By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC
ECONOMY
The U.S. economy showed continued growth in the third quarter, but signals were once again mixed. GDP growth, the broadest measure of economic activity, was revised downward to 3.3% for 2Q04. The preliminary 3Q04 GDP number inched up to 3.7%, showing little improvement despite statements by Fed officials that the economy gained traction after hitting a "soft patch" in late Spring. While some economists are predicting a GDP of 4% or better in 4Q04, soaring oil prices, auto manufacturer reliance on costly incentives to spur sales, declines in consumer confidence and spending, disappointing hiring figures and recent increases in initial unemployment insurance claims, could signal slower growth in coming quarters.
Oil prices exceeding $50 a barrel weighed heavily on stock prices, with investors fearing high energy costs would negatively impact corporate earnings. Despite spiraling energy and health care costs, inflation remains at an annualized rate of 2% to 3%, but the Fed, seeking to be proactive, will almost certainly raise the federal funds rate again at its November 10th FOMC meeting, this time from 1.75% to 2.0%. The rate is still well below most estimates of equilibrium.
An average 204,000 new jobs a month were added from January to June, but U.S. job growth slowed in September as manufacturers, airlines and retailers shed workers. September was the fourth straight month fewer than 150,000 new jobs were created, the threshold many economists estimate is necessary to absorb a growing labor force and maintain the jobless rate. Although only 96,000 non-farm jobs were added in September, far fewer than the 128,000 created in August, the unemployment rate held steady at 5.4%.
The Conference Board's index of leading economic indicators, which forecasts the economy's likely performance over the next three to six months, fell in August by 0.3%, the third consecutive monthly decline. Most economists believe the decline represents a minor correction that does not signal an end to the economic recovery which began in March 2003. The Board's index of coincident indicators, a gauge of current economic activity, increased 0.2% in August and 0.2% in July. During the six month period through August, the coincident index has increased 1.3%.
PUBLIC MARKETS
Major market indexes moved in unison, rising in August and early September, but declining as the quarter ended (Figure 2). Overall, the S&P 500 fared better than the Dow and NASDAQ. The S&P declined a modest 2.3% this quarter but was still up 0.2% for the year. The Dow and NASDAQ posted declines of 3.4% and 7.4%, respectively, for the quarter, and have declined 3.6% and 5.3%, respectively, year to date. Stock prices of most public software companies declined in July, after several high profile vendors missed their second quarter revenue and earnings forecasts. Veritas, Sybase, Siebel, BMC, JDA, Computer Associates, Peoplesoft and Compuware all came in under analysts' consensus projections, shaking investor confidence in the software sector . The SEG 100, our composite index of publicly traded software companies, performed poorly most of the quarter and closed 3Q04 down 0.04% (down 3.7% year-to-date), despite a September rally. Other key financial performance measures for the SEG-100 are enumerated in Figure 3.
On a trailing-twelve-month (TTM) revenue basis, overall financial performance of the SEG-100 improved. Median TTM revenue increased 2.4% in 3Q04 compared to 2Q04, while TTM earnings increased 4.8% over the same period (Figures 4 and 5). Software companies with subscription-based revenue components, including Computer Associates, Symantec, Mercury Interactive and McAfee, turned in stronger performances. We continue to see subscription-based revenue as key to profitability and earnings growth.
Size continues to matter in the software industry. For the quarter, SEG-100 companies with revenues greater than $1 billion posted a median EV/Revenue ratio of 3.1x, compared to a median ratio of 1.6x for software companies with less than $1 billion in revenue (Figure 6). Profitability also continues to matter (Figure 7). The median EV/Revenue multiple for software companies posting a profit in 3Q04 was 2.4x, but only 1.4x for those reporting losses.
Every software product category in the SEG-100, with the exception of CRM, showed TTM revenue growth, led by storage management (+7.4%) and Internet tools (+5.5%). As for earnings, enterprise systems management vendors led all other categories, reporting an average TTM earnings increase of 45.4%, while enterprise resource planning and manufacturing software both declined 10.3% in median TTM earnings (Figure 8).
