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- 1. Software Equity Group is an investment bank and M&A advisory serving the software and technology sectors. Since 1992, our firm has represented and guided private companies throughout the United States and Canada, as well as Europe, Asia Pacific, Africa and Israel. We have advised public companies listed on the NASDAQ, NYSE, Toronto, London and Euronext exchanges. Software Equity Group also represents several of the world's leading private equity firms. Our value proposition is unique and compelling. We are skilled and accomplished investment bankers with extraordinary software, internet and technology domain expertise. Our software industry experience spans virtually every product category, technology and market. We have profound understanding of software company finances, operations and valuation. We monitor and analyze every publicly disclosed software M&A transaction, as well as the market, economy and technology trends that impact these deals. We're formidable negotiators and savvy dealmakers who facilitate strategic combinations that enhance shareholder value. Perhaps most important are the relationships we've built, and the industry reputation we enjoy. Software Equity Group is known and respected by publicly traded and privately owned software and technology companies worldwide, and we speak with them often. Our Quarterly and Annual Software Industry Equity Reports are read and relied upon by more than fifteen thousand industry executives, entrepreneurs and equity investors in twenty-six countries, and we have been quoted widely in such leading publications as Information Week, The Daily Deal, Barrons, U.S. News & World Report, Reuters, Mergers & Acquisitions, USA Today, Arizona Republic, Detroit Free Press, Entrepreneur Magazine, Softletter, Software Success, Software CEO Online and Software Business Magazine. Software Equity Groups senior bankers have keynoted and spoken at more than one hundred software industry conferences and seminars, including Software Business, SoftExpo, Culpepper, VAR Conference, ACETECH, and the Arizona, Colorado, Chicago, Southern California, Denver, San Diego, Washington State and Boulder Software Associations.
- 2. Software Equity Group, L.L.C. Contents U.S. ECONOMY: SOFTWARE INDUSTRY MACROECONOMICS .............................................................. 2 PUBLIC MARKETS AND PUBLIC SOFTWARE & INTERNET COMPANY PERFORMANCE ..................... 3 SOFTWARE INDUSTRY GROWTH & IT SPENDING PROJECTIONS ........................................................................ 3 PUBLIC SOFTWARE COMPANY PERFORMANCE................................................................................................. 3 PUBLIC SAAS COMPANY PERFORMANCE ......................................................................................................... 6 U.S. SOFTWARE IPOS ................................................................................................................................... 6 PUBLIC INTERNET COMPANY PERFORMANCE ................................................................................................... 7 MERGERS AND ACQUISITIONS: THE NUMBERS ...................................................................................... 8 TOTAL M&A SPENDING AND DEAL VOLUME: .................................................................................................... 8 SOFTWARE M&A SPENDING AND DEAL VOLUME: ............................................................................................. 8 DEAL CURRENCY: .......................................................................................................................................... 9 PRIVATE VS. PUBLIC BUYERS: ........................................................................................................................ 9 M&A VALUATIONS: ...................................................................................................................................... 10 M&A EXIT VALUATIONS BY SOFTWARE CATEGORY: ....................................................................................... 11 SAAS M&A:................................................................................................................................................. 11 MERGERS AND ACQUISITIONS: BUYER MOTIVES ................................................................................. 11 PRODUCT ENHANCEMENT: ........................................................................................................................... 11 NEW MARKET/SUBSECTOR/TERRITORY:........................................................................................................ 13 VERTICAL MARKETS: .................................................................................................................................... 13 PRODUCT CATEGORY CONSOLIDATION: ........................................................................................................ 14 INVESTMENT ACQUISITIONS: ......................................................................................................................... 14 SOFTWARE INDUSTRY PRIVATE EQUITY ................................................................................................ 14 APPENDIX A: 2Q07 PUBLIC MARKET VALUATIONS AND STATISTICS BY PRODUCT CATEGORY .. 16 APPENDIX B: 2Q07 MERGERS AND ACQUISITIONS, SELECT PUBLIC SELLER VALUATIONS ......... 19 APPENDIX C: MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS .............................................. 20 APPENDIX D: SELECTED MERGERS AND ACQUISITIONS..................................................................... 