The third quarter marks the second consecutive quarter the Mobile category led all others in both M&A deal volume and median EV/Revenue exit multiple. With the exception of a few headline grabbing deals, the mobile category has been characterized historically by a large number of transactions involving small, private companies that did not command significant exit premiums.
This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here: http://www.softwareequity.com/research_reports.aspx
We begin this section with two fundamental truths: First, while such factors as revenue growth, equity structure and delivery model can demonstrably impact a software company’s exit valuation, the nature of its product offering – its software product category – is the single most important M&A valuation driver. Second, product category median exit valuations frequently reflect the category’s rate of market adoption (revenue growth) and often fluctuate greatly from year to year. Each premise continued to hold true in 3Q12.
For most software product categories, there is often an insufficient number of transactions each quarter that publicly report both seller TTM revenue and buyer purchase price, essential in determining the median exit value for the category. Consequently, we aggregate the data each quarter for each category on a TTM basis. As a result, it may take several quarters to detect changing product category valuation trends, as certain outlier transactions consummated nine or twelve months ago may have a residual impact on their product category multiples.
Among the 32 product categories we tracked in 3Q12, eleven had both sufficient deal activity and deal data to ascertain a TTM revenue multiple (Figure 35). Software company sellers that were focused on Storage & Systems Mgmt garnered the highest median TTM revenue multiple, 3.6x.
Sellers in this product category are benefitting from the accelerating shift to cloud and mobile computing, which are transforming the IT infrastructures of both large enterprises and SMBs.
Other software product categories with median EV/Revenue multiples greater than the overall Q3 median exit multiple of 2.3x included Mobile (2.6x) and Multimedia, Graphics and Digital Media (2.5x). Conversely, software product categories lagging well behind the general software median included Supply Chain Mgmt (1.3x), ERP (1.2x), Data Mgmt & Integration (1.2x), Other Verticals (1.1x) and Content & Document Mgmt (0.8x).
The Mobile product category accounted for 16.7% of all software M&A transactions in the third quarter, making it the most active of our eleven categories in terms of deal volume (Figure 36). The third quarter marks the second consecutive quarter the Mobile category led all others in both M&A deal volume and median EV/Revenue exit multiple. With the exception of a few headline grabbing deals, the mobile category has been characterized historically by a large number of transactions involving small, private companies that did not command significant exit premiums. While 3Q12’s results suggest the prospects for mobile targets may be improving, it’s important to note mobile deal structures frequently include stock, earnouts and other contingencies that can place reported transaction values at considerable risk.
Other active M&A categories this quarter included Healthcare (8.5% of total); Financial Services (7.5%); Engineering, PLM & CAD/CAM (6.4%); Storage & Systems Mgmt (4.3%); and Security (3.9%). The number of software product categories reporting significant transaction volumes in 3Q12 is testament to the vibrancy of the current software M&A market.
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Posted by Software Equity Group 
