 years
IT services BPO Software products and engg services Hardware  Banking, Financial Services and Insurance (BFSI) vertical
continues to be the dominant IT consuming vertical
Sources: Nasscom
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5. Software Product Companies in India
Number of product companies have grown five-fold from 102 in FY1999-00 to 539 in FY2009-10 — not
including captive R&D centres
Number of Software Product Startups (2000 – 2010) 5% 5%
6%
4%
9% 4% Categorical
2% Distribution of
539 Indian
11% Software
Product
Businesses
(2007)
16% 38%
ERM Telecom Content Apps
Collaborative Apps Search Engines Banking
Business Intelligence Engineering Apps Security
Others
127
102 103 Market Overview and Trends
 Early-movers in the Indian software product landscape had
predominantly focused on the financial and accounting domains
 Majority of the small companies are focused primarily on the
On Or Before 2000 2007 2009 Total domestic market
 Most of these companies are small and medium business units with
a turnover in the range of $0.4mn to $ 10mn
Sources: Nasscom, KPMG, CII, Zinnov
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6. Software Product Revenue Distribution
Top 10 Indian software product companies account for more than half of the total revenues
Concentration of Top 100 Indian software product Global and Domestic activity of Top 100 Indian
revenues FY2010 software companies FY 2010
3%
10%
32.8%
59.2%
36%
74.8%
51% 67.2%
40.8%
25.2%
Top1 Top 2-10 Top 11-50 Top 51-100 Top 1-10 Top 11-50 Top 51-100
Global Domestic
Sources: CII,PWC
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7. Software Product Revenue Growth
In 2015 the annual revenue aggregate of Indian software product businesses is predicted to be $9.5 billion
Total annual aggregate revenue of all software Annual aggregate revenue of Indian software product
product companies in India companies
($bn)
($bn)
9.5
5.605
3.87 1.84
3.68
1.64
1.42
1.2
2.77 0.98
2.68 0.96
3.895
0.69 0.66
1 1.1 0.46
FY 2009 FY 2010 FY 2015* FY 2008 FY 2009 FY 2010
Domestic Exports
Domestic Export
Source : Nasscom , * Nasscom projection as of 2008
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8. Start-up Ecosystem
Improvements across ecosystem factors such as venture capital funding, disruptive technologies, incubation
centres among others have spurred the start-up activity
Market Overview and Trends
 Venture capital and private equity (PE) firms, which were
Venture
earlier focusing on the services businesses, have now
Capital expressed a growing interest in Indian software product
businesses.
 Technologies such as virtualisation, Service Oriented
Architecture (SOA), innovative delivery models like web-
services, SaaS and subscription / on-demand business
models have reduced entry barriers
 Over 40 incubation centers spread across the country are
Growing Maturing Technology keenly focused on assisting technology start-ups with funding
Market Ecosystem Disruption
and mentorship- over 28 start-up product companies have
been incubated*
 Software spends globally are forecasted to grow from $294
billion in FY 2008 to $537 billion in 2015
Incubation
Centers
Sources: Nasscom, PWC, CII;* 2008 data point
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9. Software Product Start-up Trends
US still remains the major geographic focus for emerging companies in India
Geographic focus for growth Investment in Cloud Technologies in Future
Asia excluding India Maybe
9% 10%
5% US 13%
19%
5% No
Europe
11%
31% Australia & NZ Yes
17%
India
Currently
Africa
23% 57% Evaluating
Middle East
Focus areas to tap the Domestic market Focus areas for Product companies
Business Intelligence
19% 16%
16% Collaboration
Large Enterprise Mobile&telecom
34%
SMB 8% ERM
16%
Local R&D Content Magement
32% 8% Security
Government
Recruitment
18% 8% 16%
8% Others
Sources: Nasscom
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10. Global Software Market FY2015
Software spends globally are forecasted to grow from $294 billion in FY 2008 to $537 billion in 2015*
Global software spends FY2015
($bn)
Export Potential Higher Domestic Potential Higher
59.8 60.4
30.3 33.1
26.2 25
15 17.5
11.2
5.2
BI ERM Security BFSI Telecom Storage Search Engine Mobile Online Gaming Retail
Marketing Applications
Observations
 Vertical search and local search trends have led to a rise in the number of search engine companies targeting these niches, both in India and globally
 Indian SMBs will present significant addressable market potential for business intelligence (BI) and enterprise resource management (ERM)
 Mobile applications market in India is at a very nascent stage as compared to the global market, therefore holds a high potential for growth in the next few
years
Sources: Nasscom,PWC,CII
* addressable market for Indian software product businesses will be about USD 315 billion
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11. Technology Priorities
