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| Home - Software M&A Review - Sep 03 Issue |
Software M&A – Opportunity in Adversity |
By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC
Finding opportunity in adversity, private equity buyers took advantage of market conditions by snatching up undervalued software companies reeling from three years of IT budget cutbacks. Many of these small and mid-cap software companies survived the bubble burst only to run out of money three years later as sales plummeted faster than headcount. Others saw their standalone product category, such as digital media management and collaboration, subsumed into enterprise offerings. While some found merger partners, others could not attract strategic buyers, as larger software companies sharply curtailed their acquisition efforts, hoarded cash and refused to spend devalued stock. With valuations still low relative to 2000, cash-rich private equity buyers couldn’t resist.
For many private equity buyers, the payback has been quick. Symphony Technology Group turned its $11 million acquisition of Industri-Matematik into a $14 million profit in less than nine months by selling 51% of its position to Chinadotcom for $25 million. Symphony Technology, also recently acquired GERS Retail Systems. Among other recent private equity deals, Battery Ventures acquired Made2Manage, Thoma Cressy acquired Prophet 21 and Daticon, Vector Capital acquired Corel, Cerberus Capital Management bought Baan, and Saratoga Partners acquired assets from the Divine debacle.
Not all software companies stood aside. Many with cash and a clear strategic vision jumped headlong into the fray. Most notable is SSA Global Technologies, which in the last year picked up assets of Computer Associates, Infinium Software, Elevon, Ironside Technologies, Baan and, now, EXE Technologies. Intuit continued its aggressive acquisition strategy to move “beyond accounting”, by adding lucrative bankcard processor Innovative Merchant Solutions. And of course, there were a few “blind leading the blind” mergers of financially challenged companies. But have faith. We predict a considerably more active Q4. Below are our thoughts on eight recent deals.
Ascential Software (Nasdaq:ASCL) acquires Mercator Software (Nasdaq:MCTR)
Category: Enterprise application integration
Purchase Price: $97,900,000EV
Seller Revenue: $111,900,000
Revenue Multiple: 0.87x
Payment Terms: Cash
SEG’s Perspective:
Fending off a hostile bid from Strategic Software Holdings, enterprise application/data integration provider Mercator agrees to a $106M cash offer from Ascential. Since spinning out from Informix, the acquisitive Ascential has bought Vality, Torent Systems and Metagenix to beef up its data warehousing suite. The deal represents a 22% premium to Mercator’s shareholders. Ascential has more than $500M in cash remaining.
Chinadotcom (Nasdaq:CHINA) to acquire Ross Systems (Nasdaq:ROSS)
Category: Enterprise resource planning
Purchase Price: $66,110,000EV
Seller Revenue: $46,050,000
Revenue Multiple: 1.44x
Payment Terms: Stock and cash
SEG’s Perspective:
Hong Kong-based Chinadotcom (CDC), a pan-Asian enterprise software and services provider, acquires Ross Systems, a leading ERP vendor in the process manufacturing space. With a whopping 600 enterprise customers in Asia-Pacific, CDC aspires to dominate the region and preempt Tier 1 players, but lacked a comprehensive ERP offering. Ross was an obvious choice. After seeing revenue decline 50% over the past three years, Ross shareholders saw the writing on the wall and grabbed the 23% premium, but will receive only 26% of the purchase price in cash.
Chinadotcom (Nasdaq:CHINA) to acquire 51% of Industri-Matematik
Category: Supply chain management
Purchase Price: $25,000,000
Seller Revenue: $45,000,000 (estimate)
Revenue Multiple: 0.56x
Payment Terms: N/D
SEG’s Perspective:
Five days after its Ross buy, Chinadotcom (CDC) acquired 51% of IMI from Symphony Technology Group, a financial investor that bought IMI in 4Q02 for $11 million, yielding a $14 million profit after just nine months. CDC needed a supply chain solution company to round out its enterprise suite – which now includes Ross. Look for CDC to cut costs by funneling IMI development to its China R&D center. This rollup should enable CDC to lengthen its lead in China and the Pac Rim. Symphony retains 49% of IMI.
Interwoven (Nasdaq:IWVN) to acquire iManage (Nasdaq:IMAN)
Category: Collaboration/content management
Purchase Price: $135,918,000EV
Seller Revenue: $42,700,000
Revenue Multiple: 3.18x
Payment Terms: Stock and cash
SEG’s Perspective:
After six months of partnering, Web content management leader Interwoven acquires iManage, a provider of content collaboration and document management solutions. Interwoven can now tout an end-to-end knowledge management suite to better compete against Documentum. iManage shareholders receive a 23.6% premium, but only about 18% in cash and the balance in stock. Could be risky. Interwoven lost $14.6M on flat revenue of $52M in 1H03. Its $2.40 market price fell on the announcement, but rebounded to $2.85.
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