IT spending remains one of the most important bellwethers of software company financial performance. According to a Goldman Sachs August IT spending survey of CIOs, IT budgets (hardware, software and services) have been essentially flat year-to-date but should increase in 4Q04. For 2005, 45% of the CIOs surveyed are predicting their overall IT budgets will increase an average of 1.8%. Their highest software priorities were security, wireless LAN connectivity, VPN, web-application software and enterprise portal software.
Merrill Lynch's August 2004 software spending survey showed CIOs almost split among those expecting reduced IT spending and those anticipating a back-end loaded September and a healthy 4Q04 IT budget flush. Top spending priorities for the group were application integration, BI/data warehousing, security, document/content management and corporate portals (Figure 9). About 65% or Merrill Lynch's respondents indicate that software consumes between 10%-30% of their IT budget. Both the Goldman Sachs and Merrill Lynch surveys are predicting robust IT budget increases in the December timeframe.
INITIAL PUBLIC OFFERINGS
An active third quarter for new issues ensured 2004 will be the best year for IPOs since 2000. New issues held steady in the third quarter and are expected to maintain that pace in the fourth quarter thanks to a strong pipeline. According to Thomson Financial, 63 companies went public in 3Q04, raising a total of $13.3 billion. That compares to 58 IPOs and $9.5 billion in 2Q04. For comparison purposes, 21 companies went public in 3Q03 raising an aggregate $4.2 billion. The largest deal this quarter was online-search company Google, which raised $1.8 billion in its auction style IPO. Software IPOs in 3Q04 included Cogent (biometric hardware/software), NAVTEQ (navigation software), RightNow (CRM), Blackbaud (non-profit vertical software) and Phase Forward (clinical trials software) (Figure 10).
MERGERS & ACQUISITIONS: THE TRENDS
Consolidation is a familiar term in the software industry, but the intended meaning varies. Narrowly viewed, it connotes the buyout of a software company by a larger industry player, primarily to gain market share and eliminate a competitor. Oracle's attempt to acquire Peoplesoft is a classic example, but it's not representative of the sort of competitor buyouts taking place in 2004. More frequently, smaller public companies, seeking to bulk up in order to compete with the behemoths (software companies with market caps greater than $1 billion), acquired similarly-sized competitors to achieve scale. In 3Q04, competitor buyouts rose 5.4% over 2Q04. Art Technology Group's acquisition of Primus (online commerce software) provides a good example of a challenger buying a peer to gain market share and improve earnings by combining operations and cutting costs. From a broader software industry perspective, consolidation is simply a combining together of software companies for reasons financial, strategic or otherwise. The question we wrestle with daily is what specific buyer motives prompted those combinations? Our Trends section this quarter looks at software industry consolidation, driving forces and misconceptions.
For the past three years, better than four out of five software industry mergers and acquisitions can be characterized as product enhancement acquisitions or market extension acquisitions. We've defined both terms repeatedly in prior issues of our Report. What we have not emphasized previously, however, is the extraordinary degree to which these M&A deal drivers are intertwined.
According to our analysis, some 13% of 3Q04 transactions were market extension plays, with buyers acquiring their way into new vertical markets, new geography, or new software categories (Figure 11). Examples include Cognos' acquisition of Swedish enterprise performance management provider Frango; Vision HRM's acquisition of not-for-profit vertical software provider Serenic; and business intelligence provider Datawatch's purchase of content management solution Mergence. One year ago, in 4Q03, such market extension buys comprised almost 20% of all acquisitions. Has there been a change in buyer thinking, or is there a different phenomenon at work here?
We used to think relatively "safe" product enhancement deals and more "risky" market extension deals reflected very different buyer mentalities and they unquestionably do, for some buyers. But upon closer examination, it appears the ebb and flow of these deal types are related and far more predictable than one might imagine. Today's market extension buyer will likely become tomorrow's product enhancement buyer, as it seeks to flesh out and differentiate its offering in the new product category or territory. Thereafter, the same buyer will likely seek, once again, to extend into a new market. It's a dynamic process which accounts for the vast majority of today's software mergers and acquisitions.
