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Software M&A - Q4 Insights

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

The fourth quarter ended on a high note with some financial and very strategic deals, several of which signal a shift in buyer thinking. Valuations continued to improve, with a few deals priced at higher multiples than we've seen for some time. Here's an analysis of five of Q4's most interesting acquisitions.

Silver Lake Partners acquires Serena Software (NASDAQ: SRNA)
Category: Enterprise Systems Management
Purchase Price: $1,056,000,000EV
Seller Revenue: $251,400,000
Revenue Multiple: 4.2xEV
EBITDA: $90,260,000
EBITDA Multiple: 11.7xEV
Payment Terms: Cash

SEG's Perspective:
Having “reportedly” performed a thorough market evaluation considering strategic and private equity buyer alternatives, Serena Software, a leading provider of enterprise systems management, opts for private equity selling to Silver Lake Partners, an aggressive private equity shop that recently led the $11B acquisition of Sungard, and before that, the $2B acquisition of UGS. Silver Lake will lever up Serena with approximately $675 million of secured and unsecured debt, yielding a mere $350 million cash cost to Silver Lake. Serena shareholders are quite suspect, questioning management’s justification for going private and the valuation. While the $24 per share purchase price represents a paltry 5% premium over the five day trading average, it is highly likely this was due to speculation about the deal by investors which caused a run in the stock. The purchase price represents a 21% premium over the 60 day average. 

Epicor (NASDAQ: EPIC) acquires CRS Retail Systems
Category: Retail Management Software
Purchase Price: $121,000,000
Seller Revenue: $60,000,000 (estimate)
Revenue Multiple: 2.0x
EBITDA Multiple: N/A
Payment Terms: Cash

SEG's Perspective:
Epicor, a leading provider of enterprise solutions to the midmarket, picks up CRS Retail, a premier provider of merchandising and point-of-sale software to the retail industry. CRS’s POS platform strengthens Epicor’s back office and retail supply chain offering, giving the ISV a complete end-to-end retail solution. Additionally, Epicor inherits a strong customer base of approximately 140 customers worldwide. Key to this acquisition is CRS’s .NET technology strategy, which fits nicely within .NET centric Epicor. Had CRS written in JAVA, a deal would have been unlikely. Epicor acquired CRS from Accel-KKR, a private equity firm that purchased a majority interest in CRS in October 2002 for $45 million. Accel-KKR has been busy of late. In October 2005, the firm announced the sale of Alias to Autodesk for $182 million. Accel-KKR bought Alias from Silicon Graphics in April 2005 for $57.5 million. 

Blackboard (NASDAQ: BBBB) acquires WebCT
Category: Education
Purchase Price: $154,000,000EV
Seller Revenue: $43,000,000
Revenue Multiple: 3.6xEV
EBITDA Multiple: N/A
Payment Terms: Cash

SEG's Perspective:
Blackboard, a leading provider of enterprise software to the education industry, acquires its largest competitor and strengthens its foothold within the education market with the acquisition of WebCT, a provider of course management solutions to colleges and universities. At 3.6 times revenue, this is a rich deal for a competitive buyout. However, the 1,430 unique higher-education customers Blackboard gains should offer some solace, especially since Blackboard is pushing products outside course management. WebCT’s international success was also a major motivator. Industry insiders speculate that there was other interest in WebCT, which may have sparked Blackboard’s fears that WebCT could fall in the hands of a better capitalized entity. Blackboard intends to finance the transaction with $70 million in senior secured debt and $84 million in cash. This deal follows other 2005 eLearning deals: Saba/Centra, Saba/THINQ, WebEx/Intranets.com, SumTotal/Pathlore, and Kaplan/STT.

IBM (NYSE: IBM) acquires Micromuse (NASDAQ: MUSE)
Category: Network Management Software 
Purchase Price: $723,920,000EV
Seller Revenue: $160,760,000
Revenue Multiple: 4.5xEV
EBITDA: $16,810,000
EBITDA Multiple: 43.1xEV
Payment Terms: Cash

SEG's Perspective:
Its fifteenth acquisition, IBM continues its 2005 buying spree acquiring Micromuse, a provider of network management software to manage converged networks carrying data, voice and video traffic. This is a pure product extension play for IBM, which will integrate Micromuse’s network management solutions with its rapidly growing Tivoli unit, strengthening Tivoli’s IT service management capabilities. IBM also picks up nice security and performance management stemming from Micromuse’s recent $16.2 million acquisition of GuardedNet and $33 million acquisition of Quallaby. Micromuse’s 1,800 customers, which include only 500 joint customers, should also provide a nice cross sell opportunity. IBM’s $10 per share offer represents a 33% premium above Micromuse’s 5-day trading average. 

TA Associates acquires Intuit’s Information Technology
Category: IT Asset Management
Purchase Price: $190,000,000EV
Seller Revenue: $56,974,000
Revenue Multiple: 3.3xEV
EBITDA: $23,000,000 (estimate)
EBITDA Multiple: 8.2xEV
Payment Terms: Cash

SEG's Perspective:
Intuit continues to clean house. Four years, and seven acquisitions into its “right for my business” strategy, Intuit sells its Information Technology Solutions (ITS) unit (formerly Blue Ocean Software), a leading provider of IT help desk and asset management software to small and medium-sized business, to TA Associates, a reputable private equity firm. Ten months earlier, Intuit sold its Public Sector Solutions division (formerly American Fundware) and Intuit’s third “right for my business” acquisition, to Kintera. Intuit management believed ITS would require greater focus and investment to be accretive. ITS’s trailing-twelve-month revenue grew 28% in 2004, but only 8% in 2005. Pretax profit margins declined from 42% to 36% during the same period. TA’s purchase price of 8x times EBITDA is no surprise as private equity buyers typically offer 6x to 8x times. Intuit paid $170 million for Blue Ocean in 2002.

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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