Selected M&A Deals for the Week of 11/23/2012 – 11/30/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of November 23, 2012 – November 30, 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:

•NCR Corp’s acquisition of Retalix [for an Enterprise Value (EV) of $605.1M, implying an EV/Rev multiple of 2.4x]

•Siemens’ acquisition of Invensys Rail [for an EV of $2.8B]

•Cisco’s acquisition of Cariden Technologies [for an EV of $141.0M]

•Zillow’s acquisition of HotPads [for an EV of $16.0M]

•Bayer’s acquisition of Radimetrics

•Google’s acquisition of Incentive Targeting

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Public Software Company Financial Performance

The deceleration in revenue growth was not entirely unexpected, given the forecast cutbacks in enterprise IT spending and the macroeconomic headwinds most public software companies have been facing.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

The 146 public companies comprising the SEG Software Index grew revenue by only a median 13.2% in 3Q12, after posting median growth rates of 14.9% for Q1 and 15.5% for Q2 (Figure 4).  The deceleration in revenue growth was not entirely unexpected, given the forecast cutbacks in enterprise IT spending and the macroeconomic headwinds most public software companies have been facing.  Indeed, given that growth in enterprise IT spending for all of 2012 is unlikely to exceed 4% or 5%, public software companies have done well to achieve the revenue growth they’ve reported for the first three quarters.

Despite the overall slowdown in TTM revenue growth rates, a number of public software companies read the tea leaves well and pushed their top line well above the median.  Of the ten software companies posting the highest TTM revenue growth in Q3, six derived all or a substantial part of their revenue from mobile software solutions.  The list includes Unwired Planet (274.5% TTM revenue growth), Qihoo (169.9%), Gree (146.6%), NQ Mobile (113.4%), Velti (66.0%) and Zynga (43.1%).

However, mobile continues to be a double-edged sword.  Five of the ten software companies with the lowest TTM revenue growth were also mobile solution providers: Smith Micro Software (-57% TTM revenue growth), Myriad Group (-35%), Access (-28%), RealNetworks (-16%) and Trunkbow (-9%).  Unlike their top performing peers, these mobile companies are struggling to adapt legacy business models to a rapidly evolving market.

Two of the top ten companies achieving the best TTM revenue growth were security software providers Palo Alto Networks (115%) and Sourcefire (38%).  Rounding out the top ten software overachievers were Sapiens International (72%) and Allot Communications (39%).

The third quarter’s growth rate helped drive median TTM revenue of the SEG Software Index above $389 million (Figure 4).  Indeed, Q3’s median TTM revenue was more than twice the median TTM revenue of the SEG Software Index in 3Q08.  Over this same time period, the number of public software companies has declined from 201 to  146 – further evidence that consolidation in the software sector is resulting in not only fewer, but considerably larger, publicly traded software companies (Figure 5).

Despite the marked decline in TTM revenue growth, public software companies proved especially adept at maintaining their healthy EBITDA margins in the third quarter.  The median EBITDA margin of the on-premise public software companies comprising our Software Index was 19.1% in Q3, a modest improvement over 2Q12’s 18.5% (Figure 4).

Many of the most profitable on-premise software companies are industry behemoths that have the size and market leverage to drive high margins, including Oracle (43.5% EBITDA margin), Microsoft (41.7%) and SAP (36.1%).  But an array of smaller, mid-cap public software companies also had a keen eye on the bottom line in 3Q12, led by CheckPoint Software (56.6% EBITDA margin), Gree (53.4%), ANSYS (47.3%), MSCI (45.0%) and NeuStar (42.0%).
The smallest player among our top ten most profitable software companies was SolarWinds, with TTM revenue of $233 million.  Benefitting from a highly unique and cost effective revenue and sales strategy, SolarWinds drove its Q3 EBITDA margins to 46.5%.

