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.

What you Need to Know About Mobile (Q2 Update): M&A Snapshot, Hot Companies and Product Categories, Deal Structures and More…

SEG has considerable domain expertise in the emerging mobile software sector.  As mobile software M&A skyrockets, we aggregated the last two years of M&A data to identify the emerging trends, highly acquisitive buyers, exit multiples, deal drivers and common deal structures.

To review this information and more, download our Mobile M&A overview deck by clicking here or on the image below.  If you find this information useful and would like to discuss in greater depth, send me a note at bweekes@softwareequity.com.

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Oracle acquires Taleo

Transaction Details
Date: Announced on 2/9/2012
Enterprise Value:  $1.8 billion
Seller Revenue (TTM):  $309 million
Revenue Multiple (TTM):  6.0x
Premium:  The purchase price is 18% and 24% above Taleo’s one day and month prior valuation
Payment Terms:  100% cash

Oracle Business Description

Oracle Corporation is an enterprise software company that develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide.  The company was founded in 1977 and is headquartered in Redwood City, California.

Taleo Business Description

Taleo Corporation provides SaaS based talent management software solutions. The company’s products provide medium and large enterprises with a wide range of talent management solutions including sourcing, recruiting, and onboarding to performance management, goals management, development planning, succession planning, compensation, and learning.  Taleo Corporation was incorporated in 1999 and is headquartered in Dublin, California.

SEG’s Perspective

Oracle’s acquisition of Taleo marks its second, billion dollar acquisition of a SaaS provider in the last four months.  In November, the Company acquired RightNow for $1.5 billion, a TTM revenue exit multiple of 7.0x.  Oracle’s acquisition of Taleo falls on the heels of Taleo’s acquisition of Cytiva Software, a Software Equity Group client.  In December 2011, SAP acquired SuccessFactors, another provider of talent management software, for $3.5 billion.  The Taleo and SuccessFactors acquisitions are evidence the HR management (HRM) market, a superset of talent management, has become sizable enough to regain the attention of the large ERP providers who are quickly losing sales to emerging SaaS providers.  According to Forrester, the HRM market reached $4.8 billion in 2011 and is expected to grow to $6.1 billion in 2014, representing an 8% CAGR over that time period.  Talent management is growing even quicker.  Over the same time period, this sub-segment of HRM is expected to grow at a 17.0% CAGR.  Taleo, a leading provider in talent management, is growing much quicker, closing fiscal 2011 with TTM revenue growth of 30.2%.  Yet, given Oracle’s $36 billion of revenue in 2011, Taleo’s growth and revenue contribution hardly registers on Oracle’s P&L.  Make no mistake, the acquisition of Taleo is about extending Oracle’s legacy HR product suite with talent management capabilities, acquiring a proven SaaS platform to potentially leverage for other product lines, and ensuring Oracle remains competitive with SAP.

SaaS M&A Market Overview

The SaaS M&A market is hot.  In 2011, there were 200 SaaS M&A transactions, up 91% from 2010’s 105 M&A transactions.  Valuations are ramping as well.  The median EV/Revenue exit multiple climbed to 3.7x in 2011, up from 3.2x in 2010.  Among the early adopters of SaaS, the talent management space is one of the most active SaaS M&A product categories, accounting for 10% of all SaaS transactions in 2011.

Our 2012 Annual M&A Buyer Survey, a comprehensive survey of 200 corporate development heads of the largest software buyers in the world, confirmed that SaaS M&A will continue to be highly active in 2012.  Of our respondents, 46% stated that it was “very important” or “essential” their acquisition targets be “all or substantially SaaS/subscription based”.  By contrast, only 13% of buyers indicated SaaS was “very important” or “essential” in 2010.

SEG’s HR Management Experience (SaaS and Software)

Software Equity Group has consummated 10 HR Management SaaS and software acquisitions in recent years. Specific expertise includes selling companies providing applications for employee recruitment management and onboarding, employee performance management, employee training & learning management, employee time and attendance, employee benefits administration, employee expense management, & employee shift scheduling.  Buyers of these clients have included Taleo, Kronos, Kaplan, Administaff, Wolters Kluwer, & EBIX…to name a few.  To learn more, please contact Kris Beible at kbeible@softwareequity.com.

