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Software M&A - Fall Deals

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

The fourth quarter ended on a high note with some very strategic deals, several of which signal a shift in buyer thinking. Valuations continued to improve, with a few deals priced at higher multiples than we've seen for some time. Here is an analysis of six of Q4's most interesting acquisitions.

BMC Software (NYSE: BMC) acquires Magic Software unit of Network Associates Inc. (NYSE: NET)
Category: Help desk/service management
Purchase Price: $47,000,000
Seller Revenue: $63,558,000
Revenue Multiple: 0.74x
Payment Terms: Cash

SEG’s Perspective:
IT infrastructure leader BMC Software, which picked up the remnants of help desk provider Remedy from bankrupt Peregrine Systems in late 2002 for $350MM in cash, now adds Magic Solutions to beef up its service management offering in the SME (small/medium enterprise) space. Magic was a business unit of computer security software provider Network Associates, acquired in March 1998 for $110MM. After six years, Network Associates decided to focus closer to home and the selling price this time was $47MM. Although BMC claims Magic is highly profitable with positive cash flow, it does not expect the transaction to be accretive until its next fiscal year. Still, Magic has revenue of $63.5MM and gives BMC access to 4,000 new midmarket customers, a good deal by almost any measure.

Chinadotcom (Nasdaq: CHINA) acquires Pivotal Corp. (Nasdaq: PVTL)
Category: Customer relationship management
Purchase Price: $56,239,200 (EV)
Seller Revenue: $57,072,000
Revenue Multiple: .98x
Payment Terms: Stock, cash

SEG’s Perspective:
In a case of better late than never, Chinadotcom wins the battle for Pivotal Corp., the Canadian mid-market CRM specialist in a deal valued at $57MM. Following a protracted public struggle involving private equity firm Oak Investment Partners and CRM rival Onyx, Pivotal agreed to merge with Chinadotcom under terms providing shareholders with up to $2.14 per share in cash and Chinadotcom shares. Oak, which bid $1.78 per share and sought to combine Pivotal with portfolio company Talisma, will receive a $1.5MM breakup fee from Pivotal. Chinadotcom effectively paid less than 1x revenue and now adds CRM to its suite after acquiring midtier ERP provider Ross Systems in September. The same month, acquisitive Chinadotcom bought controlling interest in Industri-Matematik to address the supply chain software needs for its more than 600 Chinese and other Pacific Asia customers.

EMC Corp. (NYSE: EMC) acquires VMware Inc.
Category: Enterprise system management
Purchase Price: $635,000,000
Seller Revenue: $50,000,000
Revenue Multiple: 12.7x
Payment Terms: Cash

SEG’s Perspective:
EMC’s buying spree continues, as the world’s leading storage management software vendor moves further into the IT infrastructure. This time it’s VMware, a privately held software company that is the leader in virtual machines – software which enables multiple operating systems such as Windows, Linux and Netware to run simultaneously and independently on the same Intel server and move applications across platforms. EMC will operate VMware as a subsidiary, hoping to preserve its relationships with a wide array of server and storage vendors. We’ll see. Although EMC paid a whopping $635MM, all cash, it expects the deal to be dilutive by only $.01 in Q1 and accretive by 2005. The VMware acquisition follows closely on the heels of EMC’s December acquisition of Documentum for $1.5 B and its October acquisition of Legato Software.

Opsware Inc. (Nasdaq: OPSW) acquires Tangram Enterprise Solutions, Inc. (TESI.OB)
Category: IT resource management and security
Purchase Price: $10,000,000EV
Seller Revenue: $10,435,000
Revenue Multiple: 0.96x
Payment Terms: Stock

SEG’s Perspective:
Opsware, the data center automation innovator founded by Mark Andreessen, moves into IT asset management and IT security by acquiring Tangram Enterprise Solutions. Following a highly visible, ill-timed IPO in early 2001, Loudcloud (now Opsware) endured a $12MM per month cash burn and a threatened NASDAQ delisting before selling its managed services division to rival EDS last year for $64MM. Now Opsware seems to have finally found its niche and is cash-flow-positive. Tangram’s product line will leverage Opsware’s strategic relationships with EDS and HP. Tangram also brings more than 200 customers to Opsware, as well as the patent pending “Crosshair” technology embedded in its OverSight security product. Tangram was majority-owned by Safeguard Scientifics, which must believe in Opsware’s future prospects, since the $10MM all-stock deal was priced below recent Tangram trading levels. After paying off Tangram’s preferred shareholders, creditors and former employees, Tangram’s common shareholders’ receive roughly $5MM.


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