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Q4 2002 - Software M&A Review	<< Back
By Ken Bender, Managing Director and Allen Cinzori, Associate - Software Equity Group, LLC By our count, twelve noteworthy deals were concluded in the fourth quarter, bringing to close a year that saw considerably more software industry mergers and acquisitions than many had predicted. Look for Software Equity Group's 2002 Annual M&A Report, out by month end, which will provide a comprehensive analysis of last year's deals, valuations and trends. Fourth quarter deals built upon a theme which became well-entrenched in 2002: Buyers seek strategic acquisitions, usually close to home, which add leverage in their current markets, provide competitive differentiation and generate immediate incremental revenue and near term profitability. IBM Corp. (NYSE: IBM) acquires Rational Software Corp. (Nasdaq: RATL) Category: Software developer tools Purchase Price: 1,600,000,000EV Seller Revenue: $657,300,000 Revenue Multiple: 2.43x Payment Terms: Cash and stock SEG's Perspective: IBM bulks up its software group and improves its positioning against Microsoft by adding Rational, the crown jewel of the software development tools sector. With Rational, IBM seeks to foster its e-business-on-demand strategy enabling disparate enterprise applications to automatically integrate without writing new code. IBM also gains access to Rational's extensive customer base, which includes 98% of the Fortune 100. This is an all cash deal in which Rational shareholders receive a 29% premium for their shares. Adding back Rational's $500M of debt and subtracting its $1B of cash, IBM paid 2.4 times Rational's LTM revenue. NetIQ Corp. (NTIQ) acquires Marshal Software Category: Enterprise security Purchase Price: $23,000,000 Seller Revenue: $6,000,000 (estimated) Revenue Multiple: 3.83x Payment Terms: Cash SEG's Perspective: NetIQ, which has evolved from a provider of Windows infrastructure management solutions to a cross-platform provider of systems management, security management and Web analytics, picks up privately held Marshal Software of Auckland, New Zealand. Marshal strengthens NetIQ's enterprise content security offering and anti-spam solutions for messaging environments, currently a source of pain for many NetIQ customers. This transaction follows on the heels of NetIQ's recent acquisition of security management provider PentaSafe Security Technologies. VERITAS Software Corp (Nasdaq: VRTS) acquires Precise Software Solutions (Nasdaq: PRSE) Category: Application performance management Purchase Price: $400,000,000EV Seller Revenue: $71,800,000 Revenue Multiple: 5.57x Payment Terms: Cash & stock SEG's Perspective: A leader in storage management, Veritas is aggressively pursuing additional market opportunities and positioning to be a leading IT infrastructure management provider. Veritas will acquire Precise, a next generation application performance management provider, and Jareva Technologies, a market leader in server automation. From Precise, Veritas also picks up a complementary low end SAN product. Precise shareholders will receive a 37% premium for their shares. Veritas will pay $63M in cash for Jareva. Jareva's revenue was not disclosed. Barra (Nasdaq: BARZ) acquires Financial Engineering Associates Category: Financial investment software Purchase Price: $21,500,000 Seller Revenue: $8,000,000 Revenue Multiple: 2.69x Payment Terms: Cash SEG's Perspective: Barra, a leader in risk management technology for investment professionals, strengthens its product offering by acquiring privately held Financial Engineering Associates (FEA), a market leader in option valuation models and risk analytics software with more than 700 institutional clients. Highly profitable Barra (39% EBITDA) paid all cash for FEA. Fidelio Acquisition Company acquires Intertrust Technologies Corp (Nasdaq: ITRU) Category: Digital rights management Purchase Price: $328,100,000EV Seller Revenue: $11,700,000 Revenue Multiple: 28.04x Payment Terms: Cash SEG's Perspective: Fidelio, a company formed by Sony, Phillips and others, purchases Intertrust, the leader in digital rights management. The buyers hope Intertrust's technology will help leverage their digital media strategies, and will rely on Intertrust's strong patent portfolio and active litigation strategy to help limit competition. With trailing twelve-month revenue of $11.7M, Intertrust sells for a 39 times multiple, or 28 times after backing out its cash balance of $125M. Intertrust shareholders will receive $4.25 per share in cash, a 26% premium over what some believe was a highly overvalued market cap. Borland Software Corp. (Nasdaq: BORL) acquires Starbase Corp. (Nasdaq: SBAS) Category: Software developer tools Purchase Price: $22,900,000EV Seller Revenue: $41,100,000 Revenue Multiple: 0.56x Payment Terms: Cash SEG's Perspective: