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



Software M&A – Robust Projections for 2007

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

M&A momentum continued to build in November, virtually assuring total M&A deal volume and dollars spent in 2006 will beat 2005's tally. With 2007 IT spending growth projected to mimic the 6%-7% range of 2006, it's expected that M&A activity will remain robust throughout the coming year as buyers look to diversify into new product areas, verticals, and markets.

Citrix (NASDAQ: CTXS) Acquires Orbital Data Corporation
Category: WAN Optimization Software
Purchase Price: $50,000,000
Revenue: $4,000,000 (estimate)
Revenue Multiple: 12.5x (estimate)
Payment Terms: Cash

SEG’s Perspective:
In its fourth acquisition of the year, Citrix Systems, a network infrastructure and access company, acquires Orbital Data, a developer of WAN optimization solutions. Orbital’s products accelerate the movement of application data between corporate data centers and remote/branch offices over Wide Area Networks, functionality vital to the continued growth of Citrix. IDC forecasts the WAN optimization market will grow from $315 million in 2005 to $610 million in 2009 making it one of the fast-growing categories within software. Still, the opportunity does not come without competition as Cisco, Juniper, Packateer, Riverbed, and Expand Networks are all intently focused on the space. While the 12.5x purchase price may seem exorbitant, Citrix is expecting Orbital to generate revenue of approximately $12 million in CY2007, a multiple of 4.2x, which is in line with similar high-growth companies.

Category: Asset Management Software
Purchase Price: $585,900,000EV
Revenue: $222,100,000
EBITDA: $33,680,000
Revenue Multiple: 2.6xEV
EBITDA Multiple: 17.4xEV
Payment Terms: Cash

SEG’s Perspective:
Serial shopper IBM acquires MRO, a leading provider of physical and IT asset management software. The acquisition of MRO, an applications company, represents a noteworthy departure by IBM from its stated preference for infrastructure software companies. While MRO is best known for its physical asset management software, IBM was attracted by MRO’s recent push into IT asset management and MRO’s fit with IBM’s Tivoli product line. With large enterprise migrating toward SOA, IT asset management has become a must-have for many of the large software companies. IBM rival HP has acquired heavily in this product category, acquiring Peregrine and Mercury Interactive to complement its OpenView platform. IBM’s purchase price represents a 19% premium to MRO’s closing stock price prior to announcement.

Illinois Tool Works (NYSE: ITW) Acquires Click Commerce (NASDAQ: CKCM)
Category: Supply Chain Management & Logistics Software
Purchase Price: $285,720,000EV
Revenue: $73,870,000
EBITDA: $24,640,000
Revenue Multiple: 3.9xEV
EBITDA Multiple: 11.6xEV
Payment Terms: Cash

SEG’s Perspective:
Illinois Tool Works (ITW), a Fortune 200 diversified manufacturing company with over $13 billion in revenue, thinks way outside the box and acquires its first software company, Click Commerce, developer of supply and demand chain management software. ITW had to deviate from the valuation model1 it has used in the past to acquire Click Commerce for 4.0x TTM revenue (Equity value). ITW is no stranger to acquisitions (ITW owns 700 companies and acquires 30 to 40 companies a year) and is hoping to sell Click Commerce’s products into its significant manufacturing and warehousing installed base. The supply chain management software category had the lowest M&A multiple over the last twelve months (1.2x equity value to revenue) making the 27% premium ITW paid over Click Commerce’s closing stock price prior to announcement - a welcome outcome for Click Commerce shareholders.
1 Over the last twelve months ITW has spent $802 million on acquisitions for $786 million of revenue.

Vista Equity Partners Acquires Indus (NASDAQ: IINT)
Category: Enterprise Asset Management Software
Purchase Price: $216,140,000EV
Seller Revenue: $127,300,000
Seller EBITDA: $12,070,000
Revenue Multiple: 1.7xEV
EBITDA Multiple: 17.9xEV
Payment Terms: Cash

SEG’s Perspective:
Vista Equity Partners, a $1 billion private-equity firm, acquires Indus, one of the last remaining large pure-play enterprise asset management (EAM) vendors. Vista will merge Indus with mobile workforce management provider MDSI, a Vista portfolio company acquired for $70 million in 2005. According to AMR Research, Indus, Datastream1 (1.4x*) and MRO2 (2.6x*), all acquired in 2006, represented 50% of the total EAM market based on revenue. With EAM being rolled into larger software vendor’s suites (IBM, SAP, Oracle, Infor), the time was right for Indus to exit. Indus shareholders received a 53% premium over Indus’ closing share price prior to acquisition.

Trizetto (NASDAQ: TZIX) Acquires QCSI
Category: Insurance Vertical Software
Purchase Price: $134,200,000EV
Revenue: $56,600,000
EBITDA: $9,600,000
Revenue Multiple: 2.4xEV
EBITDA Multiple: 14.0xEV
Payment Terms: Cash

SEG’s Perspective:
Trizetto, developer of information technology solutions to healthcare insurance payers, acquires QCSI, a twelve-year-old provider of SOA healthcare insurance claims management software. Together the combined company will touch the claims of 115 million health plan members. According to Frost & Sullivan, the healthcare insurance market is consolidating with six companies responsible for 80% of the U.S. billing and claims management systems market (payers only) which is supposed to reach $1.8 billion in 2006 and grow at a 4.0% CAGR (2005-2011). In 2005, QCSI acquired CDHC1 specialist MyHealthBank, a growing market that Trizetto sites as a major growth opportunity. QCSI could earn an extra $12 million provided certain financial milestones are met.
1 Consumer-Directed Healthcare

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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