22 1| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 3. Software Equity Group, L.L.C. U.S. ECONOMY: SOFTWARE INDUSTRY Figure 1: U.S. Gross Domestic Product MACROECONOMICS 5.6% 4.3% The U.S. economy stumbled in the first quarter, 4.0% 4.1% 3.8% with real gross domestic product increasing an 3.5% 3.3% 3.3% anemic 0.7 percent in 1Q07 the slowest in 14 3.1% 2.5% quarters, and well below the 2.5% advance 2.5% chalked up in 4Q06 (Figure 1). Economists 2.0% 1.7% believe GDP rebounded in the second quarter, with initial results to be released at the end of 0.7% July. Residential fixed investment, the GDP component that includes spending on housing, 2004 2005 2006 2007 plunged 15.8% in 1Q07 and 19.8% in 4Q06. The Note: 2Q07 is an estimate housing market continues to struggle as it adjusts to a supply glut and more cautious mortgage Despite sluggish growth and continuing weakness lenders, taking almost a full percentage point out in the housing market, the jobless rate remains of GDP. Conversely, consumer spending, which near six-year lows at 4.5%, down from 4.6% a accounts for about 70% of economic activity, year earlier. The economy added 190,000 non- surged 4.2% in 1Q07, adding 2.9 percentage farm jobs in May and 132,000 in June, and has points to GDP. A mid-year survey of 60 economic averaged 145,000 per month for the year. The forecasters by The Wall Street Journal cautiously U.S. IT labor market showed impressive strength projects GDP to grow at 2.6% in the latter half of in April and May, growing 436 basis points faster 2007, and 2.9% in 2008. Economists disagreed than non-farm employment. According to Bank of about the inflationary impact of this anticipated America, IT services employment now stands at growth, particularly escalating food and energy approximately 2.87 million, 5.3% above the prior prices. peak in March 2001. While jobless claims appeared to hold steady in May and June, some The Conference Boards Index of Leading economists believe construction unemployment is Economic Indicators, an important short-term understated by some 500,000 jobs previously forecasting guide, increased 0.3% in May, with held by undocumented workers. five of the ten components advancing. The positive indicators, beginning with the largest Abroad, China is poised to pass Germany and positive, were average weekly initial claims for become the worlds third largest national unemployment insurance (inverted), stock prices, economy. According to International Monetary building permits, index of consumer expectations, Fund data, Chinas 2006 GDP is estimated at and vendor performance. The negative $2.8 trillion, slightly below Germanys $2.9 trillion contributors, beginning with the largest negative, for the same period, and within striking distance of were real money supply, average weekly Japans $4.4 trillion GDP. Analysts estimate manufacturing hours and interest rate spread. Chinas 2Q07 GDP to increase 11% and continue Manufacturers new orders for consumer goods its torrid pace for the remainder of the year. Since and materials, and manufacturers new orders for 1999, Chinas economy has leapfrogged that of non-defense capital goods, both remained steady Italy, France and the United Kingdom. in May. 2| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 4. Software Equity Group, L.L.C. Figure 2: Major Market Indices Compared to the SEG Software and SEG Internet Indices 20.0% S&P 500 Nasdaq Dow SEG Sofware Index SEG Internet Index 15.0% 10.0% 5.0% 0.0% -5.0% January February March April May June PUBLIC MARKETS AND PUBLIC SOFTWARE & Figure 3: Software Market Growth Projections ($ INTERNET COMPANY PERFORMANCE billions) Category 2005 2010 CAGR (2005 - 2010) The major stock market indexes advanced Application Development and Deployment $ 29 $ 41 7.2% relentlessly in 2Q07, more than compensating for Enterprise Applications 65 101 9.2% Database 18 24 5.9% a sluggish first quarter. During the past year, Desktop Applications 24 38 9.6% stock prices have surpassed the forecasts of all Systems Infrastructure 75 101 6.1% Total: $ 211 $ 305 7.6% but the most optimistic analysts, with the Dow, Source: IDC Corporation S&P 500, and NASDAQ increasing in value May 2007 IT Spending Survey which forecasts IT 20.3%, 18.4% and 19.8%, respectively. investments by large enterprises over the next Comparing the first trading day of 2007 to the last twelve months, server consolidation and ERP trading day of 1H07, the Dow, S&P 500 and software ranked as the highest priorities (Figure NASDAQ, are up 7.6%, 6.0% and 7.8%, 4), while open source software and software-as-a- respectively (Figure 2). With most publicly traded service ranked lowest on the list. As weve companies already reporting record profit reported in each of the past three quarters, SaaS margins, and analysts forecasting continued has yet to gain traction among very large expansion, there is widespread belief stock enterprises, at least for enterprise-wide market values will increase for the remainder of deployment. The IT spending categories showing 2007. We see some possibility, however, for a greatest advance since Goldmans January sell-off and correction in the third quarter, and Spending Survey were LAN upgrades, PCs subsequent rebound by year end. (including laptops), server consolidation, server virtualization and VOIP. Categories that have Software Industry Growth & IT Spending maintained a high spending priority ranking Projections include business intelligence, data center According to IDC Corporation, the software consolidation and ERP software. market is expected to grow to $306 billion in 2010, a 45% increase over 2005s $211 billion software Public Software Company Performance spending tally (Figure 3). Within the software The SEG Software Index, our index of 263 sector, desktop applications are projected to show publicly traded software companies, closely greatest spending growth (+9.6%), compared to tracked the NASDAQ during 1H07 (Figure 2). The more modest growth in database software equity