Th S ft I d tTh S ft I d tThe Software Industry Financial Report

The Software Industry Financial Report

Software Equity Group, L.L.C.12220 El Camino RealSuite 320San Diego, CA 92130info@softwareequity.com(858) 509-2800

Software Equity Group, L.L.C.

This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights.

Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved

Q2 2012 Software Industry Financial Report Contents

U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS ........................................................................ 2 IT SPENDING ............................................................................................................................................................ 2 INTERNET RETAIL SPENDING AND ADVERTISING ............................................................................................ 3 PUBLIC SOFTWARE/SAAS/INTERNET COMPANY STOCK PERFORMANCE ................................................... 3 PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE .......................................................................... 4 PUBLIC SOFTWARE COMPANY MARKET VALUATIONS ................................................................................... 5 PUBLIC SOFTWARE COMPANY FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY .......................... 6 PUBLIC SOFTWARE COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY ................................... 7 PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE ...................................................... 8 PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS ........................................... 9 PUBLIC SOFTWARE AS A SERVICE (SAAS) FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY .... 10 PUBLIC SOFTWARE AS A SERVICE (SAAS) COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY ............................................................................................................................................................ 10 PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE ........................................................................... 10 PUBLIC INTERNET COMPANY MARKET VALUATIONS .................................................................................... 12 PUBLIC INTERNET COMPANY FINANCIAL PERFORMANCE: BY PRODUCT CATEGORY ........................... 12 PUBLIC INTERNET COMPANY MARKET VALUATIONS: BY PRODUCT CATEGORY .................................... 13 INITIAL PUBLIC OFFERINGS ................................................................................................................................ 14 SOFTWARE/SAAS M&A DEAL VOLUME AND SPENDING ............................................................................... 16 IMPORTANT CHANGE IN SOFTWARE AND SAAS M&A DATA ACCOUNTING............................................... 17 SOFTWARE M&A VALUATIONS .......................................................................................................................... 17 SOFTWARE M&A VALUATIONS BY EQUITY STRUCTURE............................................................................... 18 SOFTWARE M&A VALUATIONS BY SIZE ........................................................................................................... 18 SOFTWARE M&A BY VERTICAL AND HORIZONTAL MARKETS ..................................................................... 19 SOFTWARE M&A BY PRODUCT CATEGORY .................................................................................................... 20 SOFTWARE AS A SERVICE (SAAS) M&A DEAL VOLUME AND VALUATIONS .............................................. 21 INTERNET M&A DEAL VOLUME AND VALUATIONS ......................................................................................... 23 APPENDIX A: 2Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY ............................................................................................................................................................ 25

Software Equity Group, L.L.C.

This Report may not be reproduced in whole or in part without the expressed prior written authorization of Software Equity Group, L.L.C. Software Equity Group registers each Report with the U.S. Copyright Office and vigorously enforces its intellectual property rights.

Copyright © 2012 Software Equity Group, L.L.C., All Rights Reserved

APPENDIX A: 2Q12 PUBLIC SOFTWARE MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY ............................................................................................................................................................ 26 APPENDIX B: 2Q12 PUBLIC SAAS MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY 27 APPENDIX C: 2Q12 PUBLIC INTERNET MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY ............................................................................................................................................................ 28 APPENDIX D: 2Q12 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS .................. 29 APPENDIX E: 2Q12 MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS .............................................. 30 APPENDIX F: 2Q12 MERGERS AND ACQUISITIONS, SELECT INDUSTRY MEGA-DEALS ............................ 32 APPENDIX G: 2Q12 MERGERS AND ACQUISITIONS, SELECT SOFTWARE-AS-A-SERVICE SELLERS ..... 33

Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions

16| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com

SOFTWARE/SAAS M&A DEAL VOLUME AND SPENDING As we went to press, 422 software industry M&A transactions were reported in the second quarter (Figure 26). We expect the final tally for 2Q12 to reach 430, since M&A data for the quarter is often revised and released well into the following quarter. Indeed, the updated tally for 1Q12 was 423 software/SaaS transactions, significantly greater than the 401 deals initially referenced in our first quarter report. If our projection holds true, 2Q12 deal volume will likely equal or exceed 2Q11’s 430 deals. The quarterly software/SaaS M&A tally has now surpassed 400 - the historical benchmark for healthy software M&A volume - for eight straight quarters. For those 2Q12 software/SaaS transactions with announced price tags, the aggregate purchase price was $21.3 billion, 32% higher than 1Q12’s $16.1 billion, and the second highest quarterly software M&A spend since 1Q09. Software and SaaS mega deals (i.e., > $500 million) were mostly responsible for the sharp increase. Software/SaaS mega deals in the second quarter included SAP’s acquisition of Ariba ($4.4 billion

EV, 8.8x TTM revenue); Dell’s acquisition of Quest Software ($2.2 billion EV, 2.6x TTM revenue); Microsoft’s acquisition of Yammer ($1.2 billion EV); and Apax Partners’ acquisition of Paradigm ($1 billion EV). It remains to be seen whether the second quarter’s private equity-backed mega deal signals a broader return by PE firms to large buyouts. And it’s worth noting 2Q12 marked the third consecutive quarter of at least one SaaS mega deal, evidence that SaaS market adoption continues to grow and SaaS companies are achieving sufficient critical mass to attract the software industry’s largest public companies. On a TTM basis, which presents a more reliable trend line of software M&A spending, the aggregate software/SaaS M&A price tag is holding steady, despite the ongoing uncertainty about the broader economy. As of the close of the second quarter, $73.9 billion was expended on software/SaaS transaction dollars during the prior twelve months, the identical amount spent during the twelve month period ending 1Q11.