Underlying these acquisitions is a phenomenon we call "Category Creep". It plays out it in any number of ways. Sometimes it takes the form of a "roll-up", the aggregation and integration of separate, well-established product categories. Historical examples abound. In the pre-Y2K era, Financial (Oracle), HR (Peoplesoft) and manufacturing (SAP) software application vendors, hungrily eyeing each others' turf, convinced the Fortune 1000 that fully integrated systems from the same vendor were essential. Dozens of software industry acquisitions soon followed, as those and other vendors scurried to acquire missing components and redefine themselves as full ERP providers.
Sometimes category creep occurs when an industry behemoth, unable to extract from its current market the revenue growth demanded by industry analysts and investors, annexes the leader of an adjacent product category and, in the process, redefines itself and its product category. Take EMC - the storage management behemoth - which acquired Documentum, the leading document management company and transposed itself into the leading provider of "Information Lifecycle Management" solutions, a new super category.
More often, category creep is driven by a mid-cap public software company, usually a leader in a particular product category. Typically, such a pure-play company will have superb technology, strong brand recognition, a sizable customer base, cash on its balance sheet and fierce competitors. Ironically, such success breeds discontent (i.e., "Why aren't we capitalizing more on our strengths?"). What better way to do so then evolve the current product line into a new product category that adds new functionality and capabilities which vastly improve end user productivity, ROI, etc., etc. For an example, look no further than Business Intelligence. Cognos, anxious to differentiate from its fierce rivals Business Objects, Informatica and Hyperion, acquired Adaytum, a financial analytic applications provider, and a new product category- Business Performance Management - was born. Smelling upgrade revenue and not to be outdone, financial analytic app provider Hyperion merged with Arbor (OLAP), and shortly thereafter acquired Brio (query and reporting). Not to be outdone, Business Objects acquired Acta to add data integration functionality essential for business performance management.
Business Intelligence is hardly an isolated example of product category creep. It wasn't so long ago sales automation developers and help desk application vendors consolidated to form customer relationship management, and document management software providers added object and data management to create the content management category. Today engineering design automation developers are expanding by acquisition into product lifecycle management; systems integrators and enterprise application integration providers are morphing into middleware and web services; and application development platform providers have moved aggressively into configuration management, change management, IT asset management and business technology optimization. And acquisitions are the preferred route to these new destinations.
Once a software company has moved into the new product category, or created a new product category, it will then execute one or more product enhancement acquisitions to flesh out and differentiate its new offering. Take Mercury Interactive, the respected leader in testing and analyzing the performance of enterprise and web-based applications. In June 2003 it acquired Kintana, a $44M provider of products that help automate and streamline key processes critical for IT organizations, and made it the cornerstone of Mercury's Business Technology Optimization (BTO) vision. In July 2003, Mercury bought Allerez, a developer of IT real-time reports and analytics to enhance its BTO offering. Ten months later Mercury again expanded its new BTO division by buying Appilog, a developer of applications which model and pinpoint changes to a company's IT infrastructure.
Also contributing to product creep and consolidation is the rapidly growing number of financial buyers willing to pay "strategic buyer" multiples to acquire growing, highly profitable, best-of-breed "platform" companies that serve high opportunity markets. Once the platform is established, these financial buyers are acquiring companies to add incremental and differentiating functionality and extend the platform into new markets.
With all this "consolidation", one might conclude the number of software companies is significantly lower today than 6 years ago, but there's no data to support that. And with all of this consolidation, one might expect to see a steady decline in the number of software mergers and acquisitions, but the opposite is true. Some 500 more software companies will be acquired in 2004 than were acquired in 1998. How can that be?
The software industry has proven to be remarkably resilient, innovative and opportunistic. Although some have been declaring software to be a mature industry, there are, every year, a host of innovative products and cutting edge technologies from new entrants which make end users more productive, informed and insightful. Once they gain traction, customers, brand identity and profitability, they become viable consolidation candidates.
