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Software M&A Insights

M&A valuations continued to range widely in the third quarter, reflecting disparate buyer motives and significant variations by product category. Once again the highest multiples were paid by those buyers seeking to enhance and differentiate their existing offering by adding incremental functionality. Veritas fleshes out its content management offering by acquiring KVault, a leading provider of email archiving solutions, while McAfee plugs a hole in its intrusion prevention offering by acquiring Foundstone, a provider of network vulnerability assessment software. Lower multiples were paid by buyers seeking to expand internationally, as Cognos acquires Swedish BPM provider Frango, and Open Solutions bought Datawest to enlarge its Canada footprint.

Veritas (NYSE: VRTS) acquires KVault Software
Category: E-mail content management
Purchase Price: $225,000,000
Seller Revenue: $23,000,000
Revenue Multiple: 9.8x
Payment Terms: Cash

SEG’s Perspective:
Veritas acquires KVault Software, an England based developer of e-mail content archiving. The e-mail archiving market has seen 57% CAGR over the next 5 years1, in large part due to Sarbanes-Oxley. Veritas paid an estimated 10 times trailing earnings to acquire a best-of-breed offering after an attempt to build its own e-mail storage product failed last year. An estimated 23% of KVault’s 2003 revenue came from Veritas competitor EMC, which now offers a complementary archiving product through recently acquired Legato. Veritas hoped the acquisition would generate excitement after missing 2Q04 financial projections and a 30% reduction in its market cap, but Veritas’ share price fell 4% on news of the deal because of concerns it overpaid.

McAfee (NYSE: MFE) acquires Foundstone
Category: Vulnerability Management Software
Purchase Price: $86,000,000
Seller Revenue: $15,000,000
Revenue Multiple: 5.7x
Payment Terms: Cash

SEG’s Perspective:
Returning to its roots as a security software company after a major restructuring, McAfee buys Foundstone, a network-vulnerability management company. Foundstone’s revenue growth has reportedly exceeded 100% per year. Foundstone will allow McAfee to fill a gap in its intrusion prevention offering and should yield abundant cross-sell opportunities to Foundstone’s 400 enterprise customers. Part of McAfee’s makeover, including a change in name from Network Associates, involved selling its Sniffer product line ($235 million) as well as its help desk software ($47 million), while acquiring intrusion detection companies Entercept ($120 million) and IntruVert ($100 million).


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