Application development platform provider Borland expands into software lifecycle solutions by acquiring Starbase, a leading software configuration management provider. Starbase also furthers Borland's platform independence strategy and complements its TogetherSoft acquisition. Though the revenue multiple was only 0.56, Starbase shareholders will receive a cash premium of 244% for their shares. Time was running out for Starbase, with only $1.4M of cash and a trailing twelve-month operating loss of $12M before depreciation and amortization. Rocket Software acquires TCSI Corp. (Nasdaq: TCSI) Category: Telecom network management software Purchase Price: $10,700,000 Seller Revenue: $7,710,000 Revenue Multiple: 1.39x Payment Terms: Cash SEG's Perspective: Rocket Software, an ISV which develops enterprise software for OEMs such as IBM, RSA and Microsoft, picks up TCSI, a struggling public software company serving the global telecom industry. Backing out TCSI's $15M of cash from the $11M purchase price, TCSI shareholders receive a 62% premium and Rocket receives $4M to cover losses until it controls TCSI's burn. Expect immediate and substantial cost cutting of non-developer TCSI personnel. SofTech acquires Workgroup Technology Corp. (Nasdaq: WKGP) Category: Product data management software Purchase Price: $1,400,000EV Seller Revenue: $7,020,000 Revenue Multiple: 0.20x Payment Terms: Cash SEG's Perspective: Two market challenged companies, one with a substantial operating loss and the other with declining revenue and a 26% net loss last quarter, join together hoping the whole will exceed the sum of the parts. SofTech plans to wrap its CAD/CAM products with Workgroup's product data management products. SofTech shareholders reacted favorably, pushing the stock upward 100%. Documentum (Nasdaq: DCTM) acquires eRoom Technology Category: Enterprise collaboration software Purchase Price: $110,000,000 Seller Revenue: $29,500,000 Revenue Multiple: 3.73x Payment Terms: Cash and stock SEG's Perspective: After concluding that collaboration is an ideal complement to enterprise content management (ECM), leading ECM developer Documentum acquired eRoom, a venture backed provider of enterprise collaboration software and services. Documentum expects to realize substantial ROI by cross-selling each company's products in the other's installed base. Based on Documentum's stock price prior to the announcement, eRoom shareholders will receive $97M in Documentum stock and $12.6M in cash. Borland Software Corp. (Nasdaq: BORL) acquires TogetherSoft Corp. Category: Software design and development tools Purchase Price: $185,000,000 Seller Revenue: $51,000,000 Revenue Multiple: 3.63x Payment Terms: Cash and stock SEG's Perspective: Application development platform provider Borland was apparently dissatisfied with its arrangement to resell Rational Rose as its UML offering. TogetherSoft gives Borland ownership of a state-of-the-art, collaborative UML-based CASE application development toolset and access to blue chip customers such as GE, NASA and Home Depot. The multiple reflects both strategic fit and TogetherSoft's 81% revenue growth in 2001. Invitrogen Corp. (Nasdaq: IVGN) acquires InforMax (Nasdaq: INMX) Category: Software for research experiments Purchase Price: $42,000,000 Seller Revenue: $16,900,000 Revenue Multiple: 2.49x Payment Terms: Cash SEG's Perspective: Invitrogen, a provider of research tools to the life sciences industry, picks up InforMax, a software company which develops tools for design, management and interpretation of research experiments. This is another highly strategic deal which leverages both buyer and seller in the same target market. InforMax shareholders received $1.36 a share, a 142% premium. However, the revenue multiple is really negative 0.26 after backing out InforMax's $47M cash balance from the purchase price. Microsoft Corp.(Nasdaq: MSFT) acquires Vicinity Corp. (Nasdaq: VCNT) Category: Location based services and technology Purchase Price: $13,200,000EV Seller Revenue: $15,800,000 Revenue Multiple: 0.83x Payment Terms: Cash Microsoft continues to flirt with the wireless industry acquiring Vicinity, a provider of location-based solutions that enable businesses to direct customers to a local brick-and-mortar store. Microsoft aims to leverage Vicinity's products and to quickly deliver .NET platforms and solutions to this market. With $82.8M of cash on Vicinity's balance sheet, the effective purchase price was $13.2M. Vicinity shareholders received a 46% premium for their shares. EV: Enterprise Value = equity purchase price, plus seller's interest bearing debt, minus seller's cash & equivalents This update was prepared by Software Equity Group, L.L.C. (SEG), a leading M&A firm serving the technology industry. 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.
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