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Will the enterprise market spend significant IT budget on Windows Vista in 2007?



Software M&A - Fall Deals

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

M&A transactions highlighted in this issue are characterized by very healthy multiples (some might even say inflated), as strategic buyers sought to extend their product lines (Macromedia), expand into entirely new product categories (EMC), eliminate competition (Open Text) and add sexy new technology to differentiate their offerings (Symantec). These transactions are representative of those buyer motives driving most software industry mergers and acquisitions in 2H ‘03. Specifically, buyers continue to seek:

  • products that are a logical functional enhancements to the buyer’s product line,
  • leverage in the same, or a highly complementary, market as the buyer,
  • access to a large and loyal customer base,
  • immediate incremental revenue through cross-sell opportunities,
  • greater access to SMEs, and
  • transactions that are accretive immediately, or within one year.

    However, Q3 also saw a new trend begin to emerge. Buyers began to seek technologies which could help them reposition in the marketplace and differentiate from others in the space. These are not the pure “technology plays” of the bubble era, but rather tried and proven technologies which, when embedded in the buyers’ product lines, fundamentally enhance and improve the end user’s experience. Thus we see collaboration being subsumed into CRM and content management applications, and sophisticated application distribution technologies being acquired by systems software developers.

    The following provides additional insight into nine transactions which reflect these various buyer motives:

    Agilysys (Nasdaq: AGYS) acquires Kyrus
    Category: Reseller
    Purchase Price: $31,000,000
    Seller Revenue: $130,000,000
    Revenue Multiple: 0.24x
    Payment Terms: Cash

    SEG’s Perspective:
    Agilysys, a distributor/reseller of enterprise hardware and software, acquires Kyrus, a leading provider of retail solutions and IBM POS reseller. While both firms sell software, revenues reflect a significant amount of hardware pass-through. For $31M in cash and the assumption of $20 million in Kyrus debt, Agilysys gains access to the retail sector, one of several verticals it has targeted to beef up hardware sales. Agilysis, which has cut 2002 operating losses substantially, expects the deal to be accretive in 2004.

    EMC Corp. (NYSE:EMC) acquires Documentum (NASDAQ: DCTM)
    Category: Content management
    Purchase Price: $1,541,686,000EV
    Seller Revenue: $274,724,000
    Revenue Multiple: 5.61x
    Payment Terms: Stock

    SEG’s Perspective:
    Network storage behemoth EMC, hammered by three years of declining revenues and substantial losses, continues to reposition through acquisition. After buying Legato Systems, Astrum Software and Prisa Networks to provide a more open systems solution, EMC moves far beyond storage by acquiring Documentum, a leading enterprise content management company. EMC gets to redefine itself overnight and gains bidirectional cross-sell opportunities, which together account for the healthy 5.61 multiple.

    Macromedia (Nasdaq: MACR) acquires eHelp Corp.
    Category: Help authoring tools
    Purchase Price: $65,000,000
    Seller Revenue: $22,300,000**
    Revenue Multiple: 2.91x
    Payment Terms: Stock, cash

    SEG’s Perspective:
    Macromedia, the leading rich media development tools company, acquires eHelp, the market leader in help authoring software. eHelp’s software will extend Macromedia’s product line, making it easier for developers to incorporate Flash-based help and tutorials into their offerings. eHelp extends Macromedia’s offering and provides access to a variety of Fortune 500 companies, but we’re not sure that justifies the healthy 2.91 multiple.

    Open Text (Nasdaq: OTEX) acquires IXOS Software (Nasdaq: XOSY)
    Category: Content management
    Purchase Price: $188,809,000EV
    Seller Revenue: $145,000,000
    Revenue Multiple: 1.30x
    Payment Terms: Stock, cash

    SEG’s Perspective:
    Open Text, a market leader in collaboration and knowledge management software, buys German content management and archiving tools provider IXOS Software. Though positioned as complementary, Open Text eliminates a competitor in a deal that denotes continued consolidation in the content management arena. Open Text gains greater access to the SAP base and 2,700 new customers. But contrast the multiple here, typical for a consolidation play, with the multiple paid by strategic buyer EMC for Open Text rival Documentum. Open Text, which also recently purchased Germany’s Gauss Interprises, remains fair game for acquisition itself. Like collaboration software, document management is rapidly being subsumed into broader enterprise categories.

    Pumatech (Nasdaq: PUMA) acquires Synchrologic
    Category: Mobile applications
    Purchase Price: $60,000,000
    Seller Revenue: $11,800,000
    Revenue Multiple: 5.08x
    Payment Terms: Stock

    SEG’s Perspective:
    Synchronization and mobile app solution provider Pumatech, with $25M revenue and $27M left in cash, pays a whopping $60M (all stock) for competitor Synchrologic ($11.8M rev). The two firms had been locked in patent litigation brought by Pumatech. For Pumatech, the deal eliminates that headache, as well as a competitor, and provides access to better synchronization and device management technology. Pumatech previously acquired Starfish, Loudfire and Spontaneous Technology.


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