Software/SaaS M&A Deal Volume and Spending

Q3 also marked the fourth consecutive quarter there was at least one $500 million+ SaaS transaction, evidence the software industry’s largest public companies are now convinced of the viability and potential of SaaS in the enterprise market.

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

As we went to press, 405 software industry M&A transactions were reported in the third quarter (Figure 26).  We expect the final tally for 3Q12 to reach 420, since M&A announcements and related data for the quarter are often released well into the following quarter.  As testament, our initial total of 422 deals for Q2, as referenced in our second quarter report, was revised upward to a final count of 449 software/SaaS transactions.  Quarterly software/SaaS M&A deal volume has now surpassed 400 – the historical benchmark for healthy software M&A volume – for nine straight quarters.

Software/SaaS mega deals (>$500 million) in the third quarter included Verint Systems’ acquisition of Comverse Technology ($1.5 billion EV, 0.7x TTM revenue); IBM’s acquisition of Kenexa ($1.4 billion, 4.1x); Roper Industries’ acquisition of Sunquest Information ($1.4 billion); VMWare’s acquisition of Nicira Networks ($1.3 billion); Thoma Bravo’s acquisition of Deltek ($1.1 billion, 3.0x); Publicis Groupe’s acquisition of LBi International ($581.2 million, 1.9x); and HiSoft Technology’s acquisition of VanceInfo Technologies ($506.4 million, 1.3x).

Thoma Bravo’s acquisition of Deltek marks the third consecutive quarter mega-deal buyers included a private equity firm, suggesting PE firms have improved deal financing capabilities and a healthier appetite.   As important, Deltek’s 3.4x TTM revenue exit multiple suggests some PE firms are willing to pay a strategic value for the right asset.

Q3 also marked the fourth consecutive quarter there was at least one $500 million+ SaaS transaction, evidence the software industry’s largest public companies are now convinced of the viability and potential of SaaS in the enterprise market.  Having drawn that conclusion, these industry behemoths are now aggressively targeting the largest and most successful SaaS companies, which have now achieved critical mass to warrant the attention.

As for the third quarter’s total spend, the aggregate purchase price of 3Q12’s software/SaaS transactions with announced price tags was $12.2 billion, 45% lower than 2Q12’s $22.3 billion, and the lowest quarterly spend we’ve seen since 1Q10.  On a TTM basis, as of the close of the third quarter $63.1 billion was expended on software/SaaS transactions, down from $70.4 billion YoY.  The average deal size, after a period of rapid growth, began to level off in 4Q11 at $42 million, and declined to $36 million in 3Q12, a 14.3% YoY decrease (Figure 27).

While one could conclude the declining aggregate deal spend and average deal size have suffered because of continuing buyer uncertainty about the broader economy, the steady number of software/SaaS M&A transactions, and the much improved median exit multiple (see below) suggests the declines may be attributable to a greater number of smaller software companies being acquired.

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