Some additional 3Q04 trends:
Vertical acquisitions were up 4% from 2Q04. Kintera acquired three more companies this quarter (BNW Software, KindMark, GivingCapital) to solidify its leadership of the non-profit market niche, after encountering increased competition from Blackbaud, which recently went public.
Most software deals have been friendly affairs, but that may change. Oracle vs. Peoplesoft wasn't the only hostile deal on the table. During the third quarter, CyberGuard made a run at its direct competitor Secure Computing, which was twice its size, but eventually accepted defeat after realizing its all-stock offer had no teeth. JDA's all-stock offer for QRS was challenged by an array of other suitors, including e-logistics provider Inovis and three financial buyers after JDA's stock price plummeted on poor 2Q04 performance. Inovis offered 16% more than JDA's initial offer (31% more than JDA's post-bid stock price) and prevailed. We predict sweetheart deals will continue to attract competing bids from private equity firms, which seem to be less inhibited by software industry valuations than in the past.
Security software remained the most active software product category from an M&A perspective, and will likely remain so in 4Q04. Among the security software vendors targeted and acquired in 3Q04 were Mailblocks (America Onlince, TurnTide (Symantec), Foundstone (McAfee), BugScan (LogicLibrary), PestPatrol (Computer Associates), and Omniva (Liquid Machines).
MERGERS AND ACQUISITIONS: THE NUMBERS
Across all industry sectors, there were 2,945 mergers and acquisitions in the U.S. during the third quarter, aggregating $99 billion (Figure 12). At the current run rate, overall domestic deal volume in 2004 will reach 10,240, outpacing 2003 by 20%, and aggregate transaction value will exceed $732 billion, a 39% increase over 2003. As in the prior two quarters, software continued to lead all other industry sectors with 424 transactions, which equates to approximately 14% of all U.S. M&A activity in 3Q04 (Figure 13). Acquirers spent $7.5 billion on software businesses in 3Q04, a second quarterly decline in M&A dollar volume when compared to the $12.6 billion expended in 1Q04. The first quarter, however, was heavily skewed by two multi-billion dollar mega-deals totaling more than $6 billion.
The most noteworthy M&A development in 3Q04 was a rather sharp reduction in median valuation, measured as a multiple of TTM revenue, breaking a streak of six consecutive quarter-over-quarter increases. The median software company M&A valuation (based on equity purchase price), was 1.7 times (TTM) revenue in 3Q04, an increase over 3Q03, but significantly lower than 2Q04. Still, the median (TTM) revenue multiple YTD stands at a very respectable 2.3x. We see 4Q04, and the first half of 2005, settling in at the 2.3x - 2.5x (TTM) range.
We attribute the valuation decline in 3Q04 to several factors: First, the TTM median valuation of 2.9, relative to 2.3 in 1Q04, was an aberration, in part attributable to a disproportionate number of product category creep/market extension deals with high multiples. Second, the third quarter saw the NASDAQ down some 13% in August before bouncing back to close the quarter down 7.4%, as noted in earlier sections of this Report. There is a consistently close correlation between NASDAQ performance and software industry M&A valuations and deal volume.
Figure 14 demonstrates how closely NASDAQ performance is aligned with North American software industry deal volume. Figure 15 shows a strong correlation between NASDAQ performance and M&A median valuations, but requires a bit more explanation. Median valuations peaked at about 5x (TTM) in early 2000, declined more precipitously than the NASDAQ composite, then leveled off as a result of fewer fire sales, lots of cash on buyer balance sheets, and a stubborn refusal by the relatively few remaining healthy sellers to exit for less than 2x. By 1Q03, valuations were once again tracking the NASDAQ, and the two indices have remained closely correlated through 3Q04.
