By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC
Software mergers and acquisitions continue to handsomely reward sellers, as purchase price multiples are on the rise. Best-of-breed security software providers are commanding spectacular multiples due to fierce competition and strong customer demand. Case in point; Symantec buys Brightmail and CyberGuard buys WebWasher AG. Brightmail's customers include 15 of the 20 major ISP's in the U.S. as well as over 75 Fortune 500 customers while WebWasher AG controls 40% of the web filtering market in Central Europe. Both Symantec and CyberGuard are vying for dominance in internet security, a market projected to grow from $506 million in 2002 to $1.93 billion in 2007a. Another hot market is IT Governance software, as CTO's and CIO's clamor for solutions to demonstrate the business ROI of their technology investments. BMC, Compuware, IBM, Hewlett-Packard, Mercury Interactive and Symantec, among others, have all made significant investments in this category. This issue also provides postmortem insight into Novell's investment in Linux software provider SuSE AG.
BMC Software (NYSE: BMC) acquires Marimba (Nasdaq: MRBA)
Category: Systems Management Software
Purchase Price: $185,900,000EV
Seller Revenue: $40,880,000
Revenue Multiple: 4.6x
Payment Terms: Cash
SEG's Perspective:
BMC Software enhances its Business Service Management (BSM) solutions by acquiring Marimba, a developer of change and configuration management software. The deal, in which BMC paid a hefty 70% premium, is BMC's third in four months. Marimba, together with Magic Solutions, will be integrated into the Remedy product line (acquired from Peregrine in a bankruptcy sale). BMC wants to enhance its BSM offering in response to a growing customer demand for IT management solutions that are aligned with enterprise business goals (the same as Mercury Interactive's Business Technology Optimization strategy noted above). Two of Marimba's rivals, ON Technology and Novadigm, were bought by Symantec and Hewlett-Packard respectively, while IBM bought BMC competitor Candle Corp. While Marimba stock has lost 80% of its value since 2000, news of the deal sent Marimba up more than 60%, its highest price in almost 4 years.
Compuware (NASDAQ: CPWR) acquires Changepoint
Category: Collaboration Software
Purchase Price: $100,000,000
Seller Revenue: $20,000,000
Revenue Multiple: 5.0x
Payment Terms: Cash
SEG's Perspective:
Compuware, provider of systems software products for application development and maintenance, acquires Changepoint, a developer of IT governance software to quantify and measure the business value of IT investments. The deal comes at a good time for both parties. Compuware's revenue declined 20.4% in 2003, with new license revenue accounting for less than 20% of total sales, while Changepoint's revenue was flat in 2003. Proving patience can be a virtue, the $100 million all cash purchase price dwarfs the $45 million Changepoint hoped to raise when it filed for an IPO in March 2000, but quickly rescinded in April 2000. This is Compuware's second acquisition in 2004, and likely not its last with $367 million in cash on its balance sheet and a need for other sources of revenue in a competitive market.
CyberGuard (NASDAQ: CGFW) acquires Webwasher AG
Category: Security Software
Purchase Price: $40,000,000
Seller Revenue: $7,700,000
Revenue Multiple: 5.2x
Payment Terms: Cash, Stock
SEG's Perspective:
Cyberguard, a firewall and VPN vendor, continues to expand into international markets, this time by acquiring Webwasher, a German security solutions provider. Webwasher, a technology spin-off of Siemens AG, holds 40% of the Web filtering market in Central Europe and was recently named the fastest-growing provider of Web filtering solutions by IDC. Webwasher more than doubled its revenues from 2003 to 2002 and hopes for more of the same, in light of an earnout package worth an extra $10 million in stock. Cyberguard has also seen impressive growth with a 48% year-over-year revenue increase and record sales of $13 million in 1Q04. In 2003, Cyberguard acquired an Australian Linux security and firewall provider (SnapGear) and a network hardware security solution from NetOctave.
