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

Clearly, the industry’s largest on-premise software companies now view SaaS as both mainstream and a strategic imperative..

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 number of SaaS M&A transactions continues to soar.  In 3Q12, 94 SaaS companies were acquired, a stunning 96% increase from 48 transactions in 3Q11.  SaaS targets accounted for 23.2% of all software industry acquisitions in 3Q12, compared to only 9.6% of all software M&A deals just two years ago (Figure 37).

The median EV/Revenue exit multiple for SaaS providers in Q3 was 3.9x, slightly below its pre-recession high of 4.0x in 2Q12 (Figure 38), but roughly 70% higher than the third quarter’s median exit multiple for on-premise software company sellers of 2.3x TTM revenue.

The most notable SaaS transaction of the quarter was IBM’s acquisition of Kenexa ($1.3 billion EV, 4.1x TTM revenue), to bolster IBM’s social business initiatives.  Social business, inspired by consumer Internet companies such as Facebook, Twitter and LinkedIn, and pioneered by the likes of Jive and Yammer (acquired by Microsoft for $1 billion in 2Q12), is revolutionizing the way enterprises get work done.  Enterprises, plagued by employee disengagement and legacy enterprise applications that have not kept pace with current technology, are clamoring for social business solutions, and the likes of Salesforce.com, Microsoft, IBM and others are moving quickly to fill the void.
The third quarter featured a good number of other noteworthy SaaS M&A transactions.  Clearly, the industry’s largest on-premise software companies now view SaaS as both mainstream and a strategic imperative.  Third quarter SaaS company acquirers included Autodesk, Mastercard, Rackspace, Citrix, Athenahealth, Google, Oracle, and IBM.  The broad based appeal of SaaS is evidenced by the fact that 3Q12’s transactions included SaaS targets in seventeen different product categories and ten vertical markets.

The most active SaaS product categories were CRM & Marketing, accounting for 12% of all SaaS M&A transactions in 3Q12, and Talent and Workforce Management, which accounted for 10% of SaaS M&A transactions in the quarter (Figure 39).  Historically CRM & Marketing, and Talent & Workforce Management, have together accounted for the lion’s share of SaaS M&A volume.  However, as SaaS providers in an array of other categories begin to achieve more widespread acceptance and success, the two more traditional SaaS categories no longer dominate.  Indeed, CRM & Marketing and Talent & Workforce Mgmt accounted for 30% of total SaaS M&A transactions in 3Q11, but only 22% in 3Q12.  M&A transactions now abound in a host of SaaS product categories, including BI, Risk & Compliance, Development Tools, Multimedia, Graphics & Digital Media, Storage & Systems Mgmt and Supply Chain & Logistics.

We believe 3Q12 represents an inflection point in the SaaS Talent Management arena, and believe that deal volumes and median exit multiples will continue to decline.  By now most larger public software companies have built or bought SaaS providers offering compensation, learning, recruitment and performance management solutions (e.g. IBM’s acquisition of Kenexa and SkillSoft’s acquisition of ThirdForce in 3Q12).  We see buyer attention in the SaaS Talent Management category pivoting to new extensions, such as social talent management (e.g. Oracle’s acquisition of SelectMinds, and iCIMS acquisition of Jobmagic in 3Q12).

Collectively, SaaS providers serving vertical markets (both pure-play and hybrid) accounted for 30% of all SaaS M&A transactions.  Examples include DealerTrack’s acquisition of 1st Auto Transport Directory (for an Enterprise Value of $74.0 million), Autodesk acquiring Inforbix, and Pearson acquiring Psychological Software Solutions.  SaaS sellers targeting financial services accounted for 7% of all SaaS deals.  Other vertical markets where SaaS providers were in demand in 3Q12 included Education, Automotive and Non-Profit.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s