Declining stock prices have also impacted the use of cash vs. stock as deal currency (Figure 16). As a result of a floundering NASDAQ, stock-only deals were down in 3Q04 by 17% compared to the prior quarter. 56% of the deals in 3Q04 were cash only, up sharply from 42% of all transactions in 2Q04. The number of deals where a combination of cash and stock was used increased 4% increase from in the third quarter.
MERGERS AND ACQUISITIONS: MOST ACTIVE BUYERS
Multi-transaction buyers proliferated in the first quarter but decreased markedly in both the second quarter and third quarter of 2004. Some of this quarter's most active buyers:
- Agilisys
- Aperum
- IncoDev Software
- Bentley
- AXSYS
- Haestad Methods
- Cisco
- Parc
- P-Cube
- dynamicsoft
- Concerto Software
- Positive Software Systems
- Rockwell FirstPoint Contact
- IBM
- Alphablox
- Cyanea
- Venetica
- Kintera
- BNW Software
- KindMark
- GivingCapital
- Open Text
- Artesia
- Vista Plus
- Tekelec
- Steleus Group
- VocalData
- Veritas
- KVault Software
- Invio Softwar
MERGERS AND ACQUISITIONS: SELECT 2004 SOFTWARE M&A TRANSACTIONS
| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Art Technology Group(NASDAQ: ARTG) | Primus(NASDAQ: PKSI) | $20,060,000EV | $25,700,000 | 0.8x | Stock |
| Category: Customer Relationship Management, Marketing & Sales | |||||
| SEG's Insight:
Art Technology Group (ATG), provider of ecommerce software, acquires Primus Knowledge Solutions, a developer of customer relationship management, marketing and knowledge management software for managing customer queries, emails, and chat sessions. ATG saw ample cross-sell opportunities into Primus' installed base and was also attracted by Primus' 29% year-over-year revenue growth. The street didn't seem to recognize the synergies, as news of the deal had virtually no impact on Primus' share price and pushed ATG's down 12.2%. Both companies have suffered similar fates since going public in July 1999. At one time, each enjoyed a share price north of $120, but were trading below $1 on deal day. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Cognos(NASDAQ: COGN) | Frango(Stockholm: FRAN B) | $52,200,000 | $34,300,000 | 1.5x | Cash |
| Category: Enterprise Performance Management | |||||
| SEG's Insight:
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. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| CyberGuard(NASDAQ: CGFW) | Secure Computing(NASDAQ: SCUR) | $256,120,000EV | $81,250,000 | 3.2x | Stock |
| Category: Security Software | |||||
| SEG's Insight:
Network security provider CyberGuard makes an audacious offer for larger rival Secure Computing by proposing an all stock deal originally worth $297 million. CyberGuard's offer came shortly after Secure's share price dropped 36%, following its negative second quarter guidance. Secure promptly rejected the offer, which represented only a 22% premium for Secure shareholders. In response, CyberGuard offered to "sweeten the deal" by raising cash through a private placement, but provided few details. Under terms of the original deal, Secure's shareholders would have owned 56% of the combined company, while contributing almost three-quarters of total income. CyberGuard has completed three acquisitions since early 2003, seeking to compete more effectively against larger rivals Cisco and CheckPoint. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| JDA Software(NASDAQ: JDAS) | QRS(NASDAQ: QRSI) | $67,320,000EV | $123,050,000 | 0.6x | Stock |
| Category: Supply Chain Management/Logisitcs, eCommerce Software | |||||
| SEG's Insight:
JDA Software, a leading producer of software for the retail industry, incites a bidding war for QRS, publisher of the leading electronic retail catalogue in North America and a provider of collaborative commerce solutions to the general merchandise and apparel industry. Shortly after making its all stock offer, JDA released negative second quarter results which drove the deal value down from $100 million to $85 million. After news of the deal caused QRS' share price to rise 12%, three private buyout firms entered the fray, offering cash. The most notable bidder is Avling Partners, headed by QRS founder (Peter Johnson) who owns a 10.6% stake in QRS. Contrary to the predictions of some, we expect JDA to up its offer. The addition of QRS would make JDA 50% larger with 50% of revenues recurring, thanks to QRS' lucrative revenue model. QRS is obligated to pay a $3.75 million breakup fee to JDA if it breaks the engagement. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Macrovision(NASDAQ: MVSN) | InstallShield Software | $76,000,000 | $35,000,000 | 2.2x | Cash |
