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Software M&A: Q3 in Review	<< Back
By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC Software M&A activity continues to gain momentum, driven by industry consolidation, strategic acquisitions and smaller public companies going private. Enterprise resource planning continues to be one of the hottest sectors, with the spotlight focused on PeopleSoft, J.D. Edwards and Oracle. Oracle's hopes for a quick acquisition of PeopleSoft have been stymied by poison pills, antitrust issues and continued opposition by PeopleSoft's board. PeopleSoft did, however, manage to consummate its purchase of J.D. Edwards, closing the transaction in mid-July. Other acquisitive enterprise software vendors included Epicor, Lawson Software, The Sage Group and SSA Global Technologies. The business intelligence sector was equally hot, as Actuate, Business Objects and Hyperion all executed strategic acquisitions with significant "pull through" revenue potential. Overall, software M&A is on track to reach 400 deals by the end of the third quarter, a substantial improvement over Q2's 300 deals, and the 272 deals consummated in Q1. Below is our perspective on eight of the most significant deals. Business Objects (Nasdaq:BOJB) to acquire Crystal Decisions Category: Reporting and query tools Purchase Price: $820,000,000 Seller Revenue: $270,000,000 Revenue Multiple: 3.04x Payment Terms: Stock and cash SEG's Perspective: Business intelligence software provider Business Objects picks up the world's leading report writer. BO covets the midmarket and Crystal boasts 14 million licenses as well as 350 OEMs. Incremental revenue through cross-licensing is the short-term goal, but BO will have to sell an awful lot of report writers to justify the multiple it paid. For Crystal Decisions, the sale scotches a planned IPO, but it's doubtful the markets would have been as generous. BO also gets Crystal's $95 million in cash and expects the acquisition to be immediately accretive. EMC (NYSE:EMC) to acquire Legato Systems (Nasdaq:LGTO) Category: Storage backup and recovery Purchase Price: $1,239,420,000EV Seller Revenue: $ 280,300,000 Revenue Multiple: 4.42x Payment Terms: Stock SEG's Perspective: Information and storage leader EMC, hammered by IT budget cuts and resistance to its proprietary offering, continues its foray into open systems through acquisition. Its fourth software acquisition in the last 12 months, EMC acquires Legato, the number three seller of backup and recovery software. Expect EMC to also capitalize on Legato's 500 strong sales force and customer base of some 31,000 businesses. Legato shareholders received a 16 percent premium, a nice outcome given the firm's rocky road since its revenue recognition debacle in 2000. Epicor Software (Nasdaq:EPIC) acquired ROI Systems Category: Enterprise resource planning Purchase Price: $20,700,000 Seller Revenue: $ 20,000,000 Revenue Multiple: 1.04x Payment Terms: Cash SEG's Perspective: A provider of enterprise software to the mid-market, Epicor picks up ROI Systems, a privately held ERP vendor to multiple vertical sectors in manufacturing. This deal is typical of the current M&A market; Epicor looks to add immediate revenue and earnings by leveraging ROI's complementary products and 6,500 customers. This is an all-cash deal of a business that has sustained 20 years of profitability for a price equivalent to one-time trailing 12 month revenue. Hyperion Solutions (Nasdaq:HYSL) to acquire Brio Software (Nasdaq:BRIO) Category: Business intelligence tools Purchase Price: $116,500,000EV Seller Revenue: $101,800,000 Revenue Multiple: 1.14x Payment Terms: Stock and cash SEG's Perspective: Just days after the Business Objects-Crystal Decisions deal, Hyperion, a leader in business performance management, acquires Brio after former partner Crystal Decisions sells to Business Objects. Brio's strong query and reporting tools are an excellent entre to Hyperion's dynamic enterprise performance monitoring. Brio's declining revenues and ongoing operating losses starkly contrast with Crystal Decisions' growth and profitability and help explain the lower multiple. Hyperion adds Brio's 3,000 customers, while beefing up its query and reporting offering. Brio shareholders get a 39 percent premium. Intuit (Nasdaq:INTU) acquires Income Dynamics Category: Tax preparation software Purchase Price: $10,000,000 Seller Revenue: $3,500,000 (estimate) Revenue Multiple: 2.86x Payment Terms: Stock SEG's Perspective: Financial software behemoth Intuit reenters the acquisition fray, this time buying Income Dynamics, a maker of taxpayer tools that will strengthen market-leading TurboTax by giving it the power to easily estimate the value of items donated to charities. This is Intuit's first acquisition since it bought IT resource and tracking firm Blue Ocean Software for $170 million in August 2002. Income Dynamics revenues are estimated to be $3.5M. The Sage Group to acquire Timberline Software (Nasdaq:TMBS) Category: Enterprise software for construction and real estate Purchase Price: $91,850,000EV Seller Revenue: $63,100,000 Revenue Multiple: 1.46x Payment Terms: Cash SEG's Perspective: The Sage Group follows through on its promise to add vertical business tools for the midmarket with its acquisition of Timberline. Looks like Sage may be mimicking the vertical acquisition strategy Intuit began nearly two years ago. Sage paid Timberline shareholders a 33 percent premium to get the company's integrated operations/financial tools for medium-sized construction and real estate outfits. The buy gives U.K-based Sage and U.S. subsidiary Best Software a shot at holding onto its current customers as they outgrow the pair's entry-level offerings. SCO Group (Nasdaq:SCOX) acquires Vultus Category: Developer tools Purchase Price: $2,700,000 Seller Revenue: $1,250,000 (estimate) Revenue Multiple: 2.16x Payment Terms: Stock SEG's Perspective: SCO Group, a provider of tools and services for Linux developers that has seen its stock price rocket upward six fold since filing a $1B IP infringement suit against IBM, appears to be taking advantage of its new found wealth, with its all stock asset purchase of Vultus Technology, a developer of tools used to design Web app interfaces. This is the first of what SCO identifies as a string of $4 to $10M strategic acquisitions. Sellers beware. Secure Compuing (Nasdaq:SCUR) to acquire N2H2 (NTWO.OB) Category: Content filtering Purchase Price: $15,813,000EV Seller Revenue: $11,100,000 Revenue Multiple: 1.42x Payment Terms: Stock SEG's Perspective: Network security provider Secure Computing acquires content-filtering competitor N2H2, seeking to boost its number-three position in content filtering. Secure also picks up 2, 000 new customers. Secure paid 1.4 times TTM revenue after factoring in N2H2's cash and debt. The deal gives N2H2's shareholders a 38 percent return based on a five-day preceding average, not bad considering the quarter ended June 2003 was the first time N2H2 recorded a profit…of $48,000. 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.
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