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Will the enterprise market spend significant IT budget on Windows Vista in 2007?



Software M&A – A Glimpse into the First Quarter

By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC

The opening months of 2004 saw a continuation of the momentum that characterized the software industry in the closing months of 2003. Buyers were primarily public software companies seeking strategic acquisitions in response to market demands and competing players. The first quarter of 2004 saw some spectacular multiples reflecting steady improvement in valuations over the past 15 months. In terms of M&A dollar volume, the $12.6 billion spent on software company acquisitions was up 7.7% from Q4 2003 and up 4.1% from Q3 2003. Internet tools/utilities played a large role in the overall rise in aggregate purchase price for the software industry. Ask Jeeves / Interactive Search Holdings, Yahoo / Kelkoo, InfoSpace / Switchboard, and Convergys / DigitalThink had heafty multiples attached to large purchase prices. The billion dollar deals of Juniper / Netscreen and (Bain Capital, Silverlake, Wargurg Pincus) / UGS PLM already equals 2002’s number of billion dollar deals.

Software company exit valuations continued its quarter over quarter increase. The median software company M&A valuation (based on the equity purchase price) reached 2.3 times trailing-twelve-months (TTM) revenue in Q1 2004, over two times the M&A valuation in Q1 2003 and up from Q4 2003’s 2.1x median valuation. The median TTM software company M&A valuation is 1.9x, up from 1.4x for calendar 2003.

Sign up for Software Equity Group’s (www.softwareequity.com) free Q1 2004 M&A Report, out soon, which will provide a comprehensive analysis of deals, valuations and trends in Q1 2004.

Avocent (Nasdaq: AVCT) acquires OSA Technologies
Category: Firmware
Purchase Price: $100,000,000
Seller Revenue: $6,250,000(Estimate)
Revenue Multiple: 16.0x
Payment Terms: Cash, Stock

SEG’s Insight:
Avocent, supplier of KVM (keyboard, video and mouse) switching and connectivity solutions, expands into a new market by acquiring OSA Technologies, provider of embedded firmware and software to manage servers, blades, networks and storage devices. The $100 million purchase price ($52 million cash and $48 million stock) represents a hefty premium over OSA’s revenue (estimated at less than $10 million), but will extend Avocent into a new, higher end/higher margin market. OSA, with offices in Shanghai and Taipei, also offers Avocent more exposure to Asian markets. OSA has received more than $19 million in equity financing from the likes of Dell, Intel Capital, VC’s and Taiwan Manufacturers.

Yahoo (Nasdaq: YHOO) acquires Kelkoo SA
Category: Internet Tools/Utilities
Purchase Price: $576,000,000
Seller Revenue: $50,000,000
Revenue Multiple: 11.5x
Payment Terms: Cash

SEG’s Insight:
Yahoo expands both its geographical reach and search-related marketing services by acquiring Kelkoo SA, a major European comparison shopping site. Founded in France in 1999, Kelkoo grew through a series of rapid acquisitions in the U.K., Spain and Norway, and now operates in 9 European countries with 32 million unique users monthly. While the $578 million all-cash purchase price (41 times 2003 cash flow and 11 times last year’s sales) leaves some observers breathless, at least a few analysts believe Kelkoo’s revenue and cash flow will double in 2004. They also see the acquisition as necessary for Yahoo to fend off fierce competition from rivals Google and Microsoft. The Kelkoo deal follows Yahoo’s December 2002 acquisition of search engine provider Inktomi for $235 million, and its July 15, 2003 acquisition of Overture Services, a leader in paid-search listings, for a whopping $1.6 billion.