valuation of the SEG Software Index ended spending (+5.9%). According to Goldman Sachs 1H07 up 7.8% compared to the beginning of 3| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 5. Software Equity Group, L.L.C. Figure 4: CTO Tech Spending Priorities the SEG Software Index posted an impressive gain of 18.3% in 2Q07 compared to 2Q06. Over Server consolidation the same time period, cash as a percent of market ERP software Server virtualization cap decreased to 15.9% in 2Q07 from 18.4% in Business intelligence 2Q06, reflecting the higher valuations and for Voice-over-IP some, recent acquisitions. Composite financial Data center consolidation performance data for the public SEG Software Application integration Index are enumerated in Figure 6. LAN/network upgrades Disk storage Figure 5: SEG Software Index Historical Growth Disaster recovery/business continuance Metrics Security 25% IT consulting services Cash & Equivalents New PCs or PC upgrades 20% TTM Revenue Business process / IT outsourcing TTM EBITDA HIGH TTM Net Income Web application development 15% Enterprise Value Business process management / workflow 10% Compliance/risk management Cost cutting 5% CTO Tech Spending Priorities Identity and access management Storage virtualization 0% Customer relationship management IT operations management software -5% Mobile computing / remote access Outsourced software development -10% Collaboration software Wireless networking -15% Service-oriented-architecture 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 Storage management software Microsoft Vista upgrades Managed services Thin client computing Size continues to play a role in software company Utility/grid/on-demand computing valuations. SEG Software Index companies with Desktop virtualization revenues greater than $1 billion posted a median Open source software EV/Revenue ratio of 3.4x in 2Q07, compared to a LOW Software-as-a-service/remote hosted software median ratio of 2.6x for software companies with Data Source: Goldman Sachs May 2007 IT Spending Survey revenue between $200 million and $1 billion (Figure 7 & 8). While the EV/Revenue ratios were greater for larger software companies, the same 1H07, after reaching a high of 8.0% and dipping to a negative 1.4% low. One of the big winners did not hold true for EV/EBITDA ratios. was aQuantive, which was acquired by Microsoft Companies with revenue less than $100 million were valued at 17.3x EV/EBITDA, while software at a per share price 158.7% greater than its companies with revenue greater than $1 billion January 2, 2007 closing price. posted a 15.6x EV/EBITDA multiple. The Public software company financial performance, differential is unsurprising and historically with few exceptions, exceeded expectations, consistent. Investors expect smaller companies to further demonstrating to investors that software is Figure 6: SEG Software Key Statistics not yet a maturing industry with limited upside as SEG - Software some had feared. Median trailing-twelve-month Measure 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 (TTM) revenue of companies listed in the SEG EV/Revenue 2.2x 2.1x 1.9x 2.2x 2.4x 2.4x Software Index grew 11.7%, and median TTM EV/EBITDA 15.2x 13.7x 12.8x 14.6x 14.8x 15.6x EV/Earnings 25.4x 28.1x 25.7x 28.4x 26.2x 27.4x EBITDA grew 18.9% (Figure 5). TTM earnings of Current Ratio 2.1 2.1 2.0 1.9 1.9 1.8 SEG Software Index companies gained 3.5%, Gross Profit Margin 62.9% 63.4% 62.1% 61.6% 64.8% 62.7% while cash & cash equivalents posted a 3.7% EBITDA Margin 12.8% 13.5% 14.3% 13.7% 13.8% 13.6% Net Income Margin 5.0% 4.7% 4.2% 4.3% 4.6% 4.1% increase in 2Q07 compared to 2Q06. With TTM Revenue Growth 10.4% 12.5% 13.4% 13.8% 11.6% 11.7% investors once again warming to the software TTM Earnings Growth 25.3% 8.7% 2.8% 11.5% 7.3% 3.5% sector, the median enterprise value (valuation) of 4| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 6. Software Equity Group, L.L.C. Figure 7 & Figure 8: SEG Software Enterprise Value / Revenue and Enterprise Value / EBITDA by Size of Buyer (TTM Revenue) 4.0x 25.0x 2Q06 3Q06 4Q06 1Q07 2Q07 2Q06 3Q06 4Q06 1Q07 2Q07 3.4x 19.9x 20.0x 19.0x 17.3x 2.9x 3.0x 2.6x 2.6x 2.4x 15.6x 14.9x 2.1x 15.0x 13.7x 13.9x 13.4x 2.1x 12.9x 13.1x 1.9x 1.8x 2.0x 1.8x 10.0x 1.0x 5.0x 0.0x 0.0x Composite SEG- Revenue Greater Revenue between Revenue between Revenue Less Than Composite SEG- Revenue Greater Revenue between Revenue between Revenue Less Than Technology Index Than $1 billion $200 million and $1 $100 million and $100 million Technology Index Than $1 billion $200 million and $1 $100 million and $100 million billion $200 million billion $200 million Figure 9: SEG Software Categories SEG - Software Index Category EV/Rev. EV/EBITDA Revenue Growth Earnings Growth 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 2Q07 (TTM) 2Q07 (TTM) Infrastructure Software Database & File Management 2.5x 2.3x 2.0x 2.3x 2.6x 3.1x 12.5x 9.9x 9.5x 9.5x 9.3x 12.0x 2.3% 21.6% Development Tools, Operating Systems & 1.8x 2.1x 1.6x 1.2x 2.0x 2.5x 27.8x 26.7x 14.0x 14.0x 22.1x 26.3x 11.3% -0.6% Application Testing Software eCommerce Enablement Software 1.3x 0.9x 0.7x 1.1x 1.0x 2.3x 16.6x 14.8x 11.4x 11.4x 13.3x 14.6x -5.2% 3.4% Enterprise Application Integration 1.5x 1.7x 1.4x 1.8x 2.0x 2.2x 11.5x 15.7x 13.9x 13.9x 13.7x 11.4x 12.2% 8.9% Messaging, Conferencing & Communications 1.5x 1.3x 1.3x 1.8x 1.8x 1.3x 11.2x 15.9x 14.1x 14.1x 15.5x 14.1x 16.7% 9.0% Networking & Connectivity 2.2x 2.0x 1.8x 1.5x 1.6x 1.5x 22.6x 18.7x 18.1x 18.1x 16.2x 13.8x 4.5% -135.9% Security 3.0x 3.0x 2.4x 3.1x 3.2x 3.2x 13.8x 13.9x 11.7x 11.7x 15.4x 14.6x 16.2% -3.0% Storage & Systems Management Software 3.1x 3.2x 3.5x 3.6x 3.7x 3.6x 14.6x 13.1x 13.0x 13.0x 14.4x 14.0x 20.9% 11.2% Wireless 2.0x 2.0x 1.7x 1.4x 1.8x 1.6x 9.9x 14.1x 7.2x 7.2x 10.6x 12.9x 11.9% -54.0% Application Software