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



Software M&A - Second Quarter Review

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

The deals for this month reflect virtually every buyer motive currently driving software M&A: TIBCO acquires UK-based Staffware to gain access to two key vertical markets and gain increased presence in Europe and Asia-Pacific; Workstream fleshes out its workforce management offering by acquiring Kadiri and adding compensation management, a perfect “plug in”; a small, struggling public company in the network security space (Steelcloud) picks up a vital technology from a heavily funded developer that’s out of money, hoping to compete against the big boys; bargain hunter Platinum Equity acquires a public IT services firm CompuCom for 5% less than the seller’s pre-announcement closing price, disappointing many shareholders – but not buyout firm Safeguard Scientific which owned 58% and stands to net $61 million on its $67 million investment; CyberGuard tries to acquire a company with twice its revenue and far greater profitability in order to compete with the likes of Cisco and CheckPoint; JDA announces it will buy highly profitable retail catalogue provider QRS for stock, then forecasts weak second quarter earnings which hammers its trading price, drawing three private buyout firms into the bidding; Symantec seeks to corner the market on anti-spam by acquiring intriguing router-based technology weeks after snatching up Brightmail; and InstallShield, an acquisition candidate for some time, finally finds a home with Macrovision. Software buyers abound, and valuations continue to climb for the strategically advantaged.

CyberGuard (NASDAQ: CGFW) acquires Secure Computing (NASDAQ: SCUR)
Category: Security Software
Purchase Price: $256,120,000EV
Seller Revenue: $81,250,000
Revenue Multiple: 3.2x
Payment Terms: Stock

SEG’s Perspective:
Network security provider CyberGuard makes an audacious offer for larger rival Secure Computing by proposing an all stock deal originally worth $297 million. CyberGuard’s offer came shortly after Secure’s share price dropped 36%, following its negative second quarter guidance. Secure promptly rejected the offer, which represented only a 22% premium for Secure shareholders. In response, CyberGuard offered to “sweeten the deal” by raising cash through a private placement, but provided few details. Under terms of the original deal, Secure’s shareholders would have owned 56% of the combined company, while contributing almost three-quarters of total income. CyberGuard has completed three acquisitions since early 2003, seeking to compete more effectively against larger rivals Cisco and CheckPoint.

Internet Commerce Corporation (NASDAQ: ICCA) acquires Electronic Commerce Systems
Category: EDI Software
Purchase Price: $2,500,000
Seller Revenue: $1,700,000
Revenue Multiple: 1.5x
Payment Terms: Stock

SEG’s Perspective:
Internet Commerce Corporation (ICC), provider of an internet based value-added network for XML and EDI file transfers, acquires Electronic Commerce Systems (ECS), developer of EDI software and internet-based application services. ICC, a small player seeking a foothold in the EDI market, valued ECS’ presence in retail. ICC is hoping to boost revenue, which decreased 15% over its last fiscal year, by acquiring such blue chip ECS customers as Wall-Mart. ICC’s low cost internet approach to EDI has caused competitors to refuse data exchanges with EDI systems. In 2000, ICC shares traded at $90; today its shares trade at $1.17.

JDA Software (NASDAQ: JDAS) acquires QRS (NASDAQ: QRSI)
Category: Supply Chain Management/Logisitcs, eCommerce Software Purchase Price: $67,320,000EV Seller Revenue: $123,050,000 Revenue Multiple: 0.6x Payment Terms: Stock

SEG’s Perspective:
JDA Software, a leading producer of software for the retail industry, incites a bidding war for QRS, publisher of the leading electronic retail catalogue in North America and a provider of collaborative commerce solutions to the general merchandise and apparel industry. Shortly after making its all stock offer, JDA released negative second quarter results which drove the deal value down from $100 million to $85 million. After news of the deal caused QRS’ share price to rise 12%, three private buyout firms entered the fray, offering cash. The most notable bidder is Avling Partners, headed by QRS founder (Peter Johnson) who owns a 10.6% stake in QRS. Contrary to the predictions of some, we expect JDA to up its offer. The addition of QRS would make JDA 50% larger with 50% of revenues recurring, thanks to QRS’ lucrative revenue model. QRS is obligated to pay a $3.75 million breakup fee to JDA if it breaks the engagement.

Macrovision (NASDAQ: MVSN) acquires InstallShield Software
Category: Desktop Software
Purchase Price: $76,000,000
Seller Revenue: $35,000,000
Revenue Multiple: 2.2x
Payment Terms: Cash

SEG’s Perspective:
Macrovision, a provider of electronic licensing, copy protection and digital rights management solutions, acquires InstallShield, the leading developer of software installation tools. With InstallShield, Macrovision gains access to 69,000 software developers and countless enterprise system administrators. For InstallShield, the time was right, with revenue declining from an estimated $50 million in 2000 to $35 million in 2003. In addition to the $76 million all cash purchase price, the transaction includes a potential $20 million earnout. InstallShield’s main competitor, Wise Solutions (which InstallShield sued for stealing proprietary information), was acquired in December 2003 by Altiris for 2.3x.

Platinum Equity Holdings acquires CompuCom Systems (NASDAQ: CMPC)
Category: Computer and IT Services
Purchase Price: $141,176,000EV
Seller Revenue: $1,420,000,000
Revenue Multiple: 0.1x
Payment Terms: Cash

SEG’s Perspective:
Technology buyout firm Platinum Equity, adds to its portfolio of operating companies by picking up computer and IT consulting firm CompuCom Systems. Safeguard Scientifics, a buyout firm that owns 58% of CompuCom and has invested $67 million in the company since 1984, stands to make $128 million on the deal. The purchase price, a discount of 5% over CompuCom’s pre-announcement closing price but a multiple of EBITDA in line with the current market, did not sit well with investors, who drove CompuCom’s share price down 7% on the news. Platinum plans to take the company private and operate it as a standalone company.

QuadraMed (OTCBB: QMDC.OB) acquires Tempus Software
Category: HealthCare Software
Purchase Price: $13,220,590
Seller Revenue: $3,400,000
Revenue Multiple: 3.9x
Payment Terms: Cash, Stock

SEG’s Perspective:
QuadraMed, a healthcare information technology provider, acquires Tempus Software, a privately held developer of patient access and enterprise scheduling solutions for the healthcare industry. With Tempus, QuadraMed seeks to beef up its Hospital Information Systems offering and gain access to 350 healthcare facilities in the U.S. and Canada. Although QuadraMed lost almost $7 million on revenue of $132 million (ttm) and has posted a year-end profit only twice in the last 10 years, Tempus shareholders agreed to take $5.8 million in cash and 2,558,824 shares of QuadraMed common stock. Earlier in June, QuadraMed raised $94 million in a private placement to pay down debt.

SteelCloud (NASDAQ: SCLD) acquires V-One (Pink Sheets: VNEC)
Category: Network Security Software
Purchase Price: $16,000,000
Seller Revenue: $4,000,000
Revenue Multiple: 4.0x
Payment Terms: Stock

SEG’s Perspective:
Network security solution provider SteelCloud acquires V-One, a developer of SSL VPN security software in an all stock transaction. V-One, which claims to have spent $65 million in research and development, has failed to significantly grow revenue or reach profitability during the past 5 years. With only $28 thousand in cash remaining on its balance sheet, V-One had little choice but to sell. SteelCloud has had problems of its own in this highly competitive space, with revenue declining 42% over the last two quarters. The network security market is dominated by Cisco with growing competition from Juniper, which is capitalizing on its recent acquisition of NetScreen.


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