Software M&A Valuations

The median software industry exit multiple for all of 2011, measured as a multiple of trailing twelve months revenue, was 2.1x – just slightly above 2010’s median exit multiple of 2.0x and, for the first time in four years, equal to 2007’s pre-recession median M&A exit multiple (Figure 45).  Viewed quarterly, the median exit multiple was highly volatile in 2011, mirroring the volatility of the public markets, reaching 2.5x in 2Q11 before dropping to 1.8x in the final quarter (Figure 46).

Lest every software entrepreneur who reads this report multiply his/her company’s TTM revenue by 2.1 to determine current fair market value, we must emphasize that the 2011 median exit multiple is simply that – a median – the midpoint of a very broad range of exit valuations.  Perhaps more useful is our calculation that in 2011, 21.8% of software M&A deals with an ascertainable exit multiple were valued at a 1.0x EV/Revenue or less, while only 11.8% had a EV/Revenue multiple of 6.0x or greater (Figure 47).

Selected M&A Deals for the Week of 4/20/2012 – 4/27/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of April 20, 2012 through April 27, 2012.  For a comprehensive analysis of software industry mergers and acquisitions and public software company financial performance you can download our research reports by visiting http://www.softwareequity.com/research_reports.aspx.  Notable transactions for the week include:

 

  • • Gartner Australasia Pty. Limited’s acquisition of Ideas International Ltd. (ASX:IDE) for an Enterprise Value (EV) of $14.95 million, implying an EV/Rev multiple of 1.65x
  • • Veritas Capital’s acquisition of Thomas Reuters Corporation (Health Care Business) for an Enterprise (EV) value of $1.25 billion
  • • Intuit Inc’s (NasdaqGS:INTU) acquisition of Demandforce, Inc for an Enterprise Value (EV) of $423.5 million
  • • Dassault Systemes SA’s (ENXTPA:DSY) acquisition of Gemcom Software International Inc for an Enterprise Value (EV) of $360 million
  • • MICROS System’s (NasdaqGS:MCRS) acquisition of Torex Retail Holdings Limited for an Enterprise Value of $263.09 million
  • • KIT digital Inc’s (NasdaqGS:KITD) acquisition of Hydro Australia Pty Limited for an Enterprise Value (EV) of $14.54 million
  • • VMware’s (NYSE:VMW) acquisition of Cetas Software, Inc
  • • International Business Machine Corporation’s (NYSE:IBM) acquisition of Vivisimo, Inc

 

Software/SaaS M&A Deal Volume and Spending

There were 1,684 mergers and acquisitions in the U.S. software sector in 2011, aggregating $71.4 billion, compared to 1,642 transactions totaling $52.5 billion in 2010 (Figures 40 and 41). Software M&A transaction volume ramped each of the first three quarters,  reaching a three year quarterly high of 439 transactions in Q3 – the sixth consecutive quarterly increase in software M&A deal volume.  To date, 400 software company exits have been reported for 4Q11, but that will likely rise to 420 since some year-end transactions have yet to be announced (Figure 42).  Even without that adjustment, 2011’s 1,695 M&A deal count was the highest in three years, and only slightly below 2008’s tally.

Aggregate consideration paid in 2011 was $71.4 billion, 32% higher than 2010’s total U.S. software M&A spend of $52.5 billion.  It would be wrong to conclude, however, that if deal volume increased some 3%, while deal dollars grew 36%, exit valuations or average deal size grew dramatically in 2011.  Aggregate software M&A spending fluctuates greatly each quarter and each year primarily because of the presence or absence of a relatively small number of software industry mega-deals (transactions with enterprise values greater than $500 million).  As examples, 2Q11’s aggregate deal spend of about $21 billion included Microsoft’s acquisition of Skype ($9.1 billion, 10.6x TTM revenue) and 3Q11’s $24 billion price tag reflected HP’s acquisition of Autonomy ($10.3 billion, 11.1x TTM revenue). Absent such mega-deals, the aggregate software M&A consideration paid in the first and fourth quarters was $15 billion and $11.5 billion, respectively.