| Category: Desktop Software | |||||
| SEG's Insight:
Macrovision, a provider of electronic licensing, copy protection and digital rights management solutions, acquires InstallShield, the leading developer of software installation tools. With InstallShield, Macrovision gains access to 69,000 software developers and countless enterprise system administrators. For InstallShield, the time was right, with revenue declining from an estimated $50 million in 2000 to $35 million in 2003. In addition to the $76 million all cash purchase price, the transaction includes a potential $20 million earnout. InstallShield's main competitor, Wise Solutions (which InstallShield sued for stealing proprietary information), was acquired in December 2003 by Altiris for 2.3x. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| MCAFEE(NYSE: MFE) | Foundstone | $86,000,000 | $15,000,000 | 5.7x | Cash |
| Category: Vulnerability Management Software | |||||
| SEG's Insight:
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). |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Open Solutions(NASDAQ: OPEN) | Datawest Solutions(TSX: DS) | $38,000,000 | $34,300,000 | 1.1x | Cash |
| Category: Banking, Financial Services Software | |||||
| SEG's Insight:
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. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| QUADRAMED(OTCBB: QMDC.OB) | Tempus Software | $13,220,590 | $3,400,000 | 3.9x | Stock, Cash |
| Category: HealthCare Software | |||||
| SEG's Insight:
QuadraMed, a healthcare information technology provider, acquires Tempus Software, a privately held developer of patient access and enterprise scheduling solutions for the healthcare industry. With Tempus, QuadraMed seeks to beef up its Hospital Information Systems offering and gain access to 350 healthcare facilities in the U.S. and Canada. Although QuadraMed lost almost $7 million on revenue of $132 million (ttm) and has posted a year-end profit only twice in the last 10 years, Tempus shareholders agreed to take $5.8 million in cash and 2,558,824 shares of QuadraMed common stock. Earlier in June, QuadraMed raised $94 million in a private placement to pay down debt. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Symantec (NASDAQ: SYMC) | TurnTide | $28,000,000 | $1,700,000(Estimate) | 16.5x | Cash |
| Category: Anti-Spam | |||||
| SEG's Insight:
Enterprise security software provider Symantec acquires TurnTide, a startup anti-spam software developer. The deal comes less than two months after Symantec paid $370 million for anti-spam solution provider Brightmail. Symantec touts the two acquisitions as complementary, with TurnTide's technology installed on network routers to slow down a spam sender's system, and Brightmail installed on the messaging network. The enterprise anti-spam market is expected to reach $979 million this year. TurnTide began business 5 months before the acquisition with $1 million in funding from founder Josh Kopelman, whose previous company Half.com was acquired by eBay for $241 million only 6 months after its website went live. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| TEKELEC(NASDAQ: TKLC) | Steleus Group | $56,000,000 | $25,000,000 | 2.2x | Stock, Cash |
| Category: Network Performance Management Software | |||||
| SEG's Insight:
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. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Total System Services (NYSE: TSS) | Clarity Payment Solutions | $53,000,000 | $9,800,000(Estimate) | 5.4x | Cash |
| Category: Transaction Processing | |||||
| SEG's Insight:
Total Systems Services (TSYS), a $1 billion global electronic payment processing company, acquires Clarity Payment Solutions, provider of reporting, marketing, communications, compliance and risk management tools designed for the prepaid market. Clarity, now one of 9 TSYS subsidiaries, will allow TSYS to expand out of its mature current market (consumer, debit, commercial, and retail cards) into emerging prepaid markets like healthcare, payroll, insurance claims, branded gift and the like. Look for more acquisitions from TSYS as it tries to branch out into emerging foreign markets (domestic sales accounted for 92% of total revenue) and grow rapidly in a consolidating industry. In April, TSYS' largest competitor, First Data, acquired Concord EFS for $7 billion. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| Veritas (NYSE: VRTS) | KVault Software | $225,000,000 | $23,000,000 | 9.8x | Cash |