Accounting & Finance 4.6x 3.5x 4.0x 4.4x 3.8x 4.3x 14.2x 17.3x 17.7x 17.7x 14.4x 16.9x 17.9% 16.6% Billing & Service Provisioning 2.4x 2.2x 1.2x 1.6x 1.8x 1.7x 11.5x 11.1x 9.0x 9.0x 7.4x 9.4x 6.7% 19.7% Business Intelligence 2.2x 2.1x 1.8x 2.3x 2.0x 2.3x 11.7x 11.7x 10.8x 10.8x 15.8x 15.6x 13.9% 1.6% Content/Document Management 1.3x 1.3x 1.4x 1.3x 1.7x 1.7x 11.6x 13.2x 15.9x 15.9x 17.5x 15.3x 7.5% -9.7% Customer Relationship Management, Marketing & 2.7x 2.4x 2.1x 2.3x 2.4x 3.2x 16.6x 18.6x 18.3x 18.3x 17.7x 33.2x 19.3% -20.1% Sales Software Education & Computer Based Training 2.0x 2.6x 1.9x 2.0x 2.2x 2.5x 13.3x 24.0x 24.5x 24.5x 34.4x 27.9x 10.8% -54.8% Electronic Design Automation 2.4x 2.7x 2.5x 2.8x 3.0x 3.2x 17.6x 14.2x 11.3x 11.3x 13.9x 24.2x 9.6% 39.8% Engineering, PLM & CAD/CAM Software 2.2x 2.2x 1.9x 2.4x 2.9x 3.2x 17.3x 14.6x 12.5x 12.5x 14.2x 17.5x 11.5% 5.4% Enterprise Resource Planning 1.6x 1.6x 1.4x 2.3x 2.2x 2.1x 13.1x 9.4x 15.4x 15.4x 16.3x 13.9x 14.8% -65.7% Entertainment 1.5x 1.4x 1.6x 1.8x 1.6x 1.6x 12.0x 11.7x 11.5x 11.5x 13.3x 13.1x 3.7% 48.8% Financial Services Software 2.5x 2.4x 2.4x 2.5x 2.6x 2.7x 13.8x 14.3x 10.8x 10.8x 13.5x 13.1x 11.7% 34.4% Healthcare 3.0x 2.6x 2.7x 2.8x 2.6x 2.8x 18.4x 15.8x 12.3x 12.3x 14.7x 14.3x 13.2% 65.1% HR & Workforce Management 3.1x 2.3x 2.0x 2.2x 2.7x 3.5x 19.2x 15.0x 10.8x 10.8x 20.9x 25.8x 31.4% 51.2% Multimedia, Graphics, Digital Media 2.3x 2.7x 2.3x 2.7x 2.5x 2.6x 26.9x 20.7x 18.1x 18.1x 21.6x 20.3x 18.8% -1.2% Supply Chain Management & Logistics 1.6x 1.7x 1.5x 1.5x 1.6x 1.9x 17.6x 12.3x 12.6x 12.6x 13.0x 13.3x 7.2% 3.2% Web Analytics 4.4x 5.0x 4.5x 4.5x 4.2x 4.1x 19.7x 16.5x 14.2x 14.2x 16.7x 19.3x 46.8% -0.3% be less profitable as they pump money into R&D In quarters past, median trailing twelve month and sales, but they also expect much faster revenue and earnings varied widely by product growth. Larger companies, however, are generally category, and 2Q07 was no exception (Figure 9). expected to grow more slowly, but generate Year-over-year, public company providers of web significant and ever increasing profitability. analytics and human resource management software led all other software categories in public While median software industry multiples are a company revenue growth (+46.8% and +31.4%, benchmark, EV/Revenue multiples for specific respectively), while public software companies software product categories provide greater providing solutions for ecommerce enablement insight and guidance about market trends, IT (negative 1.4%) and database and file spending priorities, and areas ripe for near-term management (+2.3%) lagged far behind. As for consolidation. earnings performance, healthcare led all other software industry product categories over the same year-over-year time period, reporting an 5| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 7. Software Equity Group, L.L.C. Figure 10: Pure Play Software as a Service (SaaS) Public Software Companies TTM Revenue EV/Rev. EV/EBITDA EBITDA Margin Growth Company Category Company Sector Company Sector Company Sector Company Sector 2Q07 2Q07 2Q07 2Q07 Concur (NASDAQ: CNQR) Accounting & Finance 6.4x 4.3x 16.9x 14.4x 43.2% 17.9% 23.3% 26.3% DealerTrack (NASDAQ: TRAK)* Vertical - Automotive 6.3x 2.7x 18.8x 14.3x 38.7% 11.7% 33.7% 17.4% Kenexa (NASDAQ: KNXA) Human Resource Management 5.9x 3.5x 26.0x 25.8x 76.7% 31.4% 22.7% 14.6% Kintera (NASDAQ: KNTA) Accounting & Finance 1.3x 4.3x - 14.4x -2.6% 17.9% N/A 26.3% RightNow (NASDAQ: RNOW) CRM, Sales & Marketing Software 4.0x 3.2x N/A 33.2x 19.3% 19.3% N/A 10.1% Salesforce.com (NYSE: CRM) CRM, Sales & Marketing Software 8.6x 3.2x 86.7x 33.2x 58.4% 19.3% 10.0% 10.1% Taleo (NASDAQ: TLEO) Human Resource Management 3.5x 3.5x 54.3x 25.8x 25.7% 31.4% 6.4% 14.6% LivePerson (NASDAQ: LPSN) CRM, Sales & Marketing Software 6.9x 3.2x 42.1x 33.2x 55.4% 19.3% 16.4% 10.1% Vocus (NASDAQ: VOCS) CRM, Sales & Marketing Software 8.6x 3.2x 70.4x 33.2x 47.8% 19.3% 12.2% 10.1% Salary.com (NASDAQ: SLRY) Human Resource Management 5.5x 3.5x - 25.8x 50.6% 31.4% - 14.6% Omniture (NASDAQ: OMTR) Web Analytics 9.4x 4.1x 74.0x 19.3x 86.3% 46.8% 12.7% 23.9% Visual Sciences (NASDAQ: VSCN) Web Analytics 4.0x 4.1x 24.8x 19.3x 55.9% 46.8% 16.3% 23.9% Median: 6.1x 42.1x 49.2% 16.3% average earnings increase of 65.1%, while that of the SEG Software Index in 2Q07. As a software companies providing networking and result, SaaS providers continued to be favored by connectivity solutions posted a median decline in investors, with markedly higher valuations on an earnings of 135.9% (See Appendix A). enterprise value to revenue basis (6.1x vs. 2.4x) and enterprise value to EBITDA basis (42.1x vs. 15.6x). Public SaaS Company Performance To enable our clients and subscribers to better U.S. Software IPOs assess SaaS market adoption and SaaS provider The software IPO market showed renewed signs financial performance, we began in our 1Q06 of life in 1H07, as six newly listed software Report to separately track the financial companies raised an aggregate $739 million performance of pure play, enterprise-focused (Figure 11). While the Street is demanding SaaS providers. The SEG SaaS Index has consistent earnings growth from established expanded from 10 to 12 public companies (Figure public software companies, investors are less 10), and will continue to expand as additional discerning when it comes to new entrants. SaaS pure plays enter the public market. In 2Q07, Although five of the six companies were SaaS providers reported median revenue growth unprofitable, only Veraz Networks failed to post a of 49.2% over the same quarter a year ago, first day closing share price higher than its markedly outpacing the overall software industry offering price. Anxiously seeking the next Google (+11.7%). Despite higher infrastructure costs and or Salesforce, investors focused squarely (some more deferred revenue than their perpetual would argue solely) on revenue growth. The license counterparts, the median EBITDA margin median next-fiscal-year (NFY) revenue growth for SaaS Index companies was 2.7% greater than estimate of the six newly public companies is a Figure 11: 1H07 Software IPOs NFY Revenue Fiscal Year Date Went Offering First Day EV / EV / Enterprise Value Growth Company End Category Public Amount Return Rev. EBITDA Estimates Comverge [NASDAQ: December Vertical - Utilities 4/13/07 $95,400,000 23.9% 13.9x N/A $470,402,400 50.4% COMV] PROS Holdings December Financial Analytics 6/28/07 $75,000,000 16.8% 6.8x 35.6x $339,641,900 N/A [NYSE: PRO] Software Salary.com Human Resource March 2/15/07 $59,850,000 19.0% 5.5x N/A $126,585,000 43.8% [NASDAQ: SLRY] Management Software Solera Holdings Vertical - Automotive June 5/11/07 $350,000,000 15.0% 3.5x 12.1x $1,560,261,900 390.0% [NYSE: SLH] Insurance Sourcefire [NASDAQ: March Security 3/9/07 $86,550,000 3.3% 4.5x N/A $212,850,000 25.9% FIRE] Veraz Networks December Networking Software 4/5/07 $72,000,000 -2.5% 2.4x N/A $257,801,400 20.7% [NASDAQ: VRAZ] MEDIAN: $80,775,000 15.9% 5.0x 23.8x $298,721,650 43.8% Average: $123,133,333 12.6% 6.1x 23.8x $494,590,433 106.2% NOTE: First day return compares listed offering price to first day close 6| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 8. Software Equity Group, L.L.C. Figure 12: U.S. Software IPO Pipeline Company Category Filing Date Offering Annual Net Income Amount Revenue athenahealth (NASDAQ: Vertical - Healthcare 6/22/07 $86,250,000 $75,800,000 -$9,200,000 ATHN Proposed) Software BladeLogic (NASDAQ: Data Management 4/5/07 $82,500,000 $24,600,000 -$7,200,000 BLOG Proposed) Software Constant Contact Customer Relationship 6/25/06 $86,250,000 $27,600,000 -$7,800,000 (NASDAQ: CTCT Management, Marketing Proposed) & Sales Software Deltek (NASDAQ: PROJ Project Management 5/8/07 N/A $228,000,000 $15,000,000 Proposed) Software DemandTec (NASDAQ: Demand Chain 5/24/07 $60,000,000 $43,000,000 -$2,000,000 DMAN Proposed) Management Software HireRight (NASDAQ: HIRE Human Resources 2/12/07 $66,000,000 $55,000,000 $11,000,000 Proposed) Management Software Monotype Imaging Holdings Graphics & Publishing 1/26/07 $154,000,000 $86,200,000 $7,100,000 (NASDAQ: TYPE Software Proposed) Netsuite (NASDAQ: NETS Enterprise Resource 7/2/07 N/A $77,000,000 -$20,000,000 Proposed) Planning SoundBite (NASDAQ: Messaging, 4/16/07 N/A $29,000,000 $0 SDBT Proposed) Conferencing & Communications SS&C Technologies Financial Services 6/13/07 $200,000,000 $205,000,000 $1,100,000 Holdings (NASDAQ: SSNC Software Proposed) VMware (NYSE: VMW Virtualization Software 4/26/07 $792,000,000 $703,900,000 $86,900,000 Proposed) MEDIAN: $86,250,000 $75,800,000 $0 Average: $190,875,000 $141,372,727 $6,809,091 very impressive 43.8%. Time will tell. But with the limited partners, and allay debt repayment word out, other unprofitable software companies concerns that could stymie future buyouts. are lining up to go public. Of the eleven software The largest software IPO on deck for 2H07 is IPOs that filed S1s in 1H07, only five are EMCs spinout of VMware, which will likely be a profitable (Figure 12). blockbuster. EMC is planning to sell approximately 10% of VMware for close to $800 Several noteworthy software IPO trends are million dollars. Analysts are projecting VMware to emerging in 2007. First, SaaS companies are grow by 60% in CY07. While VMware is coming to market in greater numbers. Although unquestionably the biggest IPO in the pipeline, Salary.com was the only SaaS IPO in the first Netsuite, a Larry Ellison backed company, is the half, companies poised for public listing in 2H07 most hyped. If listed, Netsuite will be the first include SaaS providers athenahealth, Constant publicly traded SaaS ERP company and a Contact, HireRight and NetSuite. Second, several competitor to Oracle. Ellison is listed as owning public companies previously taken private by 74% of Netsuites common stock. leveraged buyout firms are now poised for reentry. While only two such private equity owned Public Internet Company Performance companies are currently in the IPO pipeline Though the software and (Deltek, a New Mountain Capital portfolio internet/ecommerce/Web 2.0 sectors are rapidly company, and SS&C, a Carlyle Group company), converging, clear distinctions remain between the we expect as many as a half-dozen more to file two in terms of business model, revenue model, S1s in the next twelve months, as private equity solution deployment and end user requirements. firms look to cash in, provide returns to patient We've opted for the time being to track these major categories separately to enable a more 7| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 9. Software Equity Group, L.L.C. Figure 13: SEG Internet Key Statistics The median trailing-twelve-month revenue SEG - Internet multiple for public internet companies was 2.2x, Measure 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 while median EV/EBITDA and EV/Earnings were EV/Revenue 1.8x 1.6x 2.2x 2.2x 2.4x 2.2x EV/EBITDA 17.9x 20.0x 17.6x 17.8x 18.9x 17.8x 17.8x and 39.9x, respectively. The median current EV/Earnings 23.7x 28.9x 26.7x 30.3x 35.8x 39.9x ratio, measured as current assets divided by Current Ratio 2.7x 2.5x 2.6x 2.2 2.5 2.3 current liabilities, an indication of a companys Gross Profit Margin 43.4% 40.8% 48.3% 42.9% 55.1% 53.1% EBITDA Margin 16.8% 14.2% 14.6% 15.2% 15.5% 13.0% liquidity, was a healthy 2.3. While internet Net Income Margin 43.4% 8.3% 10.4% 5.9% 5.5% 3.0% companies continued to reap the benefits of Revenue Growth 29.1% 28.4% 22.0% 21.6% 9.8% 24.1% growing numbers and usage, they were required Earnings Growth 27.4% -31.8% 1.1% 10.2% -7.7% 19.7% to invest heavily in marketing and infrastructure: Median 2Q07 revenue for SEG Internet