What, then, was the average software M&A price tag in 2011, and why is it important?  Average deal size serves as a barometer of buyers’ level of confidence in the economy and its target market, (i.e., bigger deals = more upside, more risk).  It may also serve as an indicator of rising or falling exit multiples.  Given the significant quarterly fluctuation in software M&A spending each quarter, we believe the most reliable way of tracking average software M&A deal size is to utilize YoY comparisons of TTM data; i.e., aggregate TTM exits divided by aggregate TTM spend.  As such, the trend since 2Q10 is noteworthy.  The average software M&A price tag, measured on a TTM basis, increased each quarter for six consecutive quarters, reaching $42 million in 3Q11, before retreating slightly to $41 million in 4Q11 (Figure 43).

Asked how many software companies they anticipate acquiring in 2012, 16% of the public software company corporate development heads responding to our 2012 Buyers Survey indicated six or more; 17% said they’d likely buy three to five companies, and 64% stated they planned to acquire one to two software companies this year (please see Survey results).  And 61% of our respondents indicated their target deal size for 2012 is in the $10M – $99M range.

Based upon our 2012 Buyer Survey results, and our conversations with a broad array of public software company corporate development heads and private equity managing directors, we anticipate software M&A transaction volume will rise approximately 10% to 1,864 this year, driven primarily by buyers seeking products that will provide strategic leverage, competitive differentiation and new opportunities to grow revenue.  We anticipate the median exit multiple and average deal size will edge up only slightly in 2012.

Public Software Company Market Valuations: By Product Category

While median financial performance metrics are useful for assessing the overall health of the software industry and for comparisons to other economic sectors, a deeper analysis of these key metrics by software product category provides greater insight about the software ecosystem.  By analyzing how public software companies in discrete product categories are performing, we enhance our understanding of market trends, sector health, product lifecycles, IT spending priorities and stock market biases. Perhaps most important, we track this data because the current median valuation of companies comprising a particular software category can weigh heavily when buyers value acquisition targets.

As we’ve noted in past reports, the median EV/Revenue multiples and financial results for a particular software category can be stagnant, or can fluctuate wildly each quarter.  As a result, software category rankings, measured by relative median valuations and financial performance, can also be consistent or volatile each quarter.  That axiom held true, once again, in 2011 (Figure 12).

The SEG Software Index is comprised of 144 public on-premise software companies sorted into 21 software product categories.  Eleven product categories achieved median EV/Revenue multiples in 4Q11 above the median SEG Software EV/Revenue of 2.2x (Figure 13).

The Networking and Network Performance Management product category posted the highest median EV/Revenue multiple, 4.5x, up 44% YoY. Companies comprising the Networking and Network Performance Management product category benefited from strong demand for WAN optimization necessary to rapidly deliver software over cloud- based architectures, and from demands by mobile service providers for solutions to manage the explosion of mobile data. SolarWinds recorded the highest median EV/Revenue of the group at 10.6x, while Allot Communications posted the highest year-over-year revenue growth of 37.5%.

Eight product categories improved their median EV/Revenue in 2011 from a year earlier (Figure 14).  The Video Game category showed signs of life in 2011, boasting the h highest YoY median EV/Revenue growth (55%) of the 21 product categories.  Yet, even after its stellar performance, Video Games finished 4Q11 with the second lowest median EV/Revenue multiple at 1.2x.  But investors are beginning to resonate with video game developers who, after missing the boat, are now launching high upside mobile and social gaming products.

Eleven product categories saw a YoY drop in their EV/Revenue multiple (Figure 12).  The EV/Revenue multiple of software companies comprising the Billing & Service Management category fell by a median 60% despite their 28.8% growth in 4Q11.

The Healthcare product category also declined in YoY median EV/Revenue.  In 4Q10, Healthcare boasted a 3.5x median market valuation, thanks to strong market demand for revenue cycle management, HIPAA compliance solutions and electronic medical records.  By the close of 4Q11, Healthcare’s median EV/Revenue multiple dropped to 2.8x due to concerns about delays in federal funding for hospitals to digitize patient records.

