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Software M&A Q3 Mega Deals

By Ken Bender and Allen Cinzori, Software Equity Group, LLC

This month's deals reflect very disparate buyer motives currently driving software M&A: Hanging over Siebel like Damocles" sword since early 2004, Oracle acquires the CRM giant and a very significant customer base; eBay bets the farm on internet telephony and enters an entirely new product category with its acquisition of Skype; Manhattan Associates fleshes out its supply chain execution offering by acquiring Evant; and struggling SumTotal picks up a more profitable competitor in the hopes that one plus one makes five.

Oracle (NASDAQ: ORCL) acquires Siebel Systems (NASDAQ: SEBL)
Category: Customer Relationship Management
Purchase Price: $3,610,000,000EV
Seller Revenue: $1,320,000,000
Revenue Multiple: 2.7xEV
EBITDA: $176,140,000
EBITDA Multiple: 20.5xEV
Payment Terms: Cash, Stock

SEG's Perspective:
No surprise here. Continuing its aggressive acquisition spree, Oracle acquires Siebel Systems, a best of breed, yet ailing provider of customer relationship management (CRM) software founded by disgruntled Oracle executive Tom Siebel. A good deal for Oracle, Siebel's CRM apps and domain expertise fill a gap in Oracle's product suite, while its sizable customer base (3.4 million customers) represents a significant cross-sell opportunity and recurring maintenance revenue stream. Siebel shareholders, who had been turning the screws on Siebel's executives and board to sell, receive a 17% premium for their shares. Siebel's significant cash hoard represented 38% of the gross purchase price. Oracle has spent $17.6 billion on five deals over the last nine months.

eBay (NASDAQ: EBAY) acquires Skype
Category: VOIP / Internet Telephony
Purchase Price: $2,600,000,000
Seller Revenue: $60,000,000 Estimate1
Revenue Multiple: 43.3x Estimate
Payment Terms: Cash, Stock
1: An estimate from press release for the end of 2005

SEG's Perspective:
eBay, the gold standard in online auctions, takes an expensive, bold step into a new market by acquiring Skype, a three-year-old internet telephone company. A surprising combination, eBay plans to use Skype to supplement its core ecommerce business, to penetrate less mature markets where Skype is stronger, and to monetize Skype's solution within its installed base. With revenue less than $60 million and negative operating income, Skype's valuation is exorbitant, and eBay could pay an additional $1.5 billion to Skype shareholders as a performance based earn out. Considering the competitive nature of this market, it is unlikely Skype shareholders could have timed their exit better. Before the deal was announced, Skype was rumored to be in discussions with News Corp., Microsoft, Google and Yahoo.

Manhattan Associates (NASDAQ: MANH) acquires Evant
Category: Demand Chain Management
Purchase Price: $50,000,000
Seller Revenue: $22,000,000 Estimate
Revenue Multiple: 2.3x
Payment Terms: Cash

SEG's Perspective:
Manhattan Associates, a provider of supply chain management solutions picks-up Evant, a developer of demand chain management software. With customer demand for integration of supply and demand networks, this is a natural evolution for Manhattan Associates. Complementing its extension into demand planning and replenishment, Manhattan Associates inherits more than 60 retailers, manufacturers and wholesale distributors. Evant received funding from Kleiner Perkins Caufield & Byers, J.P. Morgan Chase & Co., Lehman Brothers, GRP Partners, and 3i.

SumTotal Systems (NASDAQ: SUMT) acquires Pathlore
Category: e-Learning Software
Purchase Price: $48,000,000
Seller Revenue: $26,600,000 Estimate
Revenue Multiple: 1.8x
Payment Terms: Cash, Stock

SEG's Perspective:
SumTotal, a leading provider of corporate e-learning software formed through the 2004 merger of Click2learn and Docent, acquires competitor Pathlore. The acquisition expands SumTotal's customer base to include state government, health care, and the rapidly growing middle-market. With considerable product overlap, don't expect significant revenue synergies. Operating synergies, however, are expected to drive $10 million in operating cash flow on an annualized basis. SumTotal lost $16 million in 2004. Look for additional deals from SumTotal within human resource management, recruitment, and performance management as it broadens its offering and staves off competition from major software vendors (i.e., IBM, Oracle and SAP) that are quickly adding e-learning functionality to their products. Offices in the UK, Netherlands, Australia and Thailand, IDS stands to benefit from IBS's large distribution network and focus on select vertical markets. At 1.0 times TTM revenue, the purchase price is consistent with the overall supply chain industry - and for mature businesses with dated technology. IDS shareholders stand to earn an additional $2.4 million assuming certain profit-based milestones are achieved.

EV: Enterprise Value = equity purchase price, plus seller's interest bearing debt, minus seller's cash & cash equivalents

Software Equity Group, L.L.C. (SEG), a mergers and acquisitions advisory firm serving the software, life science and technology sectors, prepared this report. SEG is solely responsible for its content. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to its accuracy and does not purport to be complete. This information is not to be used as the primary basis of investment decisions. For more, please visit www.softwareequity.com, or phone (858) 509-2800.


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