M&A Valuations by Software Product Category

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.

Software M&A by Vertical and Horizontal Markets

The most active verticals in 3Q12 were Healthcare and Financial Services, accounting for 23% and 20% of total vertical software transactions, respectively.

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

Another important determinant of exit valuation is the seller’s market focus and related domain expertise.  We analyzed 3Q12’s median software M&A multiple horizontally and vertically, segregating software company sellers with vertical market solutions (e.g. retail, financial services, telecom, manufacturing, etc.) from sellers with horizontal software solutions (infrastructure, enterprise applications, etc.).

In 3Q12, providers of vertical software accounted for 37% of all software M&A, confirming vertical providers remain attractive acquisition targets primarily because of their deep domain expertise and highly defensible market positions (Figure 32).  The median EV/Revenue exit multiple of these vertical targets has doubled over the same time period, growing from 1.0x in 4Q11 to 2.0x in 2Q12 (Figure 33).

The most active verticals in 3Q12 were Healthcare and Financial Services, accounting for 23% and 20% of total vertical software transactions, respectively (Figure 34).  Both verticals continued to see heightened deal activity, mostly due to regulatory changes, growing governmental scrutiny, and evolving market conditions.  Notable deals in the healthcare sector included Thoma Bravo’s acquisition of Mediware ($156M EV, 2.4x TTM revenue); Nuance Communications acquisition of Quadramed’s HIM Business ($230M EV);  Merge Healthcare’s acquisition of Advanced Clinical Software; and McKesson’s acquisition of MedVentive.  Notable transactions in financial services included: ACI Worldwide’s acquisition of Distra ($49M EV); S&P Capital’s acquisition of Credit Market Analysis; and Global Payments acquisition of Accelerated Payment Technologies($413M EV).

Software M&A Valuation by Size

…a rapidly growing smaller company will often deem an exit premature and spurn advances by a strategic acquirer, prompting the larger suitor to raise the bid.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx
Another key driver of exit multiples is size – of both buyer and seller.  As testament, buyers with TTM revenue greater than $200 million paid a median EV/Revenue multiple of 2.8x in 3Q12, while buyers with TTM revenue less than $200 million paid only 1.6x TTM revenue (Figure 31). Equally noteworthy: Sellers with less than $20 million TTM revenue received a median EV/Revenue multiple in Q3 of 3.9x from buyers with $200 million of revenue or more, while sellers with greater than $20 million TTM revenue were paid a median exit valuation of 2.7x.

Why? A rapidly growing smaller company will often deem an exit premature and spurn advances by a strategic acquirer, prompting the larger suitor to raise the bid. Case in point: GoInstant, a small but highly respected provider of enterprise social web browsing and collaboration solutions which allow customers, business partners, and colleagues to easily meet in online sessions, browse the web, and interact in real-time, as if seated side-by-side and was gobbled up for an estimated 15.0x TTM revenue by Salesforce.com.

Selected M&A Deals for the Week of 12/7/2012 – 12/14/2012

The table below includes a select list of Software, SaaS, Internet and Mobile M&A transactions for the week of December 7, 2012 – December 14, 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:

•Trident Private Holdings’ acquisition of TNS Inc. [for an Enterprise Value (EV) of $844.3M, implying an EV/Rev multiple of 1.5x]

•Yahoo Japan Corporation’s acquisition of CyberAgent FX [for an EV of $252.5M, implying an EV/Rev multiple of 2.5x]

•Juniper Networks’ acquisition of Contrail Systems [for an EV of $169.1M]

•Accruent’s acquisition of Evoco Inc.

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Software M&A Valuations by Equity Structure

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

While a variety of factors impact a seller’s exit valuation, one important variable is the seller’s equity structure.  We separated public and private software company buyers to ascertain any difference in median purchase price paid in 3Q12.  Historically, public buyers have paid higher exit multiples than private buyers: 2.5x vs. 2.0x TTM revenue in 2007; 2.0x vs.1.7x in 2008; 1.9x vs.1.2x in 2009; 2.4x vs.1.8x in 2010, and 2.4x vs. 2.0x in 2011.  That trend continued in 3Q12 as public buyers paid a median 2.4x TTM revenue, while private buyers paid only 1.4x TTM revenue (Figure 30).  The significant premium paid by public buyers can be attributed, at least in part, to the sizable amounts of cash on their balance sheets; their preference for larger targets that typically yield a higher multiple; and the greater inclination of public buyers to pursue strategic transactions, while private buyers are often more inclined toward financial transactions.

