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Does consolidation breed software product mediocrity?



Software M&A Insights: Q2 Deals 

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

M&A deals within the software sector continued to outpace all other industries in 2Q08. Deals highlighted this month include Apax Partners’ leveraged buy-out of The Trizetto Group, a leading provider of healthcare insurance claims management software; Blackbaud’s acquisition of struggling non-profit SaaS rival Kintera; Great Hill Partners’ leveraged buy-out of CAM Commerce, a provider of integrated retail point of sale and payment-processing systems; JMI Equity and The Carlyle Group’s take private of mining industry software supplier, Gemcom Software; Micro Focus’ acquisition of NetManage, a provider of networking app modernization technologies and Phoenix Technologies’ acquisition of TouchStone Software, a provider of internet-delivered computer diagnostics and PC update technologies.

Apax Partners acquires TriZetto (NASDAQ: TZIX)
Category: Healthcare Management Software
Purchase Price: $1,258,720,000 EV
Seller Revenue (TTM): $445,110,000
EBITDA (TTM): $80,740,000
Revenue Multiple (TTM): 2.8x EV
EBITDA Multiple (TTM): 15.6x EV
Payment Terms: Cash

SEG’s Perspective:
Global private equity firm, Apax Partners, acquires The Trizetto Group, a leading provider of healthcare claims and membership management software to the healthcare insurance payer market. Trizetto’s best-of-breed healthcare management suite provides Apax partners a strong platform from which to build upon and straddles two of its key investment sectors, information technology and healthcare, the most active M&A software category this year1. The same day, CCC Information Services Group announced it would merge, through an all-stock transaction, with private equity owned Mitchell International, ($1.4EV billion, 7.0xEV TTM revenue) a provider of information, workflow and performance management solutions to the automotive physical damage and medical claims insurance industry. Additionally, the acquisition comes on the heels of Nuance Communications announced purchase of medical transcription software maker eScription ($361.8 EV million, 8.2x EV TTM revenue) only three days prior. Blue Cross Blue Shield of Tennessee and The Regence Group, both customers of Trizetto, are co-investing an undisclosed amount of equity to help fund the deal.
1. SEG Research

Blackbaud (NASDAQ: BLKB) acquires Kintera (NASDAQ: KNTA)
Category: Non-Profit Industry Software
Purchase Price: $42,480,000EV
Seller Revenue (TTM): $43,120,000
Revenue Multiple (TTM): 1.0x EV
Payment Terms: Cash

SEG’s Perspective:
Blackbaud, the leading provider of software for nonprofit organizations, acquires Kintera, its largest rival. The acquisition allows Blackbaud to eliminate its last real threat in the space and potentially monopolize the sector. Kintera’s on-demand CRM and fundraising platform has failed to post a profit since going public in 2003 and generated flat revenues over the past 2 years. Additionally, Kintera’s products overlap quite extensively with Blackbaud’s offering, leading many to believe Blackbaud will sunset the Kintera product line and convert customers to its profitable software offering. Kintera is Blackbaud’s sixth and largest consolidation play since going public in 2004. The company most recently acquired eTapestry, a provider of nonprofit fundraising software, for $26.3 million in August 2007.

Great Hill Partners acquires CAM Commerce Solutions (NASDAQ: CADA)
Category: Retail Point of Sale and Payment Processing Systems
Purchase Price: $151,370,000EV
Seller Revenue (TTM): $36,600,000
EBITDA (TTM): $8,430,000
Revenue Multiple (TTM): 4.1xEV
EBITDA Multiple (TTM): 17.9xEV
Payment Terms: Cash

SEG’s Perspective:
Great Hill Partners, a middle market private equity firm, acquires CAM Commerce, a provider of integrated retail and payment processing systems for the SME market. CAM Commerce provides Great Hill Partners an industry-leading platform from which to expand upon. CAM Commerce follows 2007 acquisitions of retail and point of sale software providers NSB Retail ($261.8EV million, 2.9xEV TTM revenue) and Torex Retail Holdings ($406.32EV million), by Epicor and Cerberus Capital, respectively. Even at 4.1x TTM revenue, the 11% premium may strike some shareholders as too low, as it represents a 10% discount to the company’s 52 week trading high of $45.25.