Index granular analysis of each. Broadly defined, companies increased 24.1% from 2Q06, while internet companies are primarily internet based median earnings decreased 19.7% over the same and their solutions are primarily often period. Enterprise valuations of companies exclusively web deployed. Our Internet Index is comprising the SEG Internet Index varied widely comprised of companies whose principal business by internet category in 2Q07, (Figure 14), with models fall within one or more of the following Internet Search Engine companies posting an categories: impressive 6.0x EV/Revenue median valuation, Advertisers Companies that provide key and eCommerce & Portals companies posting a elements in the internet advertising arena, such rather anemic 1.5x multiple. Internet Advertising as search marketing services, software to host companies posted the highest year-over-same and manage ads, and a network of websites that quarter revenue growth in 2Q07 (+39.9%). run ads. Representative companies include 24/7 Real Media, aQuantive and SINA. MERGERS AND ACQUISITIONS: THE NUMBERS New media Companies that provide online information and content. Representative Total M&A Spending and Deal Volume: The law companies include CNET, Jupiter Media, Napster of supply and demand forced buyers to dig and WebMD. deeper in 2Q07. The second quarter tally of 2,464 transactions across all industry sectors was in line Search engines Companies include with prior quarters, but the aggregate price tag Baidu.com, Google, Infospace, LookSmart, MIVA, increased sharply to $470.3 billion, setting the Sohu.com and Yahoo! stage for total M&A dollar volume in 2007 to surpass 2006 by 30% or more (Figure 15). While eCommerce & portals Companies whose some buyers and pundits might regard the trend main line of business is conducted over the web. as M&A inflation, the better explanation is Representative companies include 1-800 companies exiting today have greater value than FLOWERS.COM, Amazon.com, Bluefly, eBay and many of the underperforming companies acquired Expedia. two and three years ago for modest premiums. The 27 companies comprising the SEG Internet Software M&A Spending and Deal Volume: Index have had a much more volatile 1H07 than The North American software and IT services companies comprising the NASDAQ, S&P 500 sector was largely consistent with the activity and and SEG Software indices (Figure 2). Composite spending levels of the overall M&A market, financial performance measures for the posting 408 M&A transactions in 2Q07, slightly companies comprising the SEG Internet Index are below the 431 software and services deals enumerated in Figure 13. reported for 2Q06 (Figure 16). Aggregate M&A Figure 14: SEG Internet Categories SEG - Internet Index Category EV/Rev. EV/EBITDA Revenue Growth Earnings Growth 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 2Q07 (TTM) 2Q07 (TTM) Advertising 5.3x 5.1x 4.5x 4.2x 4.2x 4.4x 21.0x 22.8x 20.2x 22.6x 22.4x 19.3x 39.9% 66.5% eCommerce & Portals 1.8x 1.4x 1.3x 1.5x 1.6x 1.5x 27.8x 18.7x 15.9x 17.4x 14.9x 13.1x 24.1% -3.9% New Media 5.5x 4.3x 3.2x 3.4x 3.5x 2.2x 26.5x 22.7x 19.4x 18.6x 19.2x 27.0x 17.3% -52.4% Search Engine 4.2x 7.6x 6.1x 5.8x 6.1x 6.0x 16.1x 25.2x 20.7x 29.2x 29.0x 22.7x 23.4% 32.7% 8| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 10. Software Equity Group, L.L.C. Figure 15: U.S. Merger and Acquisition Activity 16,000 $1,800 $1,827B Q2: $470.3B $1,426B $1,223B 10,884 10,808 $1,500 12,000 Number of Deals Value ($ billions) $1,326B 10,884 Q2: 2892 10,198 9,278 11,123 9,514 $1,200 8,281 8,554 $1,223B 8,000 $900 $820B $452B $600 $654B 4,000 $526B $300 0 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Deals Value Source: Mergerstat Figure 16:U.S. Software Sector Specific M&A currency in 1Q07. We believe several factors are Activity at play. Sellers have grown uncomfortable with the current valuations of public buyers following the run-up in software stock prices; and buyers 438 431 425 408 are aggressively buying back their stock to boost earnings per share and avoid investor criticism for retaining excessive cash on their balance sheets. 101 101 Private vs. Public Buyers: Despite ongoing 92 83 64 68 61 50 software industry consolidation and the resulting diminution in the number of public software Q3 2006 Q4 2006 Q1 2007 Q2 2007 company buyers, M&A deal volume has not Software Life Science Comm. dramatically declined, in large part because Source: Mergerstat private buyers took up the slack and have spending, however, increased a remarkable 108% remained active. Privately held acquirers over the same quarter last year. Software deals accounted for only 24% of all software industry fetched $25.4 billion in 2Q07, compared to a total mergers and acquisitions in 2003, but represented of $12.2 billion in 2Q06 (Figure 17). Looking at 32% of all such buyers in 2006. 2Q07 showed the trailing twelve months, software M&A further increase, with private buyers, consisting spending is up 67% year-over-year due, in part, to several mega-deals (equity value greater than $1 Figure 17: U.S. Software M&A by Dollar Volume $30.5B billion) in 1H07, including aQuantive, DoubleClick, WebEx, Talx and Kronos (See Appendix B). $25.5B $26.3B $25.4B Deal Currency: Cash has long been favored over stock as software M&A deal currency, and 2Q07 showed an even greater preference for hard cash (Figure 18). All-cash deals represented 82% of software transactions in 2Q07, compared to 71% of software M&A transactions in 2Q06 and 68% in 1Q07. Only 19% of software M&A deals used all- Q3 2006 Q4 2006 Q1 2007 Q2 2007 stock or cash and stock in 2Q07, a marked Source: Mergerstat change from the 32% of deals that used stock as 9| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 11. Software Equity Group, L.L.C. Figure 18: Software M&A Form of Payment Figure 19: U.S. Public vs Private Software M&A 2% 13% 8% Buyers and Sellers 5% 16% 28% 11% Percentage of Software Buyers 27% 35% 37% 20% 37% 82% 81% 68% 67% 72% 65% 63% 63% Q3 2006 Q4 2006 Q1 2007 Q2 2007 Cash Cash & Stock Stock Q3 2006 Q4 2006 Q1 2007 Q2 2007 Private Public primarily of venture backed and private equity owned companies, accounting for a whopping 37% of all software M&A transactions (Figure 19). Percentage of Software Sellers We fully expect the volume and percentage of private buyer transactions in 2007, led by private equity/buyout firms, will surpass 2006. 