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Software M&A - 3Q Beats Entire 1H Spend

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

As in quarters past, software led all other industry sectors in total deal activity for 3Q06. Though the total number of software M&A transactions remained relatively flat (438 total deals) compared to 1Q06 and 2Q06, there was an astonishing $30.5 billion spent on M&A transactions in 3Q06, more than the entire first half of 2006 ($25.9 billion). The quarter's impressive total was boosted by six mega-deals, which we define as an equity value purchase price of $1 billion or more. The median valuation of software industry M&A transactions (based on TTM revenue and the seller's equity value) in 3Q06 was 2.7x, on par with 3Q05 (2.7x) and an increase over 2Q06 (2.3x), which we indicated last quarter was an aberration.

Listed below are some of notable software M&A deals.

Corel (NASDAQ: CREL) Acquires InterVideo (NASDAQ: IVII)
Category: Digital Video & Audio Software
Purchase Price: $91,120,000EV
Revenue: $120,760,000
EBITDA: $12,500,000
Revenue Multiple: 0.8xEV
EBITDA Multiple: 7.3xEV
Payment Terms: Cash

SEG's Perspective:
Fresh off its April IPO, Corel, a provider of graphics and publishing software, acquires InterVideo, a developer of digital video and audio software. Financially, the deal was too sweet for Corel to pass up. InterVideo was generating positive EBITDA and had grown revenue 37% over the last twelve months (partly due to its Ulead acquisition) and was expected to grow another 17% from FY06 to FY07. Additionally, 54% of Corel's purchase price was funded with cash on InterVideo's balance sheet. Strategically, InterVideo diversifies Corel's product set into the highly opportune digital media software market and away from its core office software market, where Microsoft Office and Apple's iWork have left Corel far behind. Corel is looking to excite investors after a lackluster re-entry into the public markets. Prior to its InterVideo acquisition, Corel's stock price was trading 38% below that of its IPO price.

Kronos (NASDAQ: KRON) Acquires Unicru
Category: Human Resources & Workforce Management
Purchase Price: $150,000,000
Revenue: $42,500,000
EBITDA: $12,500,000
Revenue Multiple: 3.5x
Payment Terms: Cash

SEG's Perspective:
Kronos, a provider of workforce time and attendance solutions, acquires Unicru, a developer of on-demand (SaaS) hiring management and workforce analytic solutions. While Kronos has traditionally focused on labor budgeting, forecasting, scheduling, and time and attendance, Unicru will add new functionality for the front end of the workforce management lifecycle, which includes application selection and hiring. M&A in Human Resource and Workforce Management over the last twelve months has been robust, garnering a 2.8x multiple of revenue. The premium attributed to Unicru could be the result of its historical double-digit revenue growth combined with its SaaS delivery model, which has derived a premium across all software industry sectors. Unicru, combined with Kronos' resources, puts pressure on competing SaaS hiring management providers Kenexa (NASDAQ: KNXA) and Taleo (NASDAQ: TLEO).

Open Text (NASDAQ: OTEX) Acquires Hummingbird (NASDAQ: HUMC)
Category: Content Management Software
Purchase Price: $389,397,000EV
Revenue: $258,490,000
EBITDA: $36,900,000
Revenue Multiple: 1.5xEV
EBITDA Multiple: 10.6xEV
Payment Terms: Cash

SEG's Perspective:
Open Text, a leading provider of enterprise content management (ECM) software solutions, acquires Hummingbird, a Canadian-based provider of content and document management software. By acquiring Hummingbird, Open Text better positions itself to compete against content management behemoths EMC/Documentum and the recently formed IBM/FileNet (2.4xEV TTM). According to Gartner, Open Text picks up a company with the top-five market share, and one of the highest growth rates among leading vendors at 20.4%, nearly double the rate of the content management software market1. Open Text trumped Symphony's May 2006 bid of $26.75 per share by offering a 21% premium over Hummingbird's pre-announcement closing stock price (4.1% over Symphony's bid), thus, requiring Hummingbird to pay Symphony an $11.7 million break-up fee.

The Sage Group (London: SGE) Acquires Emdeon Practice Services (EPS)
Category: Healthcare Management Software
Purchase Price: $566,973,000EV
Revenue: $305,539,000
EBITDA: $39,090,000
Revenue Multiple: 1.9xEV
EBITDA Multiple: 14.5xEV
Payment Terms: Cash

SEG's Perspective:
The Sage Group, a global provider of accounting and payroll software for small and mid-size businesses, acquires Emdeon Practice Services (formerly WebMD), a leading provider of administrative and financial management software for the healthcare market. With its third acquisition in 2006, Sage significantly enhances its market penetration in the practice management arena, which is expected to grow to $8.9 billion by 2008, a 5.4% CAGR from 2005-2008. The acquisition fits into Sage's strategy of consolidating small to mid-size enterprises (SME) by bringing over 200,000 doctor practices, 96% of which have less than 10 doctors. Equally important, Sage gains domain expertise needed to compete against larger players; GE, 3M, and Cerner - all laser focused on the SME practice management sector. With 90% renewal rates and 35% recurring maintenance revenue, EPS provides reliable cash flow and up-sell opportunities. Earlier this year, Sage sought to acquire Visma, a developer of ERP systems for small and mid-size businesses, but was outbid by private equity firm HG Capital.

SurfControl (LSE: SRF) Acquires BlackSpider
Category: Email and Content Filtering Software
Purchase Price: $37,880,000
Revenue: $7,600,000
Revenue Multiple: 5.0x
Payment Terms: Cash

SEG's Perspective:
SurfControl, a provider of web filtering and policy management software, acquires BlackSpider, an on-demand (SaaS) developer of email security and content filtering software. BlackSpider brings 1,200 subscription-based customers, 500,000 users and a 122% revenue growth rate over the last twelve months. Despite the impressive recurring revenue growth rate, BlackSpider has failed to post a pre-tax profit over the last two years. According to Gartner, the SaaS email security market is one of the fastest growing security segments and reached $200 million in 2005. With over $300 million in cash and no debt on its balance sheet, look for SurfControl's main rival, Websense, to make a similar market extension acquisition.

1. Gartner Dataquest, "Market Share: Enterprise Content Management Software, Worldwide, 2003-2005," by Tom Eid, May 18, 2006



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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