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Software M&A: Deals Get More Impressive

By Ken Bender, Managing Director, and Kris Beible, Analyst – Software Equity Group, LLC

M&A Deal activity within the software sector continues to impress. Deals highlighted this month include Citrix’s acquisition of Xensource in the red-hot virtualization arena; Cognos’ acquisition of online analytical processing (OLAP) software provider Applix; ETS’ acquisition of Thomson Prometric, a testing and assessment services administrator; Hewlett Packard’s acquisition of Opsware in the IT infrastructure management space; IBM’s acquisition of data integration partner Datamirror, and SAP’s acquisition of Business Objects, the world’s second largest pure-play business intelligence provider.

Citrix Systems (NASDAQ: CTXS) acquires Xensource
Category: Virtualization Software
Purchase Price: $500,000,000
Seller Revenue: $3,000,000
Revenue Multiple: 166.7x
Payment Terms: Cash and Stock

SEG’s Perspective:
Citrix, a leader in application delivery solutions, acquires Xensource, a provider of server and desktop virtualization software. The acquisition extends Citrix into the red-hot server virtualization market, which Citrix expects will grow to $5 billion over the next 5 years. Specifically, Xensource leverages Citrix in the small to medium-size business segment, where CIO’s, clamoring for virtualization technologies, have been reluctant to adopt market leader VMware because of the high price tag. Citrix, which financed the acquisition with 60% stock, expects Xensource to add revenue of approximately $50 million in FY08, and as much as $200 million in FY09. The acquisition was announced the day after EMC spun-out 10% of VMware, Xensource’s largest competitor, in an August IPO. VMware’s stock price is up approximately 99% over its first day closing stock price.

Cognos (NASDAQ: COGN) acquires Applix (NASDAQ: APLX)
Category: Financial Performance Management Analytics
Purchase Price: $305,740,000EV
Seller Revenue (TTM): $61,190,000
EBITDA (TTM): $11,420,000
Revenue Multiple (TTM): 5.0xEV
EBITDA Multiple (TTM): 26.8xEV
Payment Terms: Cash

SEG’s Perspective:
Cognos fills in a missing component in an evolving BI market by acquiring Applix, a leading provider of on-line analytical processing (OLAP) software. The acquisition of Applix will add in-memory analytics to Cognos’ portfolio of business intelligence solutions and double its financial performance management customer base. In-memory technology is rapidly becoming a preferred vehicle for analyzing large volumes of financial data because it enables faster query and data retrieval. Gartner estimates by 2012 some 70% of the Global 1000 will load detailed data into memory to optimize BI application performance1. The $17.87 per share bid represents a 24% premium over Applix’s pre-announcement last day closing stock price. The Cognos acquisition of Applix follows that of competitors Hyperion (3.4xEV TTM revenue) by Oracle, Cartesis (2.4x TTM revenue) by Business Objects, and Outlook Software by SAP.

1. Gartner Report

ETS acquires Thomson Prometric
Category: Testing and Assessment Services
Purchase Price: $435,000,000
Seller Revenue: $317,000,000
Revenue Multiple: 1.4x
Payment Terms: Cash

SEG’s Perspective:
ETS, a leading not-for-profit educational assessment and research organization, acquires Thomson Prometric, a provider of testing and assessment services. The acquisition allows ETS to administer tests and assessments via the web and physical testing centers, services ETS previously contracted to Prometric. ETS also picks up blue chip academic, government and corporate customer accounts and in-roads to new markets worldwide. Prometric was acquired by Thomson in 2000 for $775 million. In late 2006, Thomson divested NETg, its subscription-based e-learning content business, to SkillSoft for $285 million (1.8x revenue). Prometric will be operated as a wholly- owned for-profit subsidiary of ETS.

Hewlett Packard (NYSE: HPQ) acquires Opsware (NASDAQ: OPSW)
Category: Enterprise IT Management Software
Purchase Price: $1,600,000,000EV
Seller Revenue (TTM): $108,060,000
EBITDA (TTM): $1,520,000
Revenue Multiple (TTM): 14.8xEV
EBITDA Multiple (TTM): 1052.6xEV
Payment Terms: Cash

SEG’s Perspective:
Hewlett Packard acquires Opsware, a developer of data center automation tools. Opsware’s data center automation software beefs up HP’s Business Technology Optimization offering, which it has grown through recent acquisitions of Mercury Interactive ($4.5 billion) and Peregrine Systems ($425 million). Opsware also enables HP to compete more effectively against IBM (Tivoli) in the IT infrastructure management space. Opsware, which received a 39% premium to its pre-announcement last day closing stock price, achieved a CAGR of 78% from 2004 through 2007. Concurrently, HP announced the acquisition of Neoware (NASDAQ: NEOW), a provider of thin client computing and virtualization solutions, for $214EV million (2.4xEV TTM revenue).

IBM (NYSE: IBM) acquires DataMirror (TSX: DMC)
Category: Data Management Software
Purchase Price: $130,000,000EV
Seller Revenue TTM: $48,816,000
Revenue Multiple (TTM): 2.7xEV
Payment Terms: Cash

SEG’s Perspective:
IBM acquires Datamirror, a provider of best-of-breed real-time data integration solutions. DataMirror’s change-data-capture technology leverages IBM’s leading information integration platform, IBM Information Server, by adding real-time detection, translation and communication of all data changes across heterogeneous databases. The 2.7x revenue multiple, seemingly low for a company deemed highly strategic to behemoth IBM, reflects DataMirror’s declining System i installed base, which accounted for 50% and 65% of FY06 and FY05 revenue1, respectively. IBM’s C$27 per share bid represents a 19% premium over DataMirror’s pre-announcement last day closing stock price. DataMirror is IBM’s 21st acquisition in support of its cross-company ‘Information on Demand’ effort.

1. Gartner Report

SAP (NYSE: SAP) acquires Business Objects (NASDAQ: BOBJ)
Category: Business Intelligence Software
Purchase Price: $6,500,000,000EV
Seller Revenue (TTM): $1,380,000,000
EBITDA (TTM): $242,400,000
Revenue Multiple (TTM): 4.7xEV
EBITDA Multiple (TTM): 26.7xEV
Payment Terms: Cash

SEG’s Perspective:
SAP abandons its customary make, not buy and small tuck-in acquisition strategy by acquiring Business Objects, the world’s second largest pure-play business intelligence software provider. The acquisition better positions SAP to compete against rival Oracle, which acquired Business Objects competitor Hyperion Solutions ($2.8EV billion, 3.4EV TTM revenue) earlier this year. It also provides SAP additional leverage in the growing business performance management (BPM) space, a sub-sector of BI which is expected to outperform the overall BI market with year-over-year growth rates of 11% through 20101 – SAP recently acquired BPM developers Pilot Software and OutlookSoft, while Business Objects acquired Cartesis ($300 million, 2.4x revenue) and ALG software ($56 million, 3.0x revenue). While the Street initially disapproved of the high revenue multiple, the 31% premium2 paid to Business Objects’ shareholders is not unreasonable, considering the company grew revenues 21% on a TTM basis, compared to a median TTM revenue growth rate of 14%3 for the competition.

1. Forrester Research
2. Tender offer/pre-announcement average of last 30 days closing stock price
3. SEG research

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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