Public software companies continued to maintain historically high levels of cash and equivalents on their balance sheets, undoubtedly a reflection of their elevated EBITDA margins.  In 3Q08, the median cash and equivalents of the SEG Software Index was $72.9 million and the median EBITDA margin was only 12.8%.  In 3Q12, median cash and equivalents had grown 117% to $158.5 million, and the median EBITDA margin had increased 49% over the four year period (Figure 6).  The significant cash reserves and strong balance sheets of most public software companies, particularly the industry’s largest players, bode well for many small and mid-cap software company M&A targets.

IT Spending

Reflecting the increased uncertainty in the global economy, analysts continue to forecast tepid worldwide IT spending forecasts for 2012.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

SEG carefully monitors enterprise IT spending each quarter as a means of forecasting downstream public software company financial performance and software M&A deal volume.  Simply put, we long ago determined that healthy IT spending drives public software companies to buy, not build, in response to growing market demand.

Our readers will recall large enterprises cut back sharply on spending for software, hardware and IT services in 2009 during the economic downturn, when IT capital spending declined by more than 10%.  To provide some perspective, we estimate every percentage increase/decrease in IT spending equates to approximately $5 billion. The spending cut had an almost immediate and traumatic impact on public software company revenue and software M&A activity and valuations declined.  In 2010 and 2011, enterprise customers loosened their purse strings and domestic IT capital spending grew 8% and 6%, respectively.

Reflecting the increased uncertainty in the global economy, analysts continue to forecast tepid worldwide IT spending forecasts for 2012.  In Q2, Goldman recently lowered its 2012 forecast of worldwide IT spending from 4% in January to 3%.  Goldman attributed the reduction to lower GDP growth in advanced economies.  In July, Gartner also forecasted 3% growth in worldwide IT spending, up from their previous estimate of 2.5% in 1Q12.  In September, IDC updated its IT spending forecast to 2.5% growth.  Among Goldman, Gartner and IDC the consensus for increased domestic IT spending in 2012 is 3% (Figure 2).

Though IT spending will grow only modestly, some will fare better than most.  Gartner forecasts enterprise spending on public cloud services will reach $109 billion in 2012, and grow to $207 billion by 2016.  Similarly, IDC forecasts IT Cloud Services spend will account for 10% of all IT spending in 2013.  Furthermore, IDC and JPMorgan both cited strong IT spending for mobile devices, software and enterprise network products.

U.S. Economy: Software Industry Macroeconomics

After four consecutive quarters of accelerating growth in 2011, economic expansion in 2012 has not materialized, and the BEA has repeatedly issued downward revisions to previously released GDP growth numbers that were already anemic.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

GDP is best defined as the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

In September, the Bureau of Economic Analysis (BEA) lowered its estimate of GDP growth in the second quarter to 1.3% from its initial estimate of 1.7%.  After four consecutive quarters of accelerating growth in 2011, economic expansion in 2012 has not materialized, and the BEA has repeatedly issued downward revisions to previously released GDP growth numbers that were already anemic (Figure 1).  The BEA’s initial estimate of 2.0 growth in the third quarter confirms that meaningful and sustained economic growth remains elusive.

An early October employment report released by the U.S. Bureau of Labor Statistics indicated the unemployment rate unexpectedly fell below 8% for the first time in nearly four years.  However the surprisingly good news was called into doubt by a separate survey of employers, watched closely by Wall Street, showed businesses added 114,000 jobs in September, marking a slowdown in hiring, after July and August were revised significantly higher.

Public Internet Company Market Valuations: By Product Category

SEG Internet Index companies grew median TTM revenue an impressive 24.0% in 3Q12, up from 20.8% 3Q11.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

The public market valuations of companies comprising the SEG Internet Index varied widely by Internet category in 3Q12 (Figure 23).  Social Media led the pack, closing 3Q12 with a median EV/Revenue multiple of 8.8x, down sharply from 19.4x in 3Q11.  Companies with market valuations exceeding the median Internet EV/Revenue multiple included LinkedIn (14.5x), Yelp (12.1x) and Mail.ru Group (10.9x).  Notably absent from this list is Facebook, whose median EV/Revenue multiple nosedived from 16.0x to 7.9x.

