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| Home - Software M&A Review - Nov 05 Issue |
Software M&A - Robust Q3 Deals Despite Katrina
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 Virtually every software category of the SEG-100 chalked up higher revenue and earnings growth in 3Q05. On a TTM basis, revenue growth was strongest in the internet tools (+29.5%) and storage management (+28.9%) categories, with supply chain management (-4.4%) and enterprise system management (5.0%) lagging far behind. Enterprise system management providers, led by BMC and Computer Associates, increased TTM earnings 431.9%, leading all categories, while customer relationship management realized a 91.0% decline in TTM earnings (Figure 5).
The markets continued to favor the very largest software vendors (Figure 6). Companies with TTM revenue in excess of $1 billion posted a median 3.6x EV/Revenue ratio compared to a median 1.5x ratio for software companies with revenues less than $200 million. Despite the renewed emphasis on revenue growth, investors continued to reward profitability. The median enterprise valuation of SEG-100 companies posting profits in 3Q05 was 2.9x, but only 1.3x for those reporting losses (Figure 7).
Public software company revenue growth in the last quarter of 2005 will be disappointing or encouraging, depending upon which IT spending forecast one relies. CIO Magazine's Tech PollTM, which surveys CIOs in a broad cross section of industries, projected a 9.3% increase in IT budgets in the coming 12 months. According to the survey, much of the spending will be focused on storage management systems and infrastructure software.
Goldman Sachs" September IT spending survey, which we've found to be most reliable, was less optimistic. According to the survey, 2005 capital budgets (equipment and software) will grow modestly compared to overall IT spending budgets (including headcount and services).
The IPO market continued to be unappealing or unavailable to most software companies, with many candidates favoring an M&A path to liquidity. Taleo (NASDAQ: TLEO), a provider of enterprise workforce management software, and Unica Corporation, a developer of customer relationship management software, were the lone industry IPOs in 3Q05. Taleo, which opened at $14.00, closed its first day at $13.60. Unica fared better on its first day of trading, opening at $10.21 and closing the day at $11.71, but retreated and closed the quarter at $10.98. Most IPO candidates chose to wait on the sideline or exit by acquisition.
Mergers and Acquisitions: The Numbers
Third quarter U.S. merger and acquisition activity all but assured 2005 will post increases in both deal volume and deal value for the third consecutive year. Domestic M&A activity across all industry sectors in 3Q05 totaled 2,515 transactions aggregating $215 billion (Figure 8).
Total deal volume in 3Q05 decreased 9.1% from 2Q05, while total M&A dollars spent in 3Q05 decreased 19.3% from the prior quarter. Despite the quarter over quarter decrease; at the current run rate, 2005 U.S. M&A activity is on track to increase 20.1% in aggregate dollar value, although deal volume will increase by only 1.4% compared to 2004.
Software mergers and acquisitions continued to lead all other industry sectors with 472 transactions in 3Q05 - a 15.1% increase over the number of software deals in 2Q05 (Figure 9). Buyers dug deep, spending an aggregate of $22.8 billion on software company acquisitions in 3Q05, an increase of 65.2% relative to 2Q05. (Figure 10)
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