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Software M&A – Highest Ever Deals in 2006

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

2006 established new benchmarks for domestic M&A activity across all industry sectors, beating the aggregate M&A purchase price and M&A deal volume records set in 1999 and 2000, respectively. 4Q06 chalked up 3,116 transactions, aggregating $471.7 billion, bringing the tally for domestic M&A activity across all industry sectors to a remarkable 11,701 transactions totaling $1.47 trillion. It wasn’t merely a national phenomenon. According to Dealogic, the total value of announced acquisitions worldwide reached $3.46 trillion for the year, beating 2000’s record of $3.33 trillion. Dow Jones estimates technology mergers and acquisitions worldwide were $215 billion in 2006.

In North America, there were 1,726 mergers and acquisitions in the software and IT services sector, up slightly from 1,707 transactions in 2005. Although the sector remained a major contributor to overall domestic deal volume, software and IT services comprised a smaller percentage (14%) of total transactions in 2006 than in prior years. However, the modest increase in year-over-year software M&A transactions was overshadowed by an impressive 11% increase in aggregate software M&A spending. Software deals fetched $81.9 billion in 2006, compared to an aggregate of $73.8 billion in 2005.

Below are 4Q06’s most notable deals.

Bond International Software (London AIM: BDI) Acquires Gowi Group
Category: Human Resource Management
Purchase Price: $17,436,000
Revenue: $16,652,000
Revenue Multiple: 1.0x
Payment Terms: Cash, Stock

SEG’s Perspective:
In its largest acquisition to date, Bond Software, provider of human resource management software, acquires Gowi, provider of HR, payroll and content management solutions primarily to the public, publishing and education verticals. With fierce competition among HR software companies, Bond will be able to leverage Gowi’s domain expertise in key verticals. Gowi was profitable and had grown significantly through acquisitions, two of which were made in 2006 prior to being acquired by Bond. The HR and workforce management software sector was a high flying M&A category in 2005, but cooled off in 2006, posting a median M&A multiple of 1.6x.

DataPath Acquires Industrial Logic Corporation
Category: Network Management Software
Purchase Price: $21,000,000
Revenue: $13,000,000 (estimate)
Revenue Multiple: 1.6x (estimate)
Payment Terms: Cash

SEG’s Perspective:
Privately held DataPath, a systems integrator of satellite and wireless communications networks, acquires ILC, developer of network management software. DataPath will use ILC’s software solutions to differentiate DataPath in their primary market of Aerospace and Defense. Equally important to ILC’s strong relationships with the Army, Navy and FEMA, is ILC’s high margin software portfolio. On top of the purchase price, DataPath has agreed to retire $5 million in ILC debt, bringing the enterprise value of ILC to approximately $26 million.

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.

Insight Venture Partners Acquires Netsmart (NASDAQ: NTST)
Category: Vertical – Healthcare Software
Purchase Price: $108,750,000EV
Revenue: $57,810,000
EBITDA: $9,130,000
Revenue Multiple: 1.9x EV
EBITDA Multiple: 11.9x EV
Payment Terms: Cash

SEG’s Perspective:
Insight Venture Partners, an investment firm with a $2 billion technology fund, along with Bessemer Venture partners, acquires Netsmart, developer of solutions for the behavioral and public health care fields. While serving a niche market within healthcare, Netsmart quietly produced stellar financials. The company had been profitable for 33 consecutive quarters, grew TTM revenue 85% with the help of four acquisitions over the last two years and had analysts predicting 16% revenue growth along with 10% EPS growth for CY07 compared to CY06. Still, the company failed to excite investors as a public company making it a prime leveraged buyout opportunity. Insight and Bessemer paid a modest 12% premium to Netsmart’s closing stock price prior to announcement.

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