Fair, Isaac and Company (NYSE: FIC) acquires London Bridge (LSE: LNB)
Category: Financial Services Software
Purchase Price: $259,249,268EV
Seller Revenue: $69,019,808
Revenue Multiple: 3.8x
Payment Terms: Cash
SEG's Perspective:
Fair Isaac, developer of credit scoring systems and statistics-based predictive tools for the consumer credit industry, acquires London Bridge Software, a UK based provider of banking, credit management, and mortgage lending management software. Fair Isaac paid a 54% premium for a company which saw revenue decrease 6.3% in its last fiscal year, although cost cutting measures helped improve EBITDA from a $94 million loss in 2002 to almost a $1 million gain in 2003. With license revenue declining year-over-year since 2002, maintenance and e-commerce services have comprised a growing percentage of London Bridge's revenue. For investors, the purchase price is quite a let down from London Bridge's peak valuation in March 2000 of $3.8 billion. London Bridge shares increased 52% on news of the deal.
Mercury Interactive (NYSE: MERQ) acquires Appilog
Category: Systems Management Software
Purchase Price: $49,000,000
Seller Revenue: $4,000,000 (Estimate)
Revenue Multiple: 12.3x
Payment Terms: Cash
SEG's Perspective:
With its fourth acquisition in twelve months, Mercury Interactive continues to move beyond applications and testing into business technology optimization (BTO) by acquiring Appilog, a provider of automated application matching software to manage dependencies between enterprise applications and supporting infrastructure. Appilog, together with Kintana (acquired by Mercury in 2003 for $267.5 million) will establish Mercury as a leading provider in BTO, a market that is projected to grow from $3.3 billion in 2004 to $6 billion in 2007. Appilog raised $13 million in two rounds since its founding in 2000 (Poalim Ventures, Delta Ventures, Cedar Fund, Genesis Partners).
Pitney Bowes (NYSE: PBI) acquires Group 1 Software (Nasdaq: GSOF)
Category: Customer Relationship Management
Purchase Price: $263,410,000EV
Seller Revenue: $109,970,000
Revenue Multiple: 2.4x
Payment Terms: Cash
SEG's Perspective:
Pitney Bowes, a vendor of mailroom equipment and mailing solutions, grows its document management business by acquiring Group 1 Software, a developer of direct mail, direct marketing and customer communications software. The purchase price, a 40% premium over Group 1's closing stock price before the deal was announced, is the largest of Pitney Bowes 35 acquisitions (totaling $1.3 billion) since 2001. As a result, Standard & Poor's Rating Services has placed Pitney Bowes on "Credit watch with negative implications", citing concerns about the company's leverage profile, in large part due to its acquisition strategy. Group 1 has been struggling, with revenue decreasing 4.2% and earnings decreasing 50.3% in its last fiscal year. Investors responded favorably to the deal, driving Group 1's closing share price up 38% from its previous close.
Siebel Systems (Nasdaq: SEBL) acquires Eontec Limited
Category: Banking Software
Purchase Price: $70,000,000
Seller Revenue: $15,000,000
Revenue Multiple: 4.7x
Payment Terms: Cash
SEG's Perspective:
Siebel Systems acquires Ireland-based Eontec, a provider of multichannel retail banking solutions, its nineteenth acquisition since 1997 and third since last fall. Siebel has targeted banking as a key vertical for its CRM offering, but needed a multichannel solution to compete effectively in the sector. For Eontec, the acquisition comes none too soon, after struggling to penetrate the U.S. market and cutting its workforce by half since 2001. In addition to $70 million cash payment at closing, the deal includes a possible $60 million earnout, a veritable pot of gold at the end of the rainbow. Since its founding in 1994, Eontec has received at least $35 million in VC financing from Warburg Pincus, ICC Venture Capital, and other investors.
Sybase (NYSE: SY) acquires XcelleNet
Category: Mobile Middleware
Purchase Price: $95,200,000
Seller Revenue: $30,000,000
Revenue Multiple: 3.2x
Payment Terms: Cash
SEG's Perspective:
Sybase accelerates its push into mobile middleware with the purchase of mobile and remote device management provider XcelleNet. Sybase revenue slid from $964 million in 2000 to $778 million in 2003 after losing a chunk of its database business to Microsoft SQL Server. It's a big multiple, and a big bet for Sybase, which may use 17% of its total cash assets to aggressively grow a business unit (iAnywhere) that contributed 11% of total revenue last year. The seller, Francisco Partners, bought XcellNet in 2000 from Sterling Commerce for $50 million, a few years after Sterling acquired it for $200 million.