| Category: E-mail Content Management | |||||
| SEG's Insight:
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. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| VERTICALNET(NASDAQ: VERT) | B2eMarkets | $12,963,603 | $8,100,000 | 1.6x | Stock |
| Category: Supply Chain Management and Logistics | |||||
| SEG's Insight:
VerticalNet, a former dotcom darling and operator of online vertical trade communities that is now a provider of strategic sourcing and supply chain software, acquires strategic sourcing software maker, B2eMarkets (B2e). B2e complements VerticalNet's previous 2004 acquisition of Tigris, a decision support optimization provider, and will bring with it sorely needed new customers. VerticalNet, with new licenses accounting for only 3% of total revenue and four customers responsible for 72% of total revenue over the last 6 months, convinced B2e to take its stock and a promissory note as payment. The united company will be competing against the recently combined Ariba/FreeMarkets, larger ERP software developers, and niche players in spend analytics, sourcing, and optimization. In an attempt to clean up its balance sheet and return to profitability, VerticalNet recently raised $3 million in a private placement. VerticalNet's $32 million market cap is a far cry from its 1999 IPO market cap of $738 million. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| ViryaNet(NASDAQ: VRYA) | Utility Partners | $5,200,000 | $5,600,000(Estimate) | 0.9x | Cash, Stock |
| Category: Human Resource & Workforce Management | |||||
| SEG's Insight:
ViryaNet, a developer of internet based software for managing service operations through browsers, wireless devices, laptops, and PCs, acquires Utility Partners (UP), a mobile workforce management solution provider for the utilities vertical. The acquisition eliminates a competitor in the utilities sector where ViryaNet has focused. ViryaNet, which hasn't had a profitable fiscal year since 1996 and currently posts a $13.3 million market cap, financed the acquisition with 52% stock and the balance in cash. ViryaNet, whose TTM revenue is $13.4 million, will get a significant boost from UP's approximately $5.6 million in revenue. The deal coincided with an announcement by one of ViryaNet's competitors, MDSI, which terminated its acquisition of mobile resource management provider @Road. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| WebMD(NASDAQ: HLTH) | ViPS | $160,000,000 | $58,300,000 | 2.7x | Cash |
| Category: Health Care Software | |||||
| SEG's Insight:
Continuing an acquisition spree of 22 companies in 2002 and 12 companies in 2003, WebMD acquires ViPS, a provider of decision support, claims processing and fraud prevention solutions to the Government, Blue Cross - Blue Shield plans and commercial health payers. In addition to providing ready access to these key target markets, ViPS will add some $17 million to WebMD's bottom line. The $160 million purchase price includes certain assumed liabilities and will be paid in cash. Once a subsidiary of First Data, ViPS was taken private by investment firm Cornerstone Equity Investors in 1998 for $48 million with revenue of approximately $24.5 million. |
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| Buyer | Seller | Price | Revenue | Mult. | Currency |
| WorkStream(NASDAQ: WSTM) | Bravanta | $5,600,000 | $5,600,000(Estimate) | 1.0x | Stock |
| Category: Incentive Management | |||||
| SEG's Insight:
Workstream, a provider of hosted workforce management solutions, acquires another incentive management software company. This time it's Bravanta, a San Francisco startup which has raised over $46 million from large VCs. The deal comes two months after Workstream's acquisition of compensation management solution provider Kadiri, and is WorkStream's third buy this year. WorkStream's strategy is to grow through acquisition and seek a buyer when consolidated revenue reaches $35 million to $40 million. With Bravanto, WorkStream expects to add 300 blue chip customers and $9 million in revenue (a significant boost to its FY2003 $18 million total). With $10 million recently raised in a private placement earmarked for growth, look for more acquisitions from Workstream. |
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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
