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Corum Group Ltd.www.corumgroup.com
SIIA - On-demand Europe 2008Software Industry M&A Market UpdateJune 10, 2008
SaaS in the Economic Storm
Bellevue Boston Houston London Mexico City Munich Oslo Paris Philadelphia Phoenix Portland Santa Clara Toronto Zurich
2
Middle Market Software M&A Specialists
M&A specialists since 1985
Software and IT experts – mostly former CEOs
Publisher of industry-leading M&A research
Host of Selling Up Selling Out conferences / M&A workshop series
Dominant North American and European presence
60%+ cross-border transactions
Platinum sponsor of World Financial Symposiums – Silicon Valley, Boston, London
$6 billion in wealth created
200+ transactions completed
3
Headlines Tell the Story
“Can M&A’s Best Times Get Better?”Wall Street Journal, January 2007
“Money is Everywhere – But for How Long?”Wall Street Journal, January 2007
“Stock Surge + Bond Boom = M&A Magic”Wall Street Journal, April 2007
“As Deal Barriers Fall, Takeover Bids Multiply”Wall Street Journal, May 2007
“M&A – The Best Investment Game in Town”Moneyextra.com UK, May 2007
“Market Pressures Test Resilience of Buyout Boom”Wall Street Journal, June 2007
“Dry-Up in Debt Won’t Deter Tech Deals”Barron’s, September 2007
“Time to Celebrate; 2007 Breaks M&A Record”Wall Street Journal, October 2007
“M&A Seen on the Brink After Record 2007”Reuters, December 2007
“Tech Cos Seen Going M&A Route, Not IPO in 2008” Reuters, December 2007
“IT Spending Growth Expected to Slow in 08”InformationWeek, December 2007
“Bear Stearns’ No. 1 Foe: Fear Itself”CNN Money, March 2008
“Deal Making: It Shall Return” Wall Street Journal, May
2008
“Let’s Still Make a Deal” Business Week, June
2008
4
Current Market Conditions
Global economic infrastructure in disarray
Difficultly borrowing money
IPO markets are dead
Many are struggling
Worries about depth of recession
Concern over inflation
Price of oil up
Troubled housing market
Consumer confidence low
Unemployment up
Cost of food and consumer goods rising
5
The Silver Lining
On the plus side: Technology revenues remain strong
Earnings remain positive
Forward analyst estimates look good
Lending requirements loosening
PE buyers see opportunity in the coming months
PE and VC investors raising new funds
International markets remain strong
No buyers saying “we’re pulling back”
Large cap stocks up
Strong cash reserves
M&A has become operational
6
Company Stock Price 6/01/2007
Stock Price 6/0/2008
% Change Year AgoCash
Current Period Cash
Sun $5.18 $12.94 149.81% $4,114 $3,027
Apple $118.40 $186.10 57.18% $12,557 $19,448
IBM $106.54 $127.36 19.54% $11,935 $12,134
Oracle $19.66 $22.68 15.36% $9,085 $10,366
Google $500.40 $575.00 14.91% $10,782 $12,027
SAP $49.05 $53.80 9.68% $6,445 $10,506
EMC $16.83 $17.30 2.79% $10,363 $9,976
HP $45.81 $46.25 0.96% $2,987 $2,426
Nokia $28.19 $27.90 -1.03% $4,284 $5,613
Cisco $26.86 $26.35 -1.90% $3,832 $2,416
Symantec $19.97 $19.34 -3.15% $20,681 $22,693
Yahoo $28.78 $26.40 -8.27% $28,873 $21,076
Microsoft $30.59 $27.80 -9.12% $2,345 $2,608
Large Cap Tech Stocks
7
Reality Check
Don’t take the current market for granted.
Volatile public markets
“Long, deep recession,” Warren Buffet
Price of oil continues to rise
Political change
Global conflicts
8
The need to buy is stronger than ever
Acquisitions add more growth
Counter takeover attempts
Consolidation
Speed time to market
Buy talent and domain expertise
Fill product gaps
Get ahead of a technology curve
Tap into emerging consumer markets
Cost of being public and complying with SOX
Need for international presence
Only true liquidity event for managing shareholders
Why Does M&A Prevail?