InfoSpace (Nasdaq: INSP) acquires Switchboard (Nasdaq: SWBD)
Category: Internet Tools/Utilities
Purchase Price: $104,150,000EV
Seller Revenue: $15,190,000
Revenue Multiple: 10.5x
Payment Terms: Cash

SEG’s Insight:
In a drive to increase its share of the $450 million online local directory market, Internet and wireless solution provider Infospace acquires Switchboard, a provider of online business directories advertising products. InfoSpace expects Switchboard to add $10 million to $12 million in revenue and between $4 million to $5 million in search and directory income during the second half of 2004. Local search has become a hot area for Internet companies, with Google and Yahoo each introducing new tools in the past month. With revenue of $15 million, the $160 million all cash price represented a 28% premium over a very healthy market cap of $147 million, and was received favorably by investors. Switchboard’s price leaped 28% on deal day, while Infospace’s price jumped 14%.

Convergys (NYSE: CVG) acquires DigitalThink (Nasdaq: DTHK)
Category: Online Education
Purchase Price: $105,000,000EV
Seller Revenue: $42,100,000
Revenue Multiple: 2.9x
Payment Terms: Cash, Stock

SEG’s Insight:
Convergys, a Cincinnati Bell spinoff that is now a $2.3 billion global provider of outsourced customer billing and HR services, acquires DigitalThink, a provider of e-learning to the Fortune 1000. After issuing first quarter earnings targets that fell below some analysts’ projections causing its share price to drop 5.8%, Convergys is betting DigitalThink will help it retain customers and aggressively expand its HR outsourcing business. The $120 million purchase price represents a 30% premium to DigitalThink’s closing price immediately before the deal was announced. The timing was right for DigitalThink, which lost more then $10 million on $45 million in TTM revenue, as well as one of its biggest clients, EDS. Investors agreed, driving DigitalThink’s share price up 51% on deal day.

Kintera (Nasdaq: KNTA)acquires Carol/Trevelyan Strategy Group
Category: Nonprofit vertical
Purchase Price: $5,250,000
Seller Revenue: $5,200,000
Revenue Multiple: 1.0x
Payment Terms: Stock, Cash

SEG’s Insight:
Kintera, a software as a service provider to nonprofit organizations, acquires Carol/Trevelyan Strategy Group, a provider of online fundraising and advocacy solutions. It’s Kintera’s thirteenth acquisition, the second since its IPO, both coming in the month of March. Kintera used restricted stock for both purchases, capitalizing on its extraordinary market valuation ($366 million on $8 million TTM revenue), this time paying $5 million in stock and $250 thousand in cash. As a result of the two acquisitions, Kintera has increased its TTM revenue 1.7x, broadened its offering, and expanded its customer base. With $35 million in cash still remaining from its IPO, and companies willing to accept Kintera stock as payment, look for the company to continue its buying spree.

Ask Jeeves (Nasdaq: ASKJ) acquires Interactive Search
Category: Internet Search
Purchase Price: $342,603,000
Seller Revenue: $100,000,000
Revenue Multiple: 3.4x
Payment Terms: Cash, Stock

SEG’s Perspective:
Consolidation continues amoung search engine providers, as Ask Jeeves acquires competing internet search company Interactive Search Holdings (ISH), the owner of the Excite, iWon, and MySearch websites. Investors responded favorably to this deal. Originally worth $328 million when tendered, valuation grew to more then $420 million after Ask Jeeves shares jumped 40% on deal day to $29.01 – a 877% increase since the beginning of 2003. Ask Jeeves, which lost $699 million during its first six years in business but is now profitable, raised the $115 million cash purchase price by issuing zero coupon convertible subordinated notes back in June. Ask Jeeves reported revenue of $107 million and an operating profit of $25 million while ISH had revenues of $140 million and profit of $35 million. The acquisition doubles Ask Jeeves market share to 7% and gives them an annual search inventory equal to 21 days worth of Google’s traffic.