JMI Equity and The Carlyle Group acquire Gemcom Software (TSX: GCM)
Category: Mining Industry Software
Purchase Price: $139,400,000EV
Seller Revenue (TTM): $53,600,000
EBITDA (TTM): $13,028,000
Revenue Multiple (TTM): 2.6EV
EBITDA Multiple (TTM): 10.7EV
Payment Terms: Cash

SEG’s Perspective:
JMI Equity and The Carlyle Group acquire Gemcom Software, a Canadian-based provider of mining productivity software. Gemcom will provide both private equity firms the mining industry’s leading software for exploration and operations management as well as a financially stable platform to further build upon – Gemcom acquired Australian based competitor Surpac Minex ($25.6 million) in June 2006 to further scale and expand its presence in the APAC region. Gemcom garnered a 2.6xEV TTM revenue valuation by posting TTM revenue growth of 51.3% while maintaining a healthy 24.4% TTM EBITDA margin. Gemcom received a PIPE of $10.7 million in conjunction with its acquisition of Surpac Minex in June 2006.

Micro Focus (LSE: MCRO.L) acquires NetManage (NASDAQ: NETM)
Category: Development Tools
Purchase Price: $43,390,000EV
Seller Revenue (TTM): $37,180,000
EBITDA (TTM): $2,960,000
Revenue Multiple (TTM): 1.2xEV
EBITDA Multiple (TTM): 14.7xEV
Payment Terms: Cash

SEG’s Perspective:
Micro Focus, a provider of legacy COBOL modernization applications, acquires NetManage, a developer of networking application modernization technologies. With the NetManage acquisition, Micro Focus now enters the OS/400 and i5/OS spaces and bolsters its position with adjunct mainframe system tools. The 73% premium offered to NetManage shareholders comes only months after Rocket Software failed to raise the necessary capital to fund its publicly announced $69 million offer, opening the door for Micro Focus to make its all cash offer. NetManage brings with it $22 million of maintenance and support fees (60% of revenue) as well as the ability for Micro Focus to significantly improve the businesses bottom line. Last year, Micro Focus solidified its position in COBOL by acquiring rival Acucorp for $40.7 million.

Phoenix Technologies (NASDAQ: PTEC) acquires TouchStone Software (OTCBB: TSSW)
Category: PC Optimization Development Tools
Purchase Price: $16,950,000EV
Seller Revenue (TTM): $4,320,000
EBITDA (TTM): $710,000
Revenue Multiple (TTM): 3.9xEV
EBITDA Multiple (TTM): 24.0xEV
Payment Terms: Cash

SEG’s Perspective:
Phoenix Technologies, a developer of PC-based systems connectivity software, acquires TouchStone software, a leading provider of computer diagnostics and PC update technologies. The acquisition will enable Phoenix Technologies to build a strong online presence and infrastructure for web-based service delivery, and sell additional products through its large OEM base. Further, Touchstone’s Internet delivery model will give OEMs the ability to significantly decrease support costs and drive greater profitability. Touchstone built its product portfolio through eleven separate product (asset) acquisitions including the 1999 purchase of Phoenix Technologies’ CardWare Product Line.

This report was prepared by Software Equity Group, L.L.C. (SEG), a mergers and acquisitions advisory firm, which analyzes software industry public company stock market performance, initial public offerings, mergers and acquisitions as well as venture capital and private equity placements. SEG was founded in 1992 and has represented and guided private companies throughout North America, Europe, Asia Pacific, Africa and Israel. They represent some of the world’s leading private equity firms and have advised public companies listed on the NASDAQ, NYSE, American, Toronto, London and Euronext exchanges. For more, please visit www.softwareequity.com.

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