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Has the Software AG acquisition of webMethods made it...

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HARDER to sell to webMethods customers?

Software M&A Insights

By Ken Bender, Managing Director and David Legacki, Associate, Software Equity Group, LLC

The opening months of 2007 saw a continuation of the momentum that characterized the software industry in the closing months of 2006. Buyers sought strategic acquisitions in response to market demands and competing players. Deals highlighted this month include Business Objects’ acquisition of Cartesis to stay competitive against a combined Oracle/Hyperion; CAE’s acquisition of Engenuity in the aerospace and defense vertical.

CheckFree fleshes out its suite of financial applications with its acquisition of Corrilian; Equifax enters a new market with its acquisition of Talx, an HR management solution; Infor continues its acquisition spree, this time it’s Workbrain in the workforce management category; Sage acquires a ‘plug-in’ to its ERP software with Snowdrop; Software AG doubles its North American revenue by acquiring WebMethods; Tibco acquires business intelligence provider Spotfire, and Websense takes out its biggest competitor while increasing subscription seats to 64%.

Sign up for Software Equity Group’s complementary (http://www.softwareequity.com) 1Q07 M&A Report, which provides a comprehensive analysis of deals, valuations and trends in 1Q07.

Business Objects (NASDAQ: BOBJ) acquires Cartesis
Category: Corporate Performance Management Software (CPM)
Purchase Price: $300,000,000
Seller Revenue: $125,000,000
Revenue Multiple: 2.4x
Payment Terms: Cash

SEG’s Perspective:
Business Objects, one of the largest pure play business intelligence providers, acquires Cartesis, developer of enterprise performance management software. Cartesis extends Business Objects’ existing Business Intelligence (BI) platform with financial reporting and consolidation, as well as governance, IRR and compliance management. The acquisition follows closely after Oracle’s acquisition of Hyperion (3.4x1, 17.1x2), arguably the leader in Cartesis’ core CPM market. Cartesis was acquired from PricewaterhouseCoopers in 2004 by a group of private equity buyers which grew Cartesis’ revenue to 43% in 2005 and 28% in 2006 with the help of two acquisitions (Advance Info Systems, INEA). The acquisition is expected to be neutral to slightly accretive to earnings in the year following closing.

1: Enterprise Value/TTM Revenue
2: Enterprise Value/TTM EBITDA

CAE (NYSE: CGT) acquires Engenuity Technologies (TSX: EGY)
Category: Simulation and Visualization Software
Purchase Price: $19,763,693EV
Seller Revenue: $11,161,800
Revenue Multiple: 1.8xEV
Payment Terms: Cash

SEG’s Perspective:
CAE, a $1 billion provider of simulation equipment and services for the aviation and defense industries, acquires Engenuity Technologies, a developer of simulation and visualization software for the aerospace and defense vertical. Engenuity’s ability to leverage CAE’s modeling, simulation and training products in the competitive aerospace and defense vertical garnered a 14% purchase price premium1 despite being unprofitable and posting a 6% decline in revenue over the last three years. Initial investors in Engenuity will remain dissatisfied. CAE’s purchase price is 76% less than Engenuity’s 1999 IPO price.

1: The purchase price represents a premium of 14% based on the weighted volume average closing price for Engenuity over its last 20 trading days.

CheckFree (NASDAQ: CKFR) acquires Corillian (NASDAQ: CORI)
Category: Internet banking software and services
Purchase Price: $219,780,000EV
Seller Revenue: $60,960,000
Seller EBITDA: $2,250,000
Revenue Multiple: 3.6xEV
EBITDA Multiple: 97.7xEV
Payment Terms: Cash

SEG’s Perspective:
Financial software and services provider CheckFree acquires Corillian, a developer of online banking, payment and security solutions to the financial services industry. The acquisition, CheckFree’s second in 2007, brings together Corillian’s online banking platform and suite of financial applications, and CheckFree’s electronic billing, payment and online transaction services. With Corillian, CheckFree is better positioned to provide an integrated electronic billing and payment platform. Despite doubling revenue since its IPO in 2000, Corillian has struggled to remain profitable, posting losses in four of the last seven years and disappointing investors. Even with CheckFree’s 49% premium, the purchase price was 36% under Corillian’s IPO price. CheckFree recently acquired Carreker for $169 million (1.5xEV TTM revenue), a provider of payments technology and consulting services to the financial services industry. The two acquisitions follow Intuit’s acquisition of banking software provider Digital Insight ($1.26EV billion, 5.3xEV TTM revenue) in late 2006.

Equifax (NYSE: EFX) acquires TALX (NASDAQ: TALX)
Category: Human Resource / Payroll Solutions
Purchase Price: $1,397,622,000EV
Seller Revenue: $256,830,000
Seller EBITDA: $89,710,000
Revenue Multiple: 5.4xEV
EBITDA Multiple: 15.6xEV
Payment Terms: Cash and Stock

SEG’s Perspective:
Equifax, one of the nation’s largest credit reporting agencies, acquires TALX, a provider of unemployment tax management services, and automated employment and income verification services. Talx brings Equifax 9,000 customers, a new market, and proprietary database of 142 million employment records to complement Equifax’s stable, recurring, transaction-based revenue model. Equally compelling, Talx has grown revenue 29% and earnings 55% over the last three years, with analysts forecasting 13% revenue growth in its next fiscal year1. According to Equifax, the purchase price represents an 11.0x multiple of CY07 EBITDA2 and will be accretive to Equifax’s EPS in 2008.