89% 89% 89% 90% M&A Valuations: Software industry M&A valuations in 1H07 held few surprises. Across all software product categories, the median exit valuation (based on TTM revenue and the sellers 11% 11% 11% 10% equity value) was 2.3x in 2Q07, on par with 1Q07 (2.3x) and 2Q06 (2.3x) (Figure 20). We expect no valuation surprises for the remainder of 2007, and Q3 2006 Q4 2006 Q1 2007 Q2 2007 predict median software industry M&A valuations Private Public will be consistent with the past two years. Once again, however, we caution our readers about significant that public and private sellers traded using the median deal multiple to assess the fair places in 1H07. Public company sellers, market or prospective exit valuation of a particular accounting for 37% of all software M&A software company. transactions over 1H07, had a median exit valuation of 3.0x TTM revenue. During the same Size, status and subsector continue to be key time period, private company sellers accounted determinants of software company exit valuations for 63% of all transactions and commanded a (Figure 22). For software M&A transactions substantially lower median selling price of 2.1x during the last twelve months with ascertainable TTM revenue. In our 2006 Annual Report we revenue multiples, we separately analyzed the observed quite the opposite phenomenon: public effect on valuation of equity structure (private vs. sellers garnered a modest 2.1x TTM revenue public company), size (revenue) of buyer and multiple while private sellers received a far more seller, and software product category. The impressive 2.7x multiple during 2006. What exercise proved highly instructive. changed? Undervalued public software companies with stagnant growth and significant As a first step, we separated public and private recurring revenue have been picked clean, forcing software company sellers to ascertain any acquirers of publicly traded software companies to difference in selling price. As in past years, the loosen their purse strings in 2007 as they bid for disparity between the two in terms of median exit companies with higher CAGRs and market caps. valuation was significant, but it was more Increased debt leverage also helped jack-up public software company prices in 1H07. 10| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 12. Software Equity Group, L.L.C. M&A Exit Valuations by Software Category: Figure 20: U.S. Software M&A Valuation as a Despite these myriad exit valuation variables, Multiple of Revenue (Quarterly) Figure 23 reminds us the sellers software product category is the single most important M&A valuation driver. Exit valuations over the last 2.7x twelve months ranged from 4.6x for messaging 2.3x 2.3x software sellers to 1.3x for supply chain 1.9x management providers. Security still ranks near the top of the exit valuation chart, along with web analytics, database tools and file management. SaaS M&A: In todays software M&A market, no discussion of exit valuation would be complete without an analysis of pure play SaaS company Q3 2006 Q4 2006 Q1 2007 Q2 2007 exits. Buyers today are placing inordinately high value on the recurring revenue streams, bookings, Additionally, we sliced 1H07s TTM median and profitability potential of SaaS providers. software M&A multiple horizontally and vertically, Figure 24 lists 1H07s most notable SaaS M&A segregating vertical market software company transactions. sellers (e.g. retail, financial services, telecom, manufacturing, etc.) from sellers with horizontal software solutions (infrastructure, enterprise MERGERS AND ACQUISITIONS: BUYER MOTIVES applications, etc.). Vertical market solution providers received a median 2.1x TTM revenue Product Enhancement: While software industry exit valuation, while horizontal solution providers buyouts and mega deals have grabbed the lions commanded a median 2.4x valuation. Historically, share of the press, the data reveals most software median exit valuations have been 25% to 33% M&A transactions in 1H07 were far more strategic higher for horizontal solution providers than than financial. An analysis of some 185 software vertical solution providers. Clearly, 2007 transactions in 2Q07 indicates six out of ten continues to be a banner M&A year for vertical buyers acquired tuck-ins. Their appetites market software companies, another recent trend whetted by an insatiable appetite for growth, we expect to continue. market leverage and competitive differentiation, they purchased smaller companies with We also separated public and private software complementary solutions and enabling company buyers to ascertain any difference in exit technologies in an attempt to complete and valuation paid. In transactions where an exit extend the functionality of their product suites. valuation multiple was ascertainable, private Buyers of every type aggressively pursued these buyers (both strategic and private equity), strategic transactions, which we characterize as comprised 16% of all software company acquirers Product Enhancements, including the largest and paid a median M&A price of 2.2x TTM. By public software companies; mid-cap public contrast, public companies comprised 84% of all software companies taken private by buyout firms; software company buyers and paid a median and smaller VC-backed or