Investors seemed wholly disinterested in Internet Commerce providers in the third quarter.  The group closed 3Q12 with a median 0.7x EV/Revenue multiple, by far the lowest of our Internet categories.  Lackluster revenue growth and EBITDA margins, well below the Internet median, is surely to blame here. The notable exception was Mercadolibre, which posted a median EV/Revenue multiple of 10.0x, over fourteen times the Commerce category median for 3Q12.  Mercadolibre, Latin America’s eBay, was boosted by investors enamored with emerging markets and the company’s 37% TTM revenue growth rate in 3Q12.

TTM revenue growth and EV/Revenue market multiples exhibited strong correlation in Q3 (Figure 24).  The three categories (Commerce, Content & Media, Infrastructure) with the lowest three TTM revenue growth rates posted the lowest median EV/Revenue multiples.  By contrast, the two product categories (Social, Services) with the highest TTM revenue growth, posted the two highest median EV/Revenue multiples.

Public Internet Company Financial Performance: By Product Category

Six out of seven companies in the (Social) category grew TTM revenue growth rates that were at least twice that of the median Internet growth rate in the third quarter.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

Compelled by market forces to scale rapidly, then monetize, the Social product category racked up the highest median TTM revenue growth rate (66.1%) among all Internet companies in Q3 (Figure 23).  Six out of seven companies in the category grew TTM revenue growth rates that were at least twice that of the median Internet growth rate in the third quarter: LinkedIn (101.9% TTM revenue growth), Facebook (88.0%), Mail.ru Group (75.4%), Yelp (74.5%), Jive (56.8%) and Renren (54.1%).

Three other product categories finished 3Q12 with TTM revenue growth rates above the Internet sector median: Services (41.9%), Ad Tech & Lead Gen (34.5%) and Gaming (32.0%).

Revenue growth in the Services category was boosted by strong TTM revenue growth from Qihoo (169.9%), Zillow (99.4%), Angie’s List (69.7%) and Shutterfly (52.4%).  Companies within the Ad Tech & Lead Gen category continued to benefit from the dramatic growth in advertising dollars migrating from offline to online, as well as from increased spending on lead generation services.  Notable examples in this category include Groupon (117.6% TTM revenue growth), LinkedIn (101.9%) and Baidu (74.0%).

Gaming, as it has for most of 2012, achieved what was arguably the best overall financial performance among all Internet categories in Q3, posting an impressive 32.0% median revenue growth rate and a stellar median EBITDA margin of 43.9%.  Gaming companies posting strong TTM revenue growth and EBITDA margins included Tencent Holdings (49.4%TTM revenue growth, 43.9% EBITDA margins) and ChangYou.com (47.2%, 54.7%).

Infrastructure and Commerce categories posted a median EBITDA margin of 8.3% in 3Q12, the lowest of all Internet product categories.  The profitability of Internet eCommerce providers has historically lagged other categories due to the significant revenue sharing inherent in their business model, as well as sometimes significant infrastructure related expenses.  As testament, Amazon posted an EBITDA margin of 3.6% in 3Q12.

By contrast, eCommerce providers with business models that eschew inventory management, logistics and distribution expenses were able to achieve considerably higher levels of profitability.  As example, eBay generated EBITDA margins of 28.0% in the third quarter

Selected M&A Deals for the Week of 11/9/2012 – 11/16/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of November 9, 2012 – November 16, 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:

•Epsilon Data Management’s acquisition of Hyper Marketing [for an Enterprise Value (EV) of $460.0M]

•Cisco’s acquisition of Cloupia [for an EV of $125.0M]

•NQ Mobile’s acquisition of Beijing Feiliu Jiutian Tech [for an EV of $48.2M]

•Akamai’s acquisition of Verivue

•Nokia’s acquisition of Earthmine

•Dell’s acquisition of Gale Technologies