Serena Software (Nasdaq: SRNA) acquires Merant Plc (Nasdaq: MRNT)
Category: Change Management
Purchase Price: $309,300,000EV
Seller Revenue: $128,300,000
Revenue Multiple: 2.41x
Payment Terms: Cash, Stock

SEG’s Perspective:
Serena Software’s acquisition of competing Enterprise Change Management (ECM) software provider Merant creates the second largest provider (23% market share) in this space behind IBM’s Rational Software division (30% market share). The combined company will have estimated annual revenue of $225 million, 15,000 customers, and 46 of the 50 largest multinational companies. Serena, sells ECM software mostly for mainframes, has a market cap of about $803 million, while Merant, whose software is deployed on distributed systems, has a market cap of about $300 million. Serena’s 2003 revenues were 27% lower then Merant’s, but Serena achieved much higher revenue and profitability per employee leading to the higher market valuation and an opportunity to improve Merant’s performance. For Merant shareholders, the deal equates to a 25% premium above Merant’s closing price on the day of the announcement, not bad considering Merant has racked up losses aggregating $140 million on revenue of $483 million over the last three fiscal years and saw its revenue fall 32%.

Bain Capital, Silver Lake Partners, Warburg Pincus acquires UGS PLM Solutions
Category: Product Design Management
Purchase Price: $2,050,000,000
Seller Revenue: $897,000,000
Revenue Multiple: 2.3x
Payment Terms: Cash

SEG’s Perspective:
In a quest for cash to offset its $5 billion in debt, Electronic Data Systems’ (EDS) sells its product design management-software unit, UGS PLM Solutions, to private buyout firms Bain Capital, Silver Lake Partners and Warburg Pincus. Each will reportedly invest $350 million cash and take an equal stake. Citigroup Global Markets Inc., J.P. Morgan Chase & Co. and Morgan Stanley have agreed to provide roughly $1.2 billion in senior bank debt and high yield bonds. The $2.05 billion price amounts to 2.3x UGS’ $897 million trailing revenue in 2003, and 10.2x current EBITDA (roughly $200 million). UGS’ 42,000 customers and 8% annual revenue growth brought an array of interested parties to the table. The UGS deal is the largest technology private equity investment since the $2 billion purchase of Seagate Technology Inc.’s disk-drive business in 2000.

Varian Medical Systems (NYSE: VAR) acquires OpTx
Category: Healthcare vertical
Purchase Price: $18,000,000
Seller Revenue: $9,000,000
Revenue Multiple: 2.0x
Payment Terms: Cash

SEG’s Perspective:
Varian Medical Systems, a provider of software for cancer radiation therapy, acquires OpTx, a developer of oncology-specific practice and patient management software. Varian anticipates OpTx will initially add about $9 million to its $1 billion in revenue, a modest contribution at best, but the acquisition provides Varian both market leverage and competitive differentiation. Varian gains ownership of a valued strategic partner whose software it has sold since 2001 under a private label agreement. Varian also gains a competitive advantage against its rival, GE Medical Systems, which was also an OpTx strategic partner. Varian’s revenue increased 29% to $267 million and net income 39% to $29 million in fourth quarter 2003.

Kintera(Nasdaq: KNTA)acquires Prospect Information Network
Category: Nonprofit vertical
Purchase Price: $3,630,000
Seller Revenue: $4,500,000
Revenue Multiple: 0.81x
Payment Terms: Stock

SEG’s Insight:
Kintera, a provider of software as a service to nonprofit organizations, acquires Prospect Information Network (PIN), a developer of donor software to nonprofit fundraisers. Kintera adds 500 clients to its roster and boosts its $8 million in revenue almost 50% by paying $3.4 million in stock and assuming $230,000 in PIN debt. Although Kintera lost $10 million in 2003, and $31 million since its founding four years ago, that hasn’t stopped Kintera from pursuing a frenetic acquisition strategy – 12 in the last 4 years. This is Kintera’s first acquisition since its 2003 IPO, which raised $35 million. The company is facing increasing competition from smaller niche companies, as well as larger public companies such as Siebold, Peoplesoft, and Microsoft.


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