311330

372

431

383407

421 426 430453 453

423 422

$3.3

$13.5

$7.6

$4.6

$17.3

$17.9

$12.7 $13.1

$21.3

$23.7

$12.8

$16.1

$21.3

$0

$5

$10

$15

$20

$25

0

50

100

150

200

250

300

350

400

450

500

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Value (BIllions)

Num

ber o

f Deals

Deals Value

Figure 26: U.S. Software Mergers & Acquisition Activity

Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions

23| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com

Collectively, vertical solution providers (pure-play SaaS and hybrid) accounted for 35% of all SaaS M&A transactions. SaaS sellers targeting real estate accounted for 7% of all SaaS deals. The remaining deals were spread nearly evenly across the eleven other vertical product categories. INTERNET M&A DEAL VOLUME AND VALUATIONS Internet M&A activity in the second quarter was robust, finishing the quarter with 273 transactions, up 37% YoY (Figure 40). The second quarter’s 273 Internet transactions was 65% of the final tally for traditional on-premise software M&A, up markedly from 3Q10 when Internet M&A was only 30% of the on-premise software deal total.

The most active Internet M&A category in 2Q12 was Ad Tech & Lead Gen, which accounted for 70 transactions in Q2 (Figure 41). A good number of the sellers in this category were daily deal sites that hoped to emulate Groupon and Living Social, but were unsuccessful due to their inability to scale quickly and massively, making them ripe for consolidation. Other Ad Tech & Lead Gen deals in Q2 included a new breed of online marketing companies leveraging social media and easy to use software to help local businesses, a highly sought after target market in the Internet space.

Historically, Groupon has been highly acquisitive in this category, but not so in the second quarter. However, a broad array of buyers in an array of industries took up the slack, including: Deluxe Corporation’s acquisition of OrangeSoda ($27.7 million EV); Twitter’s acquisition of RestEngine; Facebook’s acquisition of Tagtile; IHS’ acquisition of GlobalSpec ($135 million EV); and Cox Target Media’s acquisition of Savings.com ($100 million EV). Content & Media was also among the most active Internet categories from an M&A perspective, with 62 transactions in the second quarter. By far the most notable 2Q12 transaction in this product category was Facebook’s acquisition of Instagram. Hammered out over a weekend session between the CEO’s of both companies, the $1 billion price tag caused many to scratch their heads since Instagram had zero revenue and no discernible business model. While it certainly made strategic sense to marry the leading mobile image sharing application with the world’s largest social network, it seems highly doubtful the deal will ever yield sufficient return to justify the price tag. Social Media M&A volume was relatively low in Q2 compared to prior quarters, somewhat surprising given the high market valuations and visibility of public Social Media players. Still, there were some noteworthy acquisitions in the second quarter, including Twitter’s purchase of Hotspots.io; LinkedIn’s acquisition of SlideShare ($72 million EV); Salesforce.com’s acquisition of BuddyMedia ($745 million EV); and Facebook’s purchase of Face.com ($60 million EV). The TTM Internet M&A median exit multiple was 2.1x in 2Q12 (Figure 42). However, that median

199

216203

220

273

2Q11 3Q11 4Q11 1Q12 2Q12

Figure 40: Internet M&A Volume

Category Q2 2011 Q3 2011 Q4 2011 1Q 2012 2Q 2012Ad-Tech & Lead Gen 42 67 60 65 70Commerce 56 36 38 36 57Content & Media 36 45 48 51 62Gaming 15 6 14 13 25Infrastructure 25 27 27 31 30Social Tech 25 35 16 24 29Total 199 216 203 220 273

Figure 41: Internet M&A Volume by Product Category 2.0x

2.6x2.8x

2.1x 2.1x

2Q11 3Q11 4Q11 1Q12 2Q12

Figure 42: Median Internet M&A Valuations as Multiple of Revenue

Software Equity Group, L.L.C. Investment Banking / Mergers & Acquisitions

24| 2Q12 SOFTWARE INDUSTRY FINANCIAL REPORT www.softwareequity.com

is derived by aggregating median multiples over the prior twelve months, and doesn’t reflect the recent surge in Internet M&A volume and exit values. The median exit multiple for the second quarter, only, was 2.5x, markedly higher than the trailing twelve months figure. Given an expanded and dynamic group of public Internet companies that are trading at lofty valuations, a vibrant and growing addressable market, and rapidly evolving Internet deployed technologies, we expect Internet valuations will continue to grow robustly for the remainder of 2012.

To download the remaining portions of Software Equity Group’s complimentary quarterly Software Industry Equity Report, please visit our website: http://www.softwareequity.com/research_reports.aspx