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



Software M&A - A Glimpse into Q1

By Ken Bender and David Legacki, Software Equity Group, L.L.C.

The opening months of 2006 saw a continuation of the momentum that characterized the software industry in the closing months of 2005. Buyers were primarily public software companies seeking strategic acquisitions in response to market demands and competing players. High on many buyers" list were strategic acquisitions that enhanced their product offering. Cash continued its dominance as the primary form of payment. Here's an analysis of eight of the most interesting acquisitions from the first half of the quarter.

BEA Systems (NASDAQ: BEAS) Acquires Fuego
Category: Business Process Management
Purchase Price: $87,500,000
Seller Revenue: $12,500,000 (estimate)
Revenue Multiple: 7.0x (estimate)
Payment Terms: Cash

SEG’s Perspective:
The service oriented architecture (SOA) platform continues to fuel software M&A. This time it's BEA, a leading provider of application server software, acquiring Fuego, a profitable and growing business process management provider for SOA environments. The acquisition will provide key SOA technology for BEA in its fight against key competitors Oracle, IBM and Microsoft to win large distributed computing contracts while Fuego will leverage BEA's resources against its main rivals Lombardi, Pegasystems and Savvion. This is BEA's sixth acquisition since 2005, three of which aimed at bolstering its SOA offering. Companies with a stated focus on SOA management, governance or integration have commanded a premium valuation in 1Q06. While BEA's valuation for Fuego is steep, both Mercury Interactive (Systinet 4.6x* TTM revenue) and Progress Software (Actional for 4.5x*) paid well above the software industry's median valuation to gain SOA expertise.
*: Estimates
TTM: Trailing Twelve Month

Blue Coat (NASDAQ: BCSI) Acquires Permeo Technologies
Category: Security Software
Purchase Price: $60,800,000
Seller Revenue: $4,100,000 (estimate)
Revenue Multiple: 15.0x (estimate)
Payment Terms: Cash, Stock

SEG’s Perspective:
Blue Coat, a fast growing network security appliance provider, acquired Permeo, an NEC spin-off and provider of On Demand remote access and information security solutions. While Blue Coat has a strong presence at the gateway, it hasn't had an endpoint solution capable of protecting enterprises with a large number of mobile/remote workers outside the firewall. With Permeo, Blue Coat has extended into endpoint security and SSL VPN, enabling it to compete against Symantec after its recent acquisition of Sygate and Whole Security and Cisco with its NAC initiative. Permeo may be having some seller's remorse. After accepting Blue Coat stock as the predominant deal consideration, investors brutally punished Blue Coat a month after the transaction for missing its revenue and earnings projections. As of this writing the original deal, valued at $60.8 million, is worth $34.6 million.

Business Objects (NASDAQ: BOBJ) Acquires Firstlogic
Category: Data Management Software
Purchase Price: $69,000,000
Seller Revenue: $50,000,000 (estimate)
Revenue Multiple: 1.4x (estimate)
Payment Terms: Cash

SEG’s Perspective:
Business Objects, a leading provider of business intelligence (BI) and business productivity management solutions, acquired Firstlogic, a provider of data quality solutions. Founded in 1984, Firstlogic initially focused on postal data but has since broadened its offering to include software that cleanses and standardizes data while monitoring and analyzing the quality of database information. The deal is yet another in the increasingly competitive BI category, as BI vendors look to capitalize on anticipated IT spending increases in this area. Informatica acquired Firstlogic competitor Similarity Systems two weeks before this acquisition and both BI providers will compete with IBM's newly acquired Ascential subsidiary (which acquired Vality in 2002). Business Objects is paying approximately 1.4x trailing-twelve-month revenue for Firstlogic, versus the more than 5.0x Informatica paid for Similarity. The disconnect between the two valuations may have to do with Firstlogic's reported slower growth rate compared to Similarity. Still, the $69 million Firstlogic will receive is a nice premium to the $50 million the company was offered by Pitney Bowes in 2005.

CA (NYSE: CA) Acquires Wily Technology
Category: Application Performance Management
Purchase Price: $375,000,000
Seller Revenue: $53,000,000 (estimate)
Revenue Multiple: 7.1x (estimate)
Payment Terms: Cash

SEG’s Perspective:
Continuing its growth strategy through acquisition, CA, one of the largest IT management software companies, acquired Wily, a provider of enterprise application performance management (APM) solutions. Wily's focus on enterprise web application management is an important complement to CA's IT management vision of integrating the management of systems, security, storage, applications and the like. CA's leverage and resources will better enable Wily to compete against larger rivals Mercury, Quest and Symantec (via Veritas). Not that Wily needed help. The company was growing at 75% before the acquisition, which is estimated to be three times as fast as the overall growth of its market. In 2005, CA acquired six companies with combined revenue of $203 million* for $745 million*.
*: Estimates

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