Cloud computing ranked number 1 across CIOs both in India and US as the top technology priority for 2011
Top 10 technology priorities Market Trends
US
68% of IT majors plan to roll out Cloud Services in the
1. Cloud computing next one year in the following format
2. Virtualisation
3. Mobile Technologies 53%
4. IT Management 42%
5. Business Intelligence 34%
6. Networking, voice, and data communications
7. Enterprise applications
8. Collaboration technologies
9. Infrastructure
10. Web 2.0
India Paas Saas Iaas
1. Cloud computing Users want to adopt Cloud Services in the next one year in
2. Mobile technologies the following format
3. Virtualization 67%
4. Enterprise resource management (ERP)
5. Enterprise applications 50%
6. Business process management (BPM)
7. IT Management 33%
8. Network, voice and data communications
9. Business intelligence (BI)
10. Analytics
Sources: Source: Gartner, E&Y,PWC; Paas Saas Iaas
Platform as a service(Paas), Software as a service(SaaS), Infrastructure as a service (IaaS)
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12. Global Technology M&A FY2010
Aggregate value of deals in the software sector more than doubled from approximately $23.8 billion in 2009 to
about $49.9 billion in 2010
Global technology transactions value flow by sector 2010 Market Overview and Trends
Communicati Non-tech
 Total value of technology M&A deals in FY2010 was ~$119 bn
ons 3%
equipment  Disclosed cross-border (CB) deal value rises to 41% of total deal
8% value, up from 25% in 2009
 Trends involving security, storage, e-commerce and business
Computer analytics, as well as trends in online and mobile games,
Peripherals
advertising and marketing, all drove M&A transactions especially
10%
when they intersected with one or more of the mobile, social and
Internet cloud trends
8% Software
42%  60 cloud computing software sector deals, including multiple
transactions by Oracle, BMC Software Inc. and CA Inc.
IT services  36 deals in Information security, including two of the top five:
20% Safran-L-1 Identity Solutions (with a non-technology company buyer)
and Symantec-VeriSign’s identity and authentication business.
Semiconduct
ors  The “app store” approach expanded beyond smartphones to
9% embrace all manners of software in 2010.
• Accessibility to app store distribution supports the emergence
of a large number of small developers, which could lead to
significant M&A in the future
Sources: E&Y technology M&A 2010 update
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13. US Software Product M&A Q1 2011
394 software M&A transactions in 1Q11 totalling $8.3 billion were completed 431 transactions in 1Q10 totalling
$4.6 billion
M&A deals by product category during 1Q11 Number of SAAS deals as % of deals in software sector
9.90%
9.50%
9.4%
7.70%
7.0% 6.20%
5.40%
3.90%
4.5% 2.80%
3.8% 3.8% 3.8% 3.8% 2.60%
2.30%
Healthcare Fin Services BI SC CRM Security Manufacturing 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
Observations
 Security software providers and software companies focused on the  SaaS acquisitions accounted for 9.9% of all software
financial services industry garnered the highest median TTM revenue acquisitions in 1Q11, up from only 2.8% in 1Q09
multiple (3.7x)  In 1Q11, 39 SaaS companies were acquired, compared
 Healthcare applications led with 27 deals during 1Q11; Companies to 26 SaaS acquisitions in 4Q10 and 10 in 1Q10
vertically focused on Financial Services realised 20 transactions  SaaS businesses realized a 137% premium in their
valuation
Sources: Software Equity Group
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14. Software Product Domestic Market Outlook
SMB spending in India on SaaS, a key component of cloud computing, is anticipated to rise by 43% in 2011
Cloud computing market in India Mobile VAS market in India Internet penetration in India
19%
10006.2
USD million
USD million
358
7%
650
1200.1
110
FY2010 FY2015 FY2010 FY2015 FY2010 FY2015
SaaS Iaas + Paas
Products poised for adoption in SMB segment Products poised for growth in MVAS Online search and advertisement
 Enterprise Resource Planning  Entertainment + Gaming  Online ad spend increased from
 Business Intelligence  M-Commerce $175mn in FY2009 to $220mn during
 Customer Relationship Management  Location based services FY2010
 50% growth predicted in online ads
during FY2011
Sources: Nasscom, Economic times,
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15. Conclusion
Cloud computing capabilities will be a major deal driver in the coming year
Companies with an International Appeal Companies with a Domestic Appeal
 Applications delivered over Cloud: BI, ERP  Applications delivered over Cloud: BI, ERP,CRM
 Security software for the cloud  Search Engine Marketing
 Mobile Applications
Business Intelligence(BI), Enterprise Resource Management(ERP),Customer Relationship Management(CRM)
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