By Ken Bender, Managing Director, and Allen Cinzori, Vice President - Software Equity Group, LLC
The fourth quarter ended on a high note with some very strategic deals, several of which signal a shift in buyer thinking. Valuations continued to improve, with a few deals priced at higher multiples than we've seen for some time. Here is an analysis of six of Q4's most interesting acquisitions.
BMC Software (NYSE: BMC) acquires Magic Software unit of Network Associates Inc. (NYSE: NET)
Category: Help desk/service management
Purchase Price: $47,000,000
Seller Revenue: $63,558,000
Revenue Multiple: 0.74x
Payment Terms: Cash
SEG's Perspective:
IT infrastructure leader BMC Software, which picked up the remnants of help desk provider Remedy from bankrupt Peregrine Systems in late 2002 for $350MM in cash, now adds Magic Solutions to beef up its service management offering in the SME (small/medium enterprise) space. Magic was a business unit of computer security software provider Network Associates, acquired in March 1998 for $110MM. After six years, Network Associates decided to focus closer to home and the selling price this time was $47MM. Although BMC claims Magic is highly profitable with positive cash flow, it does not expect the transaction to be accretive until its next fiscal year. Still, Magic has revenue of $63.5MM and gives BMC access to 4,000 new midmarket customers, a good deal by almost any measure.
Chinadotcom (Nasdaq: CHINA) acquires Pivotal Corp. (Nasdaq: PVTL)
Category: Customer relationship management
Purchase Price: $56,239,200 (EV)
Seller Revenue: $57,072,000
Revenue Multiple: .98x
Payment Terms: Stock, cash
SEG's Perspective:
In a case of better late than never, Chinadotcom wins the battle for Pivotal Corp., the Canadian mid-market CRM specialist in a deal valued at $57MM. Following a protracted public struggle involving private equity firm Oak Investment Partners and CRM rival Onyx, Pivotal agreed to merge with Chinadotcom under terms providing shareholders with up to $2.14 per share in cash and Chinadotcom shares. Oak, which bid $1.78 per share and sought to combine Pivotal with portfolio company Talisma, will receive a $1.5MM breakup fee from Pivotal. Chinadotcom effectively paid less than 1x revenue and now adds CRM to its suite after acquiring midtier ERP provider Ross Systems in September. The same month, acquisitive Chinadotcom bought controlling interest in Industri-Matematik to address the supply chain software needs for its more than 600 Chinese and other Pacific Asia customers.
EMC Corp. (NYSE: EMC) acquires VMware Inc.
Category: Enterprise system management
Purchase Price: $635,000,000
Seller Revenue: $50,000,000
Revenue Multiple: 12.7x
Payment Terms: Cash
SEG's Perspective:
EMC's buying spree continues, as the world's leading storage management software vendor moves further into the IT infrastructure. This time it's VMware, a privately held software company that is the leader in virtual machines - software which enables multiple operating systems such as Windows, Linux and Netware to run simultaneously and independently on the same Intel server and move applications across platforms. EMC will operate VMware as a subsidiary, hoping to preserve its relationships with a wide array of server and storage vendors. We'll see. Although EMC paid a whopping $635MM, all cash, it expects the deal to be dilutive by only $.01 in Q1 and accretive by 2005. The VMware acquisition follows closely on the heels of EMC's December acquisition of Documentum for $1.5 B and its October acquisition of Legato Software.
Opsware Inc. (Nasdaq: OPSW) acquires Tangram Enterprise Solutions, Inc. (TESI.OB)
Category: IT resource management and security
Purchase Price: $10,000,000EV
Seller Revenue: $10,435,000
Revenue Multiple: 0.96x
Payment Terms: Stock
SEG's Perspective:
Opsware, the data center automation innovator founded by Mark Andreessen, moves into IT asset management and IT security by acquiring Tangram Enterprise Solutions. Following a highly visible, ill-timed IPO in early 2001, Loudcloud (now Opsware) endured a $12MM per month cash burn and a threatened NASDAQ delisting before selling its managed services division to rival EDS last year for $64MM. Now Opsware seems to have finally found its niche and is cash-flow-positive. Tangram's product line will leverage Opsware's strategic relationships with EDS and HP. Tangram also brings more than 200 customers to Opsware, as well as the patent pending "Crosshair" technology embedded in its OverSight security product. Tangram was majority-owned by Safeguard Scientifics, which must believe in Opsware's future prospects, since the $10MM all-stock deal was priced below recent Tangram trading levels. After paying off Tangram's preferred shareholders, creditors and former employees, Tangram's common shareholders' receive roughly $5MM.
Progress Software Corporation (Nasdaq: PRGS) acquires DataDirect Technologies Ltd.
Category: Enterprise application integration
Purchase Price: $88,000,000
Seller Revenue: $35,500,000**
Revenue Multiple: 2.48x
Payment Terms: Cash
SEG's Perspective:
Progress Software acquires privately held Data Direct Technologies, the leading developer of data access and connectivity components for software developers, in a $88MM, all-cash deal. Data Direct's products are embedded in the apps of more than 250 software companies and most of the Fortune 100. Progress, which grew 13 percent in its fiscal year ending 11/30/03, has now moved well beyond its 4th GL development platform days and is considered a major software infrastructure player. Plans are for DataDirect to operate as a separate business unit to maintain an appearance of impartiality, similar to another highly successful Progress subsidiary, Sonic Software, its fully owned Internet middleware company. The transaction should be cash-flow-positive and slightly dilutive in year one and accretive thereafter.
Red Hat, Inc. (Nasdaq:RHAT) acquires Sistina Software
Category: Storage management
Purchase Price: $31,000,000
Seller Revenue: $2,250,000**
Revenue Multiple: 13.8x
Payment Terms: Stock
SEG's Perspective:
Open Source Linux powerhouse Red Hat will acquire storage infrastructure software maker Sistina Software in an all-stock deal valued at $31MM. As evidenced by the 13.8x multiple, this is a highly strategic buy for Red Hat as it battles to replace proprietary systems in large corporation with open source Linux applications. Red Hat will retain Sistina's development team and plans to bring an open source version of Sistina's software out by mid-year. With this acquisition, Red Hat expands its applications offering beyond Web portals and content management. An application server is slated to join Red Hat's line-up later this year. Sistina's revenue is a D&B estimate.
Sungard Data Systems Inc. (NYSE: SDS) acquires Systems & Computer Technology Corp.
Category: Educational software
Purchase Price: $491,200,000
Seller Revenue: $269,700,000
Revenue Multiple: 1.8x
Payment Terms: Cash
SEG's Perspective:
Highly acquisitive Sungard Data Systems continues to expand its market focus beyond the financial services sector. Following its 2003 acquisitions of Caminus, HTE and Sherwood International, which leverage Sungard in the energy and public sectors, Sungard beefs up its education sector business with Systems & Computer Technology (SCT), a leading provider of technology solutions to higher education. SCT adds 8 million users and 1,300 customers to Sungard's installed base, but for SCT's shareholders, the deal doesn't quite add up. We wonder why they would settle for a mere 10 percent premium after SCT successfully divested non-core assets and expanded its higher education business through a string of savvy acquisitions. The strategy was working. In the last twelve months, SCT's revenue grew 15.2% and EBITDA grew 18.0% to $45.8MM. SCT also boasted a strong balance sheet, which saw its current ratio remain near 3.5 and long term debt fall from $74.7MM to $32.0MM over the same period.
EV: Enterprise Value = equity purchase price, plus seller's interest bearing debt, minus seller's cash & cash equivalents **: Estimate.
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.