9
Global M&A Activity
Cross-border transaction
levels remain strong while
international M&A activity
contributed over 40% to the
total of announced deals
for 2007
Europe and Asia both set records for deal volume in 2007
U.S. sellers continue to look overseas for buyers
Weak dollar attracting non-U.S. buyers
Strong € makes European targets attractive to acquisitive international buyers looking to
increase revenues and profits based in stronger currency
67 international tech co’s on BusinessWeek’s InfoTech 100 list up from 25 in 1998
11
Sectors
Sector Public Val. Deal Volume Outlook
Horizontal Applications Neutral
Vertical Applications Positive
Consumer Applications Neutral
Infrastructure Positive
Internet Positive
IT Services Positive
2008 sector stats looking good…
12
Public Valuation Revenue Multiples
TTM EV/S Multiples
N/A
Decreased
Increased
Sector Q1:07 Q2:07 Q3:07 Q4:07 Q1:08 Yr on Yr
Digital Media 1.92 x 2.07 x 2.12 x 1.61 x 1.06 x
Enterprise Applications 3.87 x 3.98 x 4.14 x 3.67 x 3.15 x
Business Intelligence 3.13 x 3.25 x 2.98 x 4.12 x 2.72 x
Enterprise Content Management 2.07 x 2.37 x 2.40 x 2.08 x 1.57 x
Supply Chain Management 2.10 x 2.29 x 2.23 x 2.25 x 1.40 x
Enterprise Infrastructure 2.86 x 2.88 x 2.51 x 3.04 x 2.34 x
Legacy Extension / SOA 2.18 x 2.56 x 2.47 x 2.42 x 2.69 x
Software Development Tools 2.00 x 2.22 x 1.66 x 1.83 x 1.43 x
Storage 3.68 x 3.29 x 2.68 x 2.49 x 1.99 x
Gaming 2.54 x 2.24 x 2.20 x 1.75 x 1.98 x
Internet Infrastructure 3.83 x 3.91 x 4.60 x 4.04 x 2.85 x
Internet Pure Play 3.41 x 3.23 x 2.99 x 2.93 x 2.15 x
IT Services 0.80 x 0.89 x 0.96 x 0.83 x 0.85 x
Security 3.15 x 3.69 x 3.43 x 3.62 x 3.52 x
Wireless 1.46 x 1.75 x 1.55 x 0.99 x 0.51 x
Vert Market - Energy & Environment N/A N/A 4.94 x 4.46 x 4.02 x
Vert Market - Engineering 3.40 x 3.29 x 3.73 x 2.73 x 1.99 x
Vert Market - Financial Services 3.28 x 3.12 x 3.05 x 2.73 x 2.70 x
Vert Market - Government 1.16 x 1.15 x 1.21 x 1.24 x 1.21 x
Vert Market - Healthcare 2.28 x 2.53 x 3.16 x 2.62 x 1.93 x
Vert Market - Other 1.19 x 2.71 x 2.81 x 2.14 x 2.05 x
Vert Market - Telecom 1.33 x 1.52 x 1.50 x 1.44 x 1.26 x
13
Looking Back – Valuation Multiples
M&A Transaction Revenue Multiples – Software Industry
2008 is starting off stronger than 2007 finishedQ1 P/S multiple of 2.6x
14
SaaS is Mainstream
40% surveyed use hosted CRM (AMR)
49% will expand use of SaaS (AMR)
25% of business software revenue by 2011 (Gartner)
29% annual growth (IDC)
70% plan to use SaaS (Aberdeen Group)
5% to 55% cost savings (Springboard Research)
30%+ new soft licenses will be deployed as SaaS by 2012 (Saugatuck)
50%+ software revenues from subscription by 2015 (Needham)
15
Waves of SaaS Evolution
A platform for mission-critical application workloads
Source : Saugatuck Technology
Early AdoptionStand-alone AppsMulti-tenancyLimited ConfigurabilityFocus on TCO / rapid deployment
Mainstream AdoptionIntegrated w/ Business PortfolioSaaS Integration PlatformsBusiness Marketplaces and SaaS ecosystems
Ubiquitous AdoptionOptimized Bus. EcosystemsIT-targeted EcosystemsInter-enterprise CollaborationIT Utility / SaaS InfrastructureCustomized, Personalized WorkflowFocus on Business Transformation
SaaS 1.0 SaaS 2.0Wave I: 2001-2006
Cost-effective Software Delivery
Wave II: 2005-2010Integrated Business
Solutions
Wave III: 2008-2014Workflow-enabled
Business TransformationHigh
Low
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Ad
op
tio
n
SaaS Tipping-Point
16
Customer Satisfaction
Margin
The SaaS Value Chain – Drivers
Enterprises ISV – SaaS Prov.