Internet M&A Deal Volume and Valuations

…the Internet M&A focus shifted to a new breed of online marketing companies that had leveraged social media to help SMB customers generate leads more cost-efficiently, deemed critical in this tough economic climate..

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

Internet M&A activity in 3Q12 was robust, with 263 transactions announced by close of quarter, a marked YoY increase over 3Q11’s 216 Internet deals (Figure 40).  The third quarter’s 263 Internet transactions was 65% of the final tally for traditional on-premise software M&A, up markedly from 3Q10 when Internet M&A was only 30% of the on-premise software deal total.

The most active Internet M&A category in 3Q12 was Ad Tech & Lead Gen, which accounted for 85 transactions, or one-third of all Internet deals during the quarter (Figure 41).

In 1H12, many of these Ad Tech & Lead Gen sellers were daily deal sites unable to emulate the success of Groupon and Living Social by scaling quickly and massively, making them ripe for consolidation.  In Q3, however, the Internet M&A focus shifted to a new breed of online marketing companies that had leveraged social media to help SMB customers generate leads more cost-efficiently, deemed critical in this tough economic climate.  Representative third quarter transactions in this arena included Merkle’s acquisition of 5thFinger; WPP’s purchase of Acceleration eMarketing; Gannett’s acquisition of BLiNQ Media; Publicis Groupe’s successful bid for LBi International ($533.8 million); and RealPage’s purchase of Rent Mine Online ($15.5 million EV, 10.3x TTM revenue).  The largest transaction in this category was Dentsu’s acquisition of Aegis Group ($4.8 billion EV) which was a global expansion play for Dentsu.

Content & Media was also among the most active Internet categories from an M&A perspective, with 52 transactions in the third quarter.  Notable transactions in this category included Shutterfly’s acquisition of Penguin Digital; News.me’s acquisition of Digg ($0.5M EV); Google’s acquisition of John Wiley & Sons Travel Assets; and IAC Search & Media’s acquisition of About.com.  The sale of Digg to News.me is another reminder of how far and how quickly, Internet high flyers can fall.  It was only four years ago that Google was rumored to be interested in buying the high flying startup for $200M.  Four short years later, the Company needed a $5M Series D round to keep from running out of cash before ultimately selling the business for what is widely believed – albeit hotly debated – $0.5M total transaction price.

The TTM Internet M&A median exit multiple was 1.9x in 3Q12 (Figure 42), down sharply YoY from 2.6x in 3Q11.  The drop mirrors the steep Q3 decline in the median market valuation of public Internet companies, and reinforces investor concerns about the viability and sustainability of Internet revenue models primarily dependent upon advertising.  Compounding the problem is growing competition for these web advertising dollars from mobile deployed apps.  But if Facebook and Google are able to prove mobile web advertising is substantial, sustainable and incremental to desktop web advertising, Internet exit multiples for  Ad Tech & Lead Gen  providers will undoubtedly rise sharply in the not too distant future.

Software M&A Valuations

…one-third of all software/SaaS M&A transactions with ascertainable exit multiples had an EV/Revenue multiple of 3.0x or greater.

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 software industry’s median exit multiple was 2.3x TTM revenue in 3Q12, up sharply from 1.7x in 2Q12 (Figure 28).  The 2.3x benchmark is the highest since 2Q11’s  2.5x median exit multiple.  It’s worth noting that in Q3, one-third of all software/SaaS M&A transactions with ascertainable exit multiples had an EV/Revenue multiple of 3.0x or greater (Figure 29), and 8.0% of these deals boasted exit valuations of  5.0x TTM revenue or greater.

Among Q3’s transactions with the highest exit multiples were Salesforce.com’s acquisition of GoInstant ($70 million EV, 15.0x TTM revenue estimate); KEYW Holding Corporation’s acquisition of Sensage ($84.8, 7.0x); and SeaEnergy’s acquisition of Return to Scene ($16 million, 5.1x).

The largest SaaS deal of the quarter was IBM’s acquisition of Kenexa, a leading provider of talent management solutions ($1.3B EV, 4.1x TTM Revenue).  The deal follows on the heels of acquisitions by SAP and Oracle of Kenexa rivals SuccessFactors and Taleo.

Since very few software transactions publicly disclose a private software seller’s TTM EBITDA, we lacked sufficient data to ascertain the median EBITDA exit multiple paid in 3Q12 for private software company sellers (Figure 28).  We did, however, determine 3Q12’s median exit multiple for public software company sellers was 11.2x TTM EBITDA, a modest decline from 2Q12’s 12.1x TTM EBITDA exit multiple.