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Software M&A – First Quarter 2003, Deals and Insight

By Ken Bender, Managing Director, and Allen Cinzori, Associate - Software Equity Group, LLC

Mergers and acquisitions continue in the software sector, though buyers’ appetites have been somewhat dampened by the impending war with Iraq. Predictably, the defense and government IT sectors remain fertile ground for M&A. Below is a closer look at twelve deals from the current quarter, and Software Equity Group’s analysis of the factors which drove those deals. Look for SEG’s First Quarter 2003 M&A Update, out next month, which will provide a more comprehensive study of current M&A activity and trends.

Amdocs (NYSE: DOX) acquires Exchange Applications (Pink Sheet: EXAP)
Category: Campaign management and marketing automation
Purchase Price: $5,000,000
Seller Revenue: $24,400,000
Revenue Multiple: 0.20x
Payment Terms: Cash

SEG’s Perspective:
Amdocs, a leader in CRM and billing solutions for the telecom market, acquires the assets of Enterprise Applications (Xchange), a provider of campaign management and marketing automation software. The acquisition follows Xchange’s rapid demise after raising $99M in the public markets, and enables Amdocs to broaden its ClarifyCRM product line, acquired from Nortel in late 2001 for $200M. Laden with debt, Xchange shut its doors in February 2003 after an unsuccessful attempt at taking the business private.

Cisco Systems (Nasdaq: CSCO) acquires SignalWorks
Category: IP Telephony
Purchase Price: $13,500,000
Seller Revenue: $unknown
Revenue Multiple: n/a
Payment Terms: Stock

SEG’s Perspective:
IP telephony is a Cisco priority, with 6,000 IP communications customers and 1.5M IP phones shipped. By acquiring SignalWorks, a developer of advanced software that delivers high-performance audio capabilities for IP telephony systems, Cisco secures its technical lead and extends into new markets. This is an all stock deal - somewhat surprising since Cisco sees its stock as quite undervalued and has launched an aggressive $13B stock buyback initiative.

Indus Int’l (Nasdaq: IINT) acquires SCT’s GEUS Business Unit
Category: Software solutions for the energy sector
Purchase Price: $39,000,000
Seller Revenue: $74,200,000
Revenue Multiple: 0.53x
Payment Terms: Cash

SEG’s Perspective:
Indus, an enterprise asset management provider to the utility and energy markets, picks up Systems and Computer Technology Corp’s Global Energy and Utility Solutions (GEUS) business unit. Here’s another example of a strategic acquisition in the same target market offering immediate incremental revenue opportunities. Considering GEUS’s revenue, net assets of $31.8M and breakeven net income, it looks like Indus picked up GEUS for a song. GEUS gives Indus a CIS solution for its installed base, plus 200 new customers.

Itron (Nasdaq: ITRI) acquires Silicon Energy
Category: Enterprise energy management software
Purchase Price: $71,200,000EV
Seller Revenue: $15,000,000 estimate
Revenue Multiple: 4.75x
Payment Terms: Cash

SEG’s Perspective:
Itron, a leading technology provider to major utilities worldwide moves into the end-user market by announcing a bid for privately-held Silicon Energy, a provider of enterprise energy management solutions. Silicon Energy filed, then shelved an IPO back in 2001 at an implied market cap of $250M. The $71.2M price tag is a 4.75x multiple over Silicon Energy’s trailing revenue. Itron expects the deal to be mildly dilutive in 2003.

L-3 Communications (NYSE: LLL) acquires Ship Analytics
Category: Homeland security, command and control
Purchase Price: $11,400,000 EV
Seller Revenue: $25,000,000 estimate
Revenue Multiple: 0.46x
Payment Terms: Cash and earnout

SEG’s Perspective:
Beefing up its homeland security offering, L-3 Communications picks up privately held Ship Analytics (SA), a provider of crisis management software. Having partnered together earlier, L-3 decided to tie the knot and target state governments and FEMA. The purchase price is largely contingent. L-3 will pay $6.7M, assume $4.7M of Ship Analytics’ debt, and provide up to an additional $20.2M as an earnout, subject to financial performance, through 2005. Ship Analytics does not disclose its financials, but we estimate revenues in the range of $25M.

ManTech Int’l Corp. (Nasdaq: MANT) acquires Integrated Data Systems
Category: Government software and services
Purchase Price: $62,700,000EV
Seller Revenue: $40,000,000
Revenue Multiple: 1.57x
Payment Terms: Cash and earnout

SEG’s Perspective:
ManTech, an IT services provider to the Federal government, picks up software developer and systems integrator IDS in order to beef up its secure messaging and security network offering. IDS, with year-over-year growth exceeding 80%, derives the vast majority of its revenue from ManTech’s target market - the DoD and intelligence community. ManTech paid 12.2 times IDS’ CY 2002 EBITDA and expects to receive highly favorable tax treatment due to the structure of the deal. This is ManTech’s third acquisition following its IPO in 2002.


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