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



Software M&A – Acquisition Spree Continues

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

2005 saw 1707 North American software industry mergers and acquisitions, up 5% over 2004. The first quarter of 2006 shows no letup, as large and midcap software companies compete for acquisitions, which will drive top-line growth and leverage their market presence.

Allscripts Healthcare Solutions (NASDAQ: MDRX) Acquires A4 Health Systems
Category: Vertical Software (Healthcare) Purchase Price: $272,000,000 Seller Revenue: $75,000,000 (estimate) Seller EBITDA: $15,500,000 (estimate) Revenue Multiple: 3.6x (estimate) EBITDA Multiple: 17.5x (estimate) Payment Terms: Cash, Stock

SEG’s Perspective:
Allscripts, a provider of software and information solutions for physicians, acquired A4 Health, a developer of practice management and electronic health record solutions for small and medium size physician groups. Allscripts picked up a company with a 27% CAGR (organic and acquisition) since 2001 and a 21% EBITDA margin. A4 shareholders are likely thrilled. After being valued at approximately $12 million in 1999, the struggling 30-year old A4 brought in new management that engineered its current success. Since the beginning of 2005, more than 50 healthcare software companies have been acquired, 11 of them for more than $100 million. Among the more notable healthcare exits were GE/IDX ($1.4 billion), Aetna/ActiveHealth ($400 million), Wolters Kluwer/NDC ($382 million) and Nuance/Dictaphone ($357 million).

Borland Software (NASDAQ: BORL) Acquires Segue Software (NASDAQ: SEGU)
Category: Developer Tools/Utilities
Purchase Price: $85,510,000 EV
Seller Revenue: $36,440,000
Seller EBITDA: $3,350,000
Revenue Multiple: 2.3x EV
EBITDA Multiple: 25.5x EV
Payment Terms: Cash

SEG’s Perspective:
Amid mounting financial losses, Borland Software, a provider of application lifecycle management, acquired Segue Software, developer of software quality and testing solutions. With its integrated development environment (IDE) facing growing competition from open source software tools (Eclipse Foundation), Borland decided to divest its IDE product line (estimated to be worth between $60 and $100 million) and focus on IT lifecycle management. Segue will help both functionally and financially. For 2005, Borland posted a $28.4 million net loss (down from an $11.3 million profit) on a 10.3% decline in revenue while Segue posted a $2.9 million net profit on a 10.0% increase in revenue. The purchase price represents a 25% premium to Segue's pre-announced closing share price. With $175 million in cash and no debt, Borland has the resources to make strategic acquisitions while it competes against the likes of Mercury Interactive, Compuware, IBM and Serena.

Infor Global Solutions Acquires Datastream (Pink Sheets: DSTM)
Category: Asset Management Software
Purchase Price: $147,037,000 EV
Seller Revenue: $101,620,000
EBITDA: $12,460,000
Revenue Multiple: 1.4x EV
EBITDA Multiple: 11.8x EV
Payment Terms: Cash

SEG’s Perspective:
Venture capital backed Infor (formerly Agilisys), provider of enterprise software primarily to the manufacturing vertical, acquired Datastream, a developer of software that helps manage capital assets such as factories, truck fleets and machinery. Infor and its primary investor Golden Gate Capital have been on an acquisition spree in the manufacturing vertical where software consolidation has been most visible. With public market valuations for manufacturing software providers well below the overall industry, Infor has been able to acquire customers relatively cheap. Since 2005, Infor and Golden Gate have acquired five profitable software businesses, most notably Mapics (1.9x EV) and GEAC (1.8x EV), to gain customers and scale. As for Datastream, the purchase price represents a 14% premium to its pre-announced closing share price. Datastream's long-term investors should be pleased. In December 2001 the company was offered $96.6 million EV from competitor MRO Software at a valuation of 1.1x EV TTM revenue.

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