By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC
M&A valuations continued to range widely in the third quarter, reflecting disparate buyer motives and significant variations by product category. Once again the highest multiples were paid by those buyers seeking to enhance and differentiate their existing offering by adding incremental functionality. Veritas fleshes out its content management offering by acquiring KVault, a leading provider of email archiving solutions, while McAfee plugs a hole in its intrusion prevention offering by acquiring Foundstone, a provider of network vulnerability assessment software. Lower multiples were paid by buyers seeking to expand internationally, as Cognos acquires Swedish BPM provider Frango, and Open Solutions bought Datawest to enlarge its Canada footprint.
Veritas (NYSE: VRTS) acquires KVault Software
Category: E-mail content management
Purchase Price: $225,000,000
Seller Revenue: $23,000,000
Revenue Multiple: 9.8x
Payment Terms: Cash
SEG's Perspective:
Veritas acquires KVault Software, an England based developer of e-mail content archiving. The e-mail archiving market has seen 57% CAGR over the next 5 years1, in large part due to Sarbanes-Oxley. Veritas paid an estimated 10 times trailing earnings to acquire a best-of-breed offering after an attempt to build its own e-mail storage product failed last year. An estimated 23% of KVault's 2003 revenue came from Veritas competitor EMC, which now offers a complementary archiving product through recently acquired Legato. Veritas hoped the acquisition would generate excitement after missing 2Q04 financial projections and a 30% reduction in its market cap, but Veritas' share price fell 4% on news of the deal because of concerns it overpaid.
McAfee (NYSE: MFE) acquires Foundstone
Category: Vulnerability Management Software
Purchase Price: $86,000,000
Seller Revenue: $15,000,000
Revenue Multiple: 5.7x
Payment Terms: Cash
SEG's Perspective:
Returning to its roots as a security software company after a major restructuring, McAfee buys Foundstone, a network-vulnerability management company. Foundstone's revenue growth has reportedly exceeded 100% per year. Foundstone will allow McAfee to fill a gap in its intrusion prevention offering and should yield abundant cross-sell opportunities to Foundstone's 400 enterprise customers. Part of McAfee's makeover, including a change in name from Network Associates, involved selling its Sniffer product line ($235 million) as well as its help desk software ($47 million), while acquiring intrusion detection companies Entercept ($120 million) and IntruVert ($100 million).
TEKELEC (NASDAQ: TKLC) acquires Steleus Group
Category: Network Performance Management Software
Purchase Price: $56,000,000
Seller Revenue: $25,000,000
Revenue Multiple: 2.2x
Payment Terms: Stock,Cash
SEG's Perspective:
Tekelec, provider of telecommunications products for next-generation fixed, mobile, and packet networks, acquires Steleus Group, a real-time performance monitoring company that supplies network-related intelligence to telecom operators. After a two year strategic partnership, Steleus will now form the cornerstone of Tekelec's new Communications Software Solutions business unit. With almost 90% of its revenue coming from North America, Tekelec found Steleus' footprint outside of the U.S. (100 operators in 35 countries) particularly attractive. Aggressively seeking growth through acquisitions, Tekelec made two investments in network switching equipment makers by buying a 52% controlling interest in Santera ($28 million) and completing its acquisition of Taqua ($86 million) in April.
Cognos (NASDAQ: COGN) acquires Frango (Stockholm: FRAN B)
Category: Enterprise Performance Management
Purchase Price: $52,200,000
Seller Revenue: $34,300,000
Revenue Multiple: 1.5x
Payment Terms: Cash
SEG's Perspective:
Business intelligence powerhouse Cognos acquires Swedish business performance management (BPM) provider Frango, which specializes in consolidation and financial reporting products. With 60% of its sales coming from North America, Cognos sees Frango as an opportunity to quickly expand its European presence and compete with arch rival Business Objects on its home court. The purchase price represents a 63% premium over Frango's closing price1 on the Stockholm Exchange. In December 2002 Cognos acquired Adaytum ($160 million), which is another BPM tool for budgeting and planning.
Open Solutions (NASDAQ: OPEN) acquires Datawest Solutions (TSX: DS)
Category: Banking, Financial Services Software
Purchase Price: $38,000,000
Seller Revenue: $34,300,000
Revenue Multiple: 1.1x
Payment Terms: Cash
SEG's Perspective:
Open Solutions, primarily a provider of software systems for small banks and credit unions, acquires Datawest Solutions, a provider of outsourced Internet and telephone banking systems, CRM applications and web-based loan origination software to Canadian credit unions. Open Solutions, a small public company which competes against billion dollar giants like Fiserv and Jack Henry, acquired Datawest to extend its presence in Canada. Seeking to rapidly grow its installed base and add an array of products capable of quickly generating incremental revenue, Open has spent $76.1 million on 5 acquisitions since its November 2003 IPO.
EV: Enterprise Value = equity purchase price, plus seller's interest bearing debt, minus seller's cash & cash equivalents
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.