Public Software as a Service (SaaS) Financial Performance

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

After bottoming out at 13.7% in 2Q10, the SaaS median TTM revenue growth rate reversed course, inching up to 14.6% in 3Q10, ending eleven consecutive quarters of decline.  In 4Q10 the TTM median revenue growth rate of public SaaS providers was 15.1%, then climbed to 20.5% in 1Q11 and 23.3% in the second quarter.  In 3Q11 the median TTM revenue growth rate ticked up to 24.9%, the highest in eight quarters and the fifth consecutive QoQ increase (Figure 11).  Defying the stagnant economy, eight (31%) of twenty six public SaaS companies achieved TTM revenue growth greater than 30% in 3Q11 (Figure 12).

Profitability posed more of a problem for public SaaS companies than revenue growth, mostly because of their subscription models, infrastructure investments and heavy spending on sales and marketing.  Historically, median SaaS TTM EBITDA margins were dismal in comparison to on-premise EBITDA margins. But as SaaS revenue growth rates slowed during the Great Recession, public SaaS providers focused on improved profitability, and most succeeded in growing their bottom lines through operational improvements, reduced infrastructure spending and subscription renewals.

Predictably, SaaS EBITDA margins have eroded somewhat post-Recession, declining to a median 9.5% in 3Q11 from 10.1% in 1Q11.  The decline in the median EBITDA margin of the SEG SaaS Index signals a reprioritization by public SaaS companies on growth over profitability, as reflected by their YoY increased spending in 3Q11 on R&D, S&M and G&A as a percent of total revenue (Figure 14).

Profitability among the public SaaS providers varied widely, as they shifted into growth mode at varying speeds.  Five (19%) of the twenty six public SaaS companies in our index reported negative EBITDA margins in 3Q11, whereas three public SaaS companies exceeded 20% EBITDA margins.

Investors appear to be fully on board with this shift in operating emphasis.  At the close of 3Q11, public SaaS companies with TTM revenue growth rates above 30% were rewarded with a median 6.8x EV/Revenue multiple, compared to a median 3.5x EV/Revenue multiple for public SaaS companies with TTM revenue growth rates below 30% (Figure 15).

Initial Public Offerings

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

After a remarkable 2Q11, the IPO market slowed dramatically in the early part of 3Q11 before grinding to a halt at the end of the quarter due to whiplashing market volatility.  All four companies that went public in 3Q11 – Zillow, Tangoe, Carbonite and Tudou Holdings – listed in the first two months of the quarter.  Collectively, the four IPOs raised over $375 million at an average of roughly $94 million per IPO, down significantly from the average of $344 million per IPO in the second quarter.  Two anxiously awaited IPOs – Groupon and Zynga – opted to delay their coming out parties. As of the close of the third quarter, 17 companies have gone public in 2011, a marked increase from the twelve that initially listed in the first three quarters of 2010.  Internet IPO volume has been particular strong, with 13 newly listed companies, compared to only one through three quarters of 2010.

By the close of Q3, 2011’s seventeen newly public software/SaaS/Internet companies had a median stock return of -27.3%.  Three of the four companies that listed in 3Q11 fared far worse, off 49.4% or more from their initial IPO price.  Only four of the 17 posted positive YTD stock returns: Zillow, HomeAway, LinkedIn and Ellie Mae.  The best performer was LinkedIn, returning 73.5% by the quarter’s close.  While the allure of investing in social networking was partially responsible, LinkedIn’s 102.4% revenue growth and 13% EBITDA margin was undoubtedly received by investors as proof positive of the company’s value proposition.  Interestingly, the five Chinese companies that IPO’d in 2011 had YTD stock returns at or below the median for the group.  Renren posted the worst result, down 63.6% from its initial IPO price.

In the current climate, IPO aspirants must demonstrate significant market traction, given investors’ demonstrated preference for revenue growth over profitability. The seventeen newly when they listed, well above the Q3 median of public software, SaaS and Internet companies. companies had median revenue growth of 63.9% Five of the newly listed companies achieved TTM revenue growth rates above 100%.  Yet even these outperformers fell victim to the market’s volatility, as only one (LinkedIn) of these overachievers generated a positive YTD stock return as of the close of the third quarter.