1: Talx next fiscal year ends March 2008
2: Pro forma for synergy opportunities

Infor acquires Workbrain (TSX: WB)
Category: Workforce Management
Purchase Price: $180,750,000EV
Revenue (TTM): $96,509,000
EBITDA (TTM): ($185,000)
Revenue Multiple: 1.9xEV
Payment Terms: Cash

SEG’s Perspective:
Infor, the world’s largest private software company and third largest ERP provider, acquires Workbrain, a Canada-based developer of web-based workforce management solutions for large enterprises. While Infor had earlier aggregated a broad array of human resource management solutions from acquisitions of SSA Global and Geac, it did not have a foothold in workforce planning, scheduling, time & attendance and intelligence, all core components of Workbrain’s product portfolio. Until recently, Workbrain had been a high growth company, growing new license revenue 58% in CY04 and 41% in CY05, but stalled badly, reporting new license revenue growth of only 2% in CY06. The arrested growth combined with Workbrain’s $2.5 million net income loss made its investors more receptive to Infor’s 26% premium1. Infor’s acquisition of Workbrain positions it to compete head-on with Kronos, which is being acquired by private equity firm Hellman & Friedman for $1.8 billion (2.9x2, 15.0x3).

1: 26% premium represents the increase over Workbrain’s closing stock price prior to announcement
2: Enterprise Value/TTM Revenue
3: Enterprise Value/TTM EBITDA

Sage (LSE: SGE) acquires Snowdrop Systems
Category: Human Resource Management
Purchase Price: $33,650,000
Revenue: $14,850,000
EBITDA: $2,180,000
Revenue Multiple: 2.3x
EBITDA Multiple: 15.4x
Payment Terms: Cash

SEG’s Perspective:

Sage, a U.K-based global supplier of business management solutions, acquires Snowdrop Systems, developer of human resources and payroll management software to over 700 mid-sized businesses in the U.K. Snowdrop will complement Sage’s existing ERP solutions for SME customers with products that manage the entire employee life-cycle, including recruitment, training, development and succession planning. Snowdrop was able to grow revenue 35% year-over-year to $14.9 million, a rounding error compared to Sage’s $1 billion in revenue, but a welcome growth metric considering Sage’s 7% organic growth.

Software AG (XETRA: SOW) acquires WebMethods (NASDAQ: WEBM)
Category: Enterprise Application Integration (EAI)
Purchase Price: $417,790,000EV
Revenue (TTM): $209,290,000
EBITDA (TTM): $8,950,000
Revenue Multiple: 2.0xEV
EBITDA Multiple: 46.7xEV
Payment Terms: Cash

SEG’s Perspective:
Germany-based Software AG, Europe’s largest SOA provider, acquires fellow EAI developer WebMethods to leverage its enterprise business process management strategy. The combined company will service 4,000 customers and double Software AG’s customer base in North America. The two companies will likely be formidable competition for IBM and Oracle, which have made EAI a major strategic priority. EAI is expected to become an $11.5 billion market by 2013 and grow at a seven-year CAGR of 14.0%1 as CIOs continue to spend on SOAs and integrated web services. Since WebMethods had stumbled recently, growing 3.4% TTM (5.5% projected for next fiscal year), the acquisition was a positive outcome for WebMethods’ shareholders, who received a 26% premium2.

1: Source: Research and Markets: Enterprise Application Integration (EAI) Market Opportunities, Strategies, and Forecasts, 2007 to 2013
2: 26% premium represents the increase over WebMethod’s closing stock price prior to announcement

Tibco (NASDAQ: TIBX) acquires Spotfire
Category: Business Intelligence (BI)
Purchase Price: $195,000,000
Revenue (TTM): $45,000,000 (estimate)
Revenue Multiple (TTM): 4.3x (estimate)
Payment Terms: Cash

SEG’s Perspective:
Tibco, a leading provider of service-oriented architecture and business process management software, acquires Spotfire, developer of next generation BI solutions with visual analytics. Tibco will combine its current infrastructure software with Spotfire’s applications products to create a complete solution that facilitates analytics on real-time data feeds. Tibco will face fierce competition from large pure-play BI vendors (Cognos, Business Objects), enterprise software companies (SAP, Oracle, IBM) and infrastructure developers (BEA, Sybase, Software AG/WebMethods). Approximately 80% of Spotfire’s revenue was from new licenses, a result of renewed CIO interest in BI applications. The all-cash transaction represents a significant premium over the median TTM M&A valuation for BI software companies (2.5x Purchase Price/Revenue). Tibco expects the deal to be dilutive to its pro forma FY07 EPS.

Websense (NASDAQ: WBSN) acquires SurfControl (LSE: SRF)
Category: Content Filtering Software
Purchase Price: $358,917,000EV
Seller Revenue: $121,400,000
EBITDA: $6,970,000
Revenue Multiple: 3.0xEV
EBITDA Multiple: 51.5xEV
Payment Terms: Cash

SEG’s Perspective:
Internet security company Websense acquires SurfControl, a leading provider of on-demand email and website scanning technology. With SurfControl, Websense eliminates its main competitor in the content filtering space, increases revenue by 64% and adds 16 million subscription seats and 25,000 customers. Websense also benefits from SurfControl’s recent acquisition of BlackSpider, an on-demand email security solution ($38 million, 5.0x TTM Revenue) that should enable Websense to penetrate the elusive SME market. Websense paid 6.0x TTM revenue in December to acquire PortAuthority, a leading provider of information leak prevention solutions, its first acquisition as a public company. Websense expects SurfControl to be 20% accretive to earnings over the next twelve months.

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 for 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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