Buyers (M&A)
Competition is next door, stay
focus
Keep the customer, stay
closer
Strengthen position,
consolidate Allocation of resources on business ops & innovationIT more accountable Leverage investments and lower the riskProductivity Solve business needsIt’s all about services
IT is not the customer, business isAdd-on strategy and standardizationShorter sale cyclesLonger term and « healthier » relationships
SaaS across business and functionsStable predictable revenue More sustainable marginsPlatform approachCreate value vs growth
Solve customer business needs
17
Valuation over 9 months
Multiples In September 07
EV / Sales : 6.33 ; forward multiples : 4.19 (12months later) In January 08
EV / Sales : 3.69 ; forward multiples : 2.65
In May 08 EV / Sales : 3.14 ; forward multiples : 2.35
Relevant M&A Transactions
Date SaaS AllSeptember 07 3.99 3.11
January 08 4.62 2.47May 08 4.00 2.6
18
SaaS – Public Valuation Multiples
Ticker Company EV/S EV/EBITDA P/E EV/S P/E
CNQR Concur Technologies, Inc. 9,18 x 42,95 x nm 6,02 x 52,94 CTCT Constant Contact, Inc 7,13 x nm nm 3,34 x 74,96 TRAK DealerTrack Holdings, Inc. 2,68 x 10,21 x 48,22 2,16 x 15,45 DMAN DemandTec, Inc. 2,62 x nm nm 1,71 x 30,34 KNXA Kenexa Corporation 2,14 x 10,39 x 0,85 1,46 x 11,20 KNTA Kintera, Inc 0,96 x nm nm 0,95 x 36,00 LPSN LivePerson, Inc. 2,16 x 23,62 x 31,10 1,26 x 10,03 N NetSuite, Inc. 9,71 x nm nm 5,48 x nmOMTR Omniture, Inc. 9,65 x nm nm 4,04 x 32,65 RNOW RightNow Technologies, Inc. 3,31 x nm nm 2,36 x 60,04 SLRY Salary.com, Inc 0,81 x nm nm 0,43 x nmCRM Salesforce.com 10,75 x nm 481,27 5,75 x nmSFSF SuccessFactors, Inc. 6,74 x nm nm 3,15 x nmSNCR Synchronoss Technologies, Inc. 2,53 x 8,18 x 18,15 2,34 x 19,49 TLEO Taleo Corporation 2,97 x 31,78 x nm 2,17 x 23,21 ULTI Ultimate Software Group, Inc. 5,53 x 60,76 x 31,04 3,77 x 39,54 VOCS Vocus, Inc. 7,94 x nm nm 5,29 x 46,88 WSTM Workstream, Inc. 0,71 x nm nm 0,58 x nm
0,71 x 8,18 x 0,85 0,43 x 10,03 10,75 x 60,76 x 481,27 6,02 x 74,96 4,86 x 26,84 x 101,77 2,90 x 34,83 3,14 x 23,62 x 31,07 2,35 x 32,65
TTM Multiples Forward Multiples
19
SaaS transaction multiple
Buyer Seller
Date Announced
Purchase Price Seller's Rev
EV/S Multiple
Blackbaud, Inc Kintera, Inc. May-08 $46,0 $43,0 1,07 xDell, Inc. MessageOne, Inc. Feb-08 $155,0 $7,7 20,13 xBridgeline Software Inc. Tenth Floor, Inc. Feb-08 $4,0 $3,0 1,33 xOmniture Inc. Visual Sciences Oct-07 $415,1 $76,0 5,46 xRisc Group Ornis Sep-07 $35,0 $17,0 2,06 xAriba Procuri Sep-07 $93,0 $7,1 13,10 xBlackbaud Inc eTapestry Aug-07 $24,8 $7,0 3,54 xCorMine LLC Perfect Commerce Inc. Jul-07 n/a n/a n/aRocket City Automotive Group Inc. The Intellimark Group May-07 n/a n/a n/aSunGard HTE Inc Aceva Technologies Feb-07 n/a n/a n/aWebsense Inc SurfControl plc Apr-07 $400,0 $94,0 4,26 xADP Employease Aug-06 n/a n/a n/aProcuri TrueSource Sep-06 n/a n/a n/aIllinois Tool Works Inc Click Commerce Inc Sep-06 $292,0 $80,0 3,65 xTransaction Systems Architects P&H Solutions Aug-06 $150,0 $40,0 3,75 xSurfContral plc BlackSpider Technologies Ltd Jul-06 £20,0 £4,0 5,00 x3M Company Pinnacle Distribution Concepts Inc. Jul-06 n/a n/a n/aSterling Commerce, Inc. Nistevo Corporation May-06 n/a n/a n/aAutodesk Constructware Feb-06 $46,0 n/a n/aConcur Outtask Jan-06 $88,0 $12,5 7,04 x
