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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

Software mergers and acquisitions continue to handsomely reward sellers, as purchase price multiples are on the rise. Best-of-breed security software providers are commanding spectacular multiples due to fierce competition and strong customer demand. Case in point; Symantec buys Brightmail and CyberGuard buys WebWasher AG. Brightmail’s customers include 15 of the 20 major ISP’s in the U.S. as well as over 75 Fortune 500 customers while WebWasher AG controls 40% of the web filtering market in Central Europe. Both Symantec and CyberGuard are vying for dominance in internet security, a market projected to grow from $506 million in 2002 to $1.93 billion in 2007a. Another hot market is IT Governance software, as CTO’s and CIO’s clamor for solutions to demonstrate the business ROI of their technology investments. BMC, Compuware, IBM, Hewlett-Packard, Mercury Interactive and Symantec, among others, have all made significant investments in this category. This issue also provides postmortem insight into Novell’s investment in Linux software provider SuSE AG.

BMC Software (NYSE: BMC) acquires Marimba (Nasdaq: MRBA)
Category: Systems Management Software
Purchase Price: $185,900,000EV
Seller Revenue: $40,880,000
Revenue Multiple: 4.6x
Payment Terms: Cash

SEG’s Perspective:
BMC Software enhances its Business Service Management (BSM) solutions by acquiring Marimba, a developer of change and configuration management software. The deal, in which BMC paid a hefty 70% premium, is BMC’s third in four months. Marimba, together with Magic Solutions, will be integrated into the Remedy product line (acquired from Peregrine in a bankruptcy sale). BMC wants to enhance its BSM offering in response to a growing customer demand for IT management solutions that are aligned with enterprise business goals (the same as Mercury Interactive’s Business Technology Optimization strategy noted above). Two of Marimba’s rivals, ON Technology and Novadigm, were bought by Symantec and Hewlett-Packard respectively, while IBM bought BMC competitor Candle Corp. While Marimba stock has lost 80% of its value since 2000, news of the deal sent Marimba up more than 60%, its highest price in almost 4 years.

Compuware (NASDAQ: CPWR) acquires Changepoint
Category: Collaboration Software
Purchase Price: $100,000,000
Seller Revenue: $20,000,000
Revenue Multiple: 5.0x
Payment Terms: Cash

SEG’s Perspective:
Compuware, provider of systems software products for application development and maintenance, acquires Changepoint, a developer of IT governance software to quantify and measure the business value of IT investments. The deal comes at a good time for both parties. Compuware’s revenue declined 20.4% in 2003, with new license revenue accounting for less than 20% of total sales, while Changepoint’s revenue was flat in 2003. Proving patience can be a virtue, the $100 million all cash purchase price dwarfs the $45 million Changepoint hoped to raise when it filed for an IPO in March 2000, but quickly rescinded in April 2000. This is Compuware’s second acquisition in 2004, and likely not its last with $367 million in cash on its balance sheet and a need for other sources of revenue in a competitive market.

CyberGuard (NASDAQ: CGFW) acquires Webwasher AG
Category: Security Software
Purchase Price: $40,000,000
Seller Revenue: $7,700,000
Revenue Multiple: 5.2x
Payment Terms: Cash, Stock

SEG’s Perspective:
Cyberguard, a firewall and VPN vendor, continues to expand into international markets, this time by acquiring Webwasher, a German security solutions provider. Webwasher, a technology spin-off of Siemens AG, holds 40% of the Web filtering market in Central Europe and was recently named the fastest-growing provider of Web filtering solutions by IDC. Webwasher more than doubled its revenues from 2003 to 2002 and hopes for more of the same, in light of an earnout package worth an extra $10 million in stock. Cyberguard has also seen impressive growth with a 48% year-over-year revenue increase and record sales of $13 million in 1Q04. In 2003, Cyberguard acquired an Australian Linux security and firewall provider (SnapGear) and a network hardware security solution from NetOctave.

Fair, Isaac and Company (NYSE: FIC) acquires London Bridge (LSE: LNB)
Category: Financial Services Software
Purchase Price: $259,249,268EV
Seller Revenue: $69,019,808
Revenue Multiple: 3.8x
Payment Terms: Cash

SEG’s Perspective:
Fair Isaac, developer of credit scoring systems and statistics-based predictive tools for the consumer credit industry, acquires London Bridge Software, a UK based provider of banking, credit management, and mortgage lending management software. Fair Isaac paid a 54% premium for a company which saw revenue decrease 6.3% in its last fiscal year, although cost cutting measures helped improve EBITDA from a $94 million loss in 2002 to almost a $1 million gain in 2003. With license revenue declining year-over-year since 2002, maintenance and e-commerce services have comprised a growing percentage of London Bridge’s revenue. For investors, the purchase price is quite a let down from London Bridge’s peak valuation in March 2000 of $3.8 billion. London Bridge shares increased 52% on news of the deal.

Mercury Interactive (NYSE: MERQ) acquires Appilog
Category: Systems Management Software
Purchase Price: $49,000,000
Seller Revenue: $4,000,000 (Estimate)
Revenue Multiple: 12.3x
Payment Terms: Cash

SEG’s Perspective:
With its fourth acquisition in twelve months, Mercury Interactive continues to move beyond applications and testing into business technology optimization (BTO) by acquiring Appilog, a provider of automated application matching software to manage dependencies between enterprise applications and supporting infrastructure. Appilog, together with Kintana (acquired by Mercury in 2003 for $267.5 million) will establish Mercury as a leading provider in BTO, a market that is projected to grow from $3.3 billion in 2004 to $6 billion in 2007. Appilog raised $13 million in two rounds since its founding in 2000 (Poalim Ventures, Delta Ventures, Cedar Fund, Genesis Partners).


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