Symantec (Nasdaq: SYMC) acquires Brightmail
Category: Anti-Spam Software
Purchase Price: $370,000,000
Seller Revenue: $26,000,000
Revenue Multiple: 14.2x
Payment Terms: Cash
SEG's Perspective:
Brightmail, a high flying anti-spam provider, opts for a $370 million purchase by Symantec in lieu of a planned IPO, and receives a valuation reminiscent of days gone by. Despite significant revenue growth in the past four years, Brightmail posted its first profit ($1.2 million) in fiscal year ending January '04, with revenue jumping from $12 million to $26 million. Symantec has had a financial interest in Brightmail since 2000, when it led a fourth-round ($35 million) of equity investment, paying $18 million for an 11% stake (giving Brightmail a $160 million post-money valuation). Brightmail receives 85% of its revenue from only 5% of its customer base, with Microsoft alone accounting for more than 10% of total revenue. Microsoft is now expected to build its own anti-spam software, as well as an antivirus offering that will compete with Symantec.
Trinity Ventures acquires SciQuest (Nasdaq: SQST)
Category: Supply Chain & Logistics Software
Purchase Price: $12,170,000EV
Seller Revenue: $6,630,000
Revenue Multiple: 1.8x
Payment Terms: Cash
SEG's Perspective:
Trinity Ventures, a Menlo Park based venture capital firm, acquires SciQuest, a provider of procurement software for the life sciences and education markets. SciQuest reported a net loss of $16.6 million on revenue of $6.6 million in 2003, compared with a stunning loss of $70.8 million on revenue of $6.5 million in 2002. SciQuest shares traded as high as $90 shortly after the company went public in 1999, but plummeted to 65 cents in May 2003 before it instituted a 7.5-for-1 reverse split, pushing the stock price to $4.87 post-split. The purchase price represents a 55% premium over SciQuest's closing price before announcement, which surged 47% on news of the deal.
WebMD (NASDAQ: HLTH) acquires Dakota Imaging
Category: Healthcare Management Software
Purchase Price: $40,000,000
Seller Revenue: $17,500,000
Revenue Multiple: 2.3x
Payment Terms: Cash, Stock
SEG's Perspective:
In its fourth acquisition in less then a year, WebMD bolsters its transaction services department (WebMD Envoy) by acquiring Dakota Imaging, provider of automated healthcare claims processing technology and services. Dakota has grown its revenue an estimated 18.2% YOY and posted an EBITDA of $2.8 million in 2003. Dakota hopes for more of the same, since the deal includes a potential $25 million earnout. With $846 million in cash, plus the recent placement of $100 million worth of convertible debt with a CalPERS-backed fund, look for more acquisitions in the near future by WebMD.
Post Mortem:
Novell (NASDAQ: NOVL) acquires SuSE Linux AG
Category: Linux Software
Purchase Price: $210,000,000
Seller Revenue: $35,400,000
Revenue Multiple: 5.9x
Payment Terms: Cash
SEG's Perspective:
Novell, provider of networking and connectivity software, acquired Linux software solution provider SuSE Linux on November 4, 2003. Novell is reaping the rewards on its Linux investment, reporting second-quarter net income of $10.4 million, up from a $28.6 million dollar loss in the same quarter a year ago. Revenue was up 6% from a year ago to $293.6 million. The quarter was the first since acquiring SuSE. Novell Chairman and CEO said in a conference call "People…are now finding they don't have to move off of NetWare" to go to Linux.
EV: Enterprise value
a: Reported by IDC
This report was prepared by Software Equity Group, L.L.C. (SEG), a mergers and acquisitions advisory firm serving the software, life science and technology sectors. SEG is solely responsible for its content. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to its accuracy and does not purport to be complete. This information is not to be used as the primary basis of investment decisions. For more, please visit www.softwareequity.com, or phone (858) 509-2800.