Low 1,07 xHigh 20,13 x
Median 4,00 x
20
Unified communications NGNetworks, IPT, SIP Presence, conferencing
Devices What devices is right for particular application / activity
Datacenters Virtualized and distributed architectures ; multithreading
SOA achitectures Matching IT to business process ; core apps easy tailored
Application delivery SaaS business model
All of them are interelated !!
* John Chapman – IT Europa
SaaS in the heart of the 5 revolutions*
21
Investors / Acquirers Attracted to:
SaaS is not only a matter of business model : part of a wider vision
SaaS is “reccession proof” : cutting costs and increasing flexibility
Predictable recurring cash flow
Revenue visibility this year and beyond
Low churn / high user satisfaction
Solves cutomer business needs or they’ll leave
Easier to plan and manage growth / scalability
Higher margins at scale
Cash flow is what gives a company value License models are difficult to project If it is not predictable it may be more volatile
Markets doesn’t like what’s volatile
22
Seller Motivation
Timing – personal, business, market
Have been approached
Need a larger partner to achieve vision
Capitalize on current success
Investors want out
Running out of cash
Founder age
Facing a build vs. sell decision
Tough to compete with larger players
Lacking resources to expand internationally
Lack of liquidity
Time for change
23
Vision
Research
Management
Business Model
Planning R&D Process
Patents
Documentation
Pricing
Support
Market Share
Staff
User Base
Marketing Channels
Alliances
Competitive Position
Technology
Sales Process
Capital Structure
Growth
Profitability
Domain Expertise
What Do Buyers Really Buy?
24
Buyers – Prioritize Acquisition Opportunities
Target Size
Product prioritization – which new products / markets do they want to own?
Product leadership – compared to competition
Market size – addressable market large / expandable?
Can product port into other verticals, market segments?
Cultural and technical compatibility
Management team
25
Will the Numbers Pencil?
Financial Considerations: Will the acquisition improve financial performance?
Return on Equity
EBITDA multiples
Impact of deal on revenue growth rate and EBITDA
Recurring revenue
Accretion / dilution to GAAP Earnings Per Share (public buyer); cash flow
(private buyer)
Don’t forget -- third party analysts and / or lenders need to bless the deal
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