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



Software M&A-Q4 Review

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

Buyers in the communications and networking arenas were especially active, seeking to add new markets, new customers and new, differentiating technology. Cisco acquired privately-held dynamicsoft to attract more broadband carriers, and Harris Corporation bought Encoda to gain a greater foothold in the broadcast media sector. Computer Associates bolstered its identity and access management technology with Netegrity, while ADC Telecom unloaded its Metrica wireless service assurance unit to privately-held WatchMark-Comnitel. On the red-hot web music download front, Yahoo got serious about competing with iTunes and others by picking up privately-held MusicMatch.

Best Software acquires Federal Liaison Services
Category: Accounting/Financial Software
Purchase Price $18,010,960
Seller Revenue $8,834,119
Revenue Multiple 2.0x
Payment Terms: Cash, Stock
SEG’s Perspective:
Best Software, a US subsidiary of UK-based Sage Group that provides solutions for mid-sized and small businesses, acquires Federal Liaison Services (FLS), a provider of software and services to employers for government reporting and compliance. FLS introduced the payroll industry’s first web-based, hosted employer compliance solution, and best had been a reseller of FLS products. FLS will complement Best’s outsourced payroll services by enabling it to provide a complete tax service solution and compete more effectively with ADP and Ceridian. (NA

Cerner (NASDAQ: CERN) acquires VitalWorks Medical Division
Category: Medical Practice Management Software
Purchase Price $100,000,000
Seller Revenue $70,000,000
Revenue Multiple 1.4x
Payment Terms: Cash
SEG’s Perspective:
Cerner, a leading provider of healthcare information technology, acquires Vital Works’ Medical Division (VMD), a provider of physician practice management and medical records software. Cerner, an $840 million company which has traditionally targeted hospital and clinics, will gain access to some 30,000 physicians who are VitalWorks customers. The market for physician office management and clinical systems was estimated by Foreter Research to be $1.7 billion in 2003. 71% ($50 million) of VMD’s total revenue is recurring, giving Cerner a significant hedge should integration complications arise. The acquisition is expected to close in the first quarter and be accretive in 2005.

Cisco (NASDAQ: CSCO) acquires dynamicsoft
Category: Wireless Software
Purchase Price: $55,000,000
Seller Revenue: $16,700,000
Revenue Multiple: 303x
Payment Terms: Stock, Cash
SEG’s Perspective:
Cisco Systems, continuing to target broadband service providers, acquires dynamicsoft, a developer of carrier class infrastructure solutions. Dynamicsoft products enable service providers to deploy premium integrated communications services, including instant messaging, text chat and email. Bringing new revenue generating solutions to the carrier market will help Cisco stave off stiff competition from voice technology veterans Nortel Networks, Lucent Technologies, Alcatel and Siemens. The all cash purchase price, which includes the assumption of $3.8 million in debt, was a relative bargain for Cisco, which often pays hefty acquisition multiples. Since 1999/2000, dynamicsoft received $64 million in funding from an array of first tier VCs.

Computer Associates (NYSE: CA) acquires Netegrity (NASDAQ: NETE)
Category: Identity Management Software
Purchase Price: $340,000,000EV*
Seller Revenue: $90,260,000
Revenue Multiple: 3.8x
Payment Terms: Cash
SEG’s Perspective:
Computer Associates bolsters its identity and access management offering by acquiring Netegrity, the leader in extranet access management. According to IDC, CA was the market leader in identity and access management in 2003 (with a 15% market share and $300 million in revenue), while Netegrity occupied fifth place. The purchase price expectedly surpassed Netegrity’s market cap on the day of announcement, boosted by a competing bid from Oracle and strong M&A demand for security software providers. Netegrity brings CA a sizable base of enterprise customers, including big banks, telcos, major manufacturers and health care providers. Seeking to capitalize on perceived dissatisfaction with the merger among Netegrity customers, Hewlett-Packard offered them a discount of 20 to 80 percent off its OpenView Identity Management Solution.

Harris Corporation (NYSE: HRS) acquires Encoda Systems
Category: Enterprise Resource Planning
Purchase Price: $340,000,000
Seller Revenue: $124,000,000
Revenue Multiple: 2.7x
Payment Terms: Cash
SEG’s Perspective:
Communications technology behemoth Harris Corporation acquires Encoda Systems, a developer of enterprise software solutions for the broadcast media industry, including television, radio, cable, and satellite broadcasting companies. Encoda serves some 600 customers in 34 countries and is owned by Thomas H. Lee Partners, Blackstone Capital Partners and others. The acquisition will leverage Harris’ existing broadcast communications business and expand its market reach into new cable and satellite markets. Harris spent a significant portion of the $563 million in cash on its balance sheet to acquire Encoda.

Kintera (NASDAQ: KNTA acquires American Fundware
Category: Nonprofit Accounting Software
Purchase Price $11,000,000
Seller Revenue $12,800,000
Revenue Multiple 0.9x
Payment Terms Cash
SEG’s Perspective:
Kintera, the highly acquisitive provider of software as a service to nonprofits, acquires American Fundware, a subsidiary of Intuit that develops accounting software for nonprofit organizations and governments. Intuit, which acquired American Fundware in 2002 for $23.3 million, cited lack of sales growth as the reason for shedding the unit. Kintera picks up, for less than 1.0x, the leading financial management solution for nonprofits and significantly enhances both its product suite and market presence. Electing to preserve the $47 million in cash on its balance sheet, Kintera sold 2.5 million shares of common stock in a private placement to finance the $11 million purchase. This is Kintera’s 12th acquisition since September 2003.


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