Public Software Company Market Valuations: Overall

The  median enterprise value  to revenue (EV/Revenue) multiple for all public companies comprising the SEG Software Index was 2.4x in 2011, up slightly from 2010’s 2.2x, and markedly better than 2009’s 1.7x.  The 2.4x median EV/Revenue multiple is the highest Software Index multiple since 2007’s 2.6x (Figure 6).  The return to near pre-recession valuation levels reflects investor confidence in the near term prospects of on-premise public software companies relative to other industries and options.

On a quarterly basis, median EV/Revenue multiples of on-premise software companies rose to 2.7x in the first and second quarters, before reversing course and ending Q4 with a modestly lower 2.2x median mulitple (Figures 7 and 8).

At the end of 2010 and early 2011, when industry analysts and economic pundits were predicting a slow but steady economic recovery, smaller public software companies were viewed as well positioned for accelerated growth.  As testament, in 4Q10, the median EV/Revenue multiple of SEG Software Index companies with TTM revenues between $100 million and $200 million was 3.5x, compared to only 2.6x for companies with TTM revenues greater than $1 billion.  However, as economic sentiment soured in 3Q11 and 4Q11, smaller software companies, deemed too risky, were pummeled by investors.  By the close of 4Q11, SEG Index companies with TTM revenues between $100 million and $200 million saw their median EV/Revenue multiple plunge to 1.9x, while the median TTM EV/Revenue of their larger peers remained relatively steady at 2.5x (Figure 9).

Size (i.e., annual revenue) wasn’t the only important determinant of public software company market valuation. We analyzed the median EV/Revenue multiples of SEG Software companies based upon their 2011 TTM revenue growth rates and EBITDA margins.

Companies that grew TTM revenue between 20% and 30% in 2011, and those that grew revenue more than 30%, were awarded median EV/Revenue multiples of 3.3x and 3.5x, respectively – significantly higher than the median 2.4x multiple of the SEG Software Index overall (Figure 10).  Among the outperformers with TTM revenue growth above 30% and high median EV/Revenue multiples: Gree (101.5%, 6.8x), Qlik Technologies (42.0%, 7.1x), Ariba (38.5%, 6.1x), VMWare (34.7%, 10.2x) and F5 Networks (30.6%, 6.8x).

Similarly, highly profitable public software companies with EBITDA margins between 20% and 30%, and those with EBITDA margins greater than 30%, were awarded median EV/Revenue multiples of 2.6x and 3.7x, respectively (Figure 11).  Notable examples included: CheckPoint Software (55.0% EBITDA, 8.5x EV/Rev), Gree (50.8%, 6.8x), ANSYS (49.0%, 7.7x), SolarWinds (47.4%, 10.6x), Rovi Corporation (39.8%, 5.4x) and F5 Networks (32.3%, 6.8x).

It should come as no surprise that many of these fast growing and highly valued public software companies provide enterprise solutions that addressed the top IT spending priorities in 2011: mobility, analytics, virtualization and cloud performance management.

Selected M&A Deals for the Week of 4/13/2012 – 4/20/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of 4/13/2012 – 4/20/2012.  For a comprehensive analysis of software industry mergers and acquisitions and public software company financial performance you can download our research reports by visiting http://www.softwareequity.com/research_reports.aspx.  Notable transactions for the week include:

•DTS Inc’s (NasdaqGS:DTSI) acquisition of SRS Labs Inc (NasdaqGm:SRSL) for an Enterprise Value (EV) of $114.2 million, implying an EV/Rev multiple of 3.48x
•KLAB’s (TSE:3656) acquisition of Pikkle, Inc. for an Enterprise Value (EV) of $2.18 million, implying an EV/Rev multiple of 3.13x
•Gartner Inc’s (NUSE:IT) acquisition of Ideas International Ltd (ASX:IDE) for an Enterprise Value (EV) of $14.95 million, implying an EV/Rev multiple of 1.65x
•Marlin Equity Partners, LLC acquisition of Openwave Systems Inc. for an Enterprise Value (EV) of $55 million
•IBM’s acquisition of Varicent Software
•Groupon, Inc’s (NasdaqGS:GRPN) acquisition of DITTO.ME, Inc
•Twitter’s acquisition of Hotspots.io