small-cap software purchase price of 2.5x TTM. companies seek greater viability and growth. Finally, we analyzed TTM exit valuations based Product Enhancement deals, as a percentage of upon the size (revenue) of buyer and seller. As in total software M&A transactions, have grown prior years, buyer size was a key determinant of steadily over the past two years, comprising 56% exit valuation. Buyers with revenue greater than in 2H06 (Figure 25), 57% in 1Q07 and 59% of $200 million paid a median purchase price of 2.6x 2Q07 software transactions. A typical example in sellers TTM revenue over the last twelve months; 2Q07 is Microsofts acquisition of aQuantive while buyers with less than $200 million revenue (12.2x TTM revnue) to stave off fierce competition paid a median 1.7x TTM revenue. and gain a better foothold in the high growth internet advertising category. Other Product 11| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 13. Software Equity Group, L.L.C. Figure 22: 1H06 Median Valuations Figure 22 Cont.: 1H07 Median Valuations Public Sellers Public Sellers 2.0x Median Multiple 3.0x Median Multiple (Equity Value) (Equity Value) Almost exact reversal 37% 22% in valuations 78% 63% Private Sellers Private Sellers 3.0x Median Multiple 2.1x Median Multiple (Equity Value) (Equity Value) Vertical Seller Vertical Seller 2.5x Median Multiple 2.1x Median Multiple (Equity Value) (Equity Value) 26% 33% 74% 67% Horizontal Seller Horizontal Seller 2.7x Median Multiple 2.4x Median Multiple (Equity Value) (Equity Value) Private Buyers Private Buyers 2.1x Median Multiple 2.2x Median Multiple (Equity Value) (Equity Value) 16% 84% Public Buyers Public Buyers 2.8x Median Multiple 2.5x Median Multiple (Equity Value) (Equity Value) Buyer Less Than Buyer Greater Buyer Less Than Buyer Greater $200 million Than $200 million $200 million Than $200 million 1.6x Median 3.2x Median 1.7x Median 2.6x Median Multiple (Equity Multiple (Equity Multiple (Equity Multiple (Equity Value) Value) Value) Value) 41% 59% Seller Greater Seller Greater Seller Greater Seller Greater Than $20 Than $20 Than $20 Than $20 Million*: 1.1x Million*: 2.7x Million*: 1.5x Million*: 2.1x Seller Less Seller Less Seller Less Seller Less Than $20 Than $20 Than $20 Than $20 Million*: 1.7x Million*: 4.5x Million*: 1.7x Million*: 3.3x *: Revenue *: Revenue 12| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 14. Software Equity Group, L.L.C. Figure 23: U.S. Software M&A by Product Enhancement transactions in 2Q07 include Category Tibcos acquisition of Spotfire (4.3x), a business intelligence software provider; SAPs acquisition Messaging, Conferencing & of Outlook Corporation to enhance its business 4.6x Communications intelligence capabilities; and PTCs purchase of NC Graphics for enhanced computer-aided Security 4.0x manufacturing capabilities. We fully expect Product Extension deals will Web Analytics 3.8x continue to dominate the software M&A landscape for the remainder of 2007. Database & File Management 3.4x New Market/Subsector/Territory: The buyers in transactions we characterize as Market Networking & Connectivity 2.7x Expansion are primarily motivated by a perceived need to enter an entirely new product category or geographical territory. Market expansion Education & Computer Based Training 2.6x transactions also include horizontal enterprise software company buyers seeking to enter a vertical market or bolster their vertical domain Business Intelligence 2.5x expertise through vertical acquisition. This M&A driver category is still a minor contributor to Engineering, PLM & CAD/CAM 2.2x overall software M&A activity, accounting for 2% Software of transactions in 2Q07, down from 4% in 1Q07. A good example: Illinois Tool Works, a $14.5 billion Other Verticals (A&D, Telco, Retail, etc.) 2.2x provider of tools (nail guns, industrial adhesives, etc.), made its second foray into software by acquiring Kiwiplan. Another market expansion HR & Workforce Management 2.2x buyer was Constellation Software, a publicly traded Canadian software company that acquired Healthcare 2.1x Grampian, a software provider to the U.K. distillery industry. Development Tools, IT Asset Management & Application Testing 2.1x Vertical Markets: This category consists of vertical Software software companies that acquire other vertical software developers serving the same vertical Wireless 2.0x markets. Seeking to gain market share and cross- sell opportunities, these vertical buyers accounted Content/Document Management 1.9x for 32% of all software M&A transactions in 2Q07, down slightly from 35% in 1Q07. Healthcare has historically been the most active M&A vertical Manufacturing & Asset Management 1.9x market category, but 1H07 saw an uncharacteristic decline in healthcare deals. The financial services vertical, however, was Financial Services Software 1.8x especially active throughout the first-half of the year. Noteworthy financial services deals include Multimedia, Graphics, Digital Media Open Solutions acquisition of IA Systems and 1.7x Fincentric, Checkfrees acquisition of Upstream, and JP Morgans acquisition of Xign. Other Supply Chain Management & Logistics 1.3x vertical market software transactions in 2Q07 included Pearsons acquisition of eCollege (9.8x) in the education vertical, DealerTraks acquisition of automotive software provider Arkona (4.6x), 13| 2Q07 SOFTWARE INDUSTRY EQUITY REPORT Copyright 2007 Software Equity Group, L.L.C.
- 15. Software Equity Group, L.L.C. Figure 24: 1H07 Select SaaS M&A Transactions Revenue Buyer Seller Purchase Price Seller Revenue Multiple Cisco Systems WebEx (Nasdaq: WEBX) $ 3,200,000,000 $ 380,010,000 8.4x Equifax TALX (Nasdaq: TALX) $ 1,400,000,000 $ 256,830,000 5.5x Pearson eCollege {NASDAQ:ECLG] $ 538,000,000 $ 54,880,000 9.8x Websense Surfcontrol [LSE:SRF] $ 400,000,000 $ 121,400,000 3.3x Experian Hitwise