Ten software companies filed S-1’s in 3Q11, bringing the U.S. software IPO queue up to seventeen (Figure 22).  The IPO pipeline consists of a healthy group of software companies across the on-premise software, SaaS and Internet sectors.  Internet companies in the pipeline are much larger and growing considerably faster than their on-premise software company counterparts, with median TTM revenue of $127 million (vs. $66 million) and a median revenue growth rate of 201% (vs.32%), and only slightly less profitable when measured by median EBITDA margin (7.8% vs. 8.6%).  If the GDP begins to grow and investors regain their appetite for newly listed companies with strong revenue growth and growth potential, Internet IPOs should continue to outperform their software counterparts.

M&A Deal Volume and Spending: All Industry Sectors

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

Globally, the third quarter’s 12,142 M&A transactions across all industry sectors eclipsed the previous post recession peak of 11,722 transactions set in 1Q11.  3Q11’s tally represents a 23% YoY increase from 3Q10’s 9,872 M&A transactions, and a 5% gain over 2Q11’s 11,515 M&A transactions.  Despite the record number of worldwide M&A transactions, the total spend of $606 billion in 3Q11 was 10% lower than 2Q11’s $671 billion, and 12% off 1Q11’s post-recession peak of $691 billion.

Domestically, 4,089 M&A transactions were announced across all industry sectors in the third quarter of 2011 (Figure 23).  The 3Q11 U.S. deal total was down slightly from 2Q11’s 4,202 transactions, but up 21% year over year.  Mirroring the rapid pace of transactions internationally, domestic M&A transactions are also heading for record volume this year.  In 1Q11, there were more than 4,000 domestic deals, the highest domestic deal volume we’ve reported since we began tracking this metric in 2001.  The second and third quarters each exceeded 4,000 transactions, as well. Perhaps as important, buyers loosened their purse strings over the past year.  In 3Q11, acquirers’ spent an aggregate $304 billion on 4,089 transactions, a whopping 35% more than 3Q10’s total price tag of $225 billion.  Average deal size also jumped, reaching $75 million in 3Q11, up from $67 million in 3Q10.

There were 622 worldwide leveraged buyouts in 3Q11, totaling $20.8 billion, compared to 658 worldwide LBOs worth $32.1 billion in 2Q11, and 695 in 1Q11 aggregating $25.5 billion.  The number of U.S. LBOs dropped to 213 in 3Q11 from 240 in 2Q11 and 233 in 1Q11.  The total spend on U.S. LBOs in the third quarter was $15.3 billion, down from $17.3 billion in 2Q11 but still considerably greater than the $13.1 billion total spent in 1Q11.  The drop in deal volume suggests PE buyers may be having a difficult time finding attractively priced targets in the face of rising valuations.  The largest LBO in 3Q11 was Apax Partners’ $5.8 billion acquisition of Kinetic Concepts, at 2.7x TTM revenue, a relatively high valuation of for a financial buyer.

Software/SaaS M&A Deal Volume and Spending

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

To date, there were 405 reported software M&A transactions in 3Q11, virtually the same as in the second quarter (409) and third 3Q10 (407) (Figure 24).  Since M&A data for the quarter is often revised and released well into the following quarter, we anticipate the final deal tally for 3Q11 will exceed 420, the highest quarterly tally this year.  M&A deal volume has been above or very near its historically healthy level of 400 for six of the past seven quarters, following five consecutive quarters of sub-400 M&A transactions (4Q08 to 4Q09).  In the first three quarters of 2011, there have been 1,242 software M&A transactions, up 1.7% YoY for the same nine month period, and 30% higher than the 957 software deals reported for the first nine months of 2009.

A total of $23.8 billion was spent on 3Q11 transactions with announced price tags, 13% higher than 2Q11’s $21.0 billion, and the highest software M&A spend since 2Q07.  Software mega deals are in large part responsible, as nearly half of the total spend in each of 3Q11 and 2Q11 came from transactions greater than $500 million: In 3Q11, HP acquired Autonomy for an enterprise value of $10.3 billion; in 2Q11 Microsoft acquired Skype for an enterprise value of $9.1 billion.

Considering the irregular fluctuations in total M&A spend each quarter, YoY comparisons of TTM data are a more reliable measure to discern M&A spending trends. And the trend over the past year is encouraging.  On a TTM basis, total software transaction dollars aggregated $70.6 billion at the close of 3Q11, 49% greater than the $47.4 billion spent on software M&A deals at the close of 3Q10. Similarly, on a TTM basis, the average deal size increased for the sixth consecutive quarter to $42 million (Figure 25).