Public Software as a Service (SaaS) M&A Deal Volume and Valuations

Last year at this time, after surveying the corp dev heads of public software, SaaS and Internet companies about their acquisition strategies in 2011, we reported a whopping 131% increase in respondents stating SaaS would be a “very important” acquisition prerequisite when assessing potential targets.  They were true to their word: 200 SaaS companies were acquired in 2011, up 91% from the 105 SaaS providers that exited in 2010.  By comparison, on-premise software M&A volume increased only 7% in 2011.

On a quarterly basis, SaaS M&A transactions ramped steadily, increasing from 39 in 1Q11 to 45 in the second quarter, then to 48 in 3Q11 and finally to 68 4Q11.  All told, SaaS acquisitions accounted for 17.0% of all software industry acquisitions in 4Q11, compared to only 4.5% of all deals just two years ago (Figure 54).

SaaS exit valuations are also ramping.  The median EV/Revenue exit multiple for SaaS providers in 2011 was 3.7x, up moderately from 3.2x in 2010 and 2.7x in 2009.  By comparison with the median 2.1x TTM EV/Revenue exit multiple of on-premise software companies in 2011, the SaaS 2011 exit multiple represents a 76% exit valuation premium (Figure 55).

SaaS exit valuations are also ramping.  The median EV/Revenue exit multiple for SaaS providers in 2011 was 3.7x, up moderately from 3.2x in 2010 and 2.7x in 2009.  By comparison with the median 2.1x TTM EV/Revenue exit multiple of on-premise software companies in 2011, the SaaS 2011 exit multiple represents a 76% exit valuation premium (Figure 55).


Ten SaaS acquisitions in 2011 had reported enterprise values greater than $100 million, including two billion dollar mega deals in Q4: SAP’s acquisition of SuccessFactors ($3.5 billion EV, 12.1x TTM revenue) and Oracles’ acquisition of Rightnow ($1.5 billion EV, 7.0x TTM revenue).  Other notable deals with enterprise values greater than $100 million were IBM’s acquisition of DemandTec ($427 million EV, 4.8x TTM revenue); SuccessFactors acquisition of Plateau Systems ($290 million EV, 4.2x TTM revenue);  Oracle’s acquisition of InQuira ($230 million EV, 4.0x TTM revenue); and Fiserv’s acquisition of CashEdge ($465 million EV, 9.3x TTM revenue). These large SaaS transactions underscore the transition of SaaS in buyers’ minds from “nice to have” to “have to have.”  Large public software companies have unquestionably taken note of growing enterprise adoption of SaaS applications, and the demonstrated preference by the huge but elusive SMB market for SaaS over on-premise software.

Among the discrete SaaS categories we track, CRM earned top honors in 2011, accounting for 17% of all SaaS M&A transactions (Figure 56).

Most notable were Oracle’s acquisition of Rightnow ($1.5 billion EV, 7.0X TTM Revenue); Adobe’s purchase of Demdex; NeuStar’s purchase of TARGUS ($650 million EV, 4.4x TTM Revenue); and Salesforce.com’s acquisition of Model Metrics ($58 million EV).

The HR & Workforce Management product category, in second place, accounted for 10% of all SaaS M&A transactions in 2011 and included SAP’s acquisition of SuccessFactors ($3.5 billion EV, 12.1x TTM Revenue), Callidus Software’s acquisition of Rapid Intake (transaction details undisclosed), SumTotal Systems’ acquisition of GeoLearning (transaction details undisclosed); and ADP’s acquisition of Asparity Decision (transaction details undisclosed).

With fully 46% of respondents to our 2012 Software Company Buyers Survey indicating that it was “very important” or “essential” their targets be “all or substantially SaaS/subscription based” we anticipate SaaS deal volumes and median exit multiples will continue to grow in 2012, most likely 10% to 25%, depending upon the economic climate and the level of enterprise IT spending on hosted solutions.