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Software Industry M&A Outlook 2015 Q3&Q4

Calabasas Capital is a boutique investment banking firm focused on serving lower middle-market privately held companies. We specialize in representing and advising businesses on sell-side and buy-side mergers and acquisitions and we raise private equity and debt capital.

Private Equity Investment in the Software Industry Once upon a time in the investment universe, the software industry was the proprietary domain of venture capital firms. Not anymore. Today, private equity firms large and small are investing heavily in the software space and are doing so at a rapid pace. At the same time, venture capital firms are crossing into traditional private equity land writing enormous equity checks into later stage opportunities. The high valuation multiples traditionally associated with software companies is no longer an obstacle for private equity—I suppose they do not seem so high anymore relatively speaking when multiples are high already across many industries.

Market Overview

Past 8-year Transaction Overview

2000 1800

1537

Value ($ Bil.)

1600 1400 1200 1000 800 600

88 [VALUE]

1515

1840 1565

[VALUE] 88

81 907 43

69 819

1621

68

1900

140

111.4

120 100 80 60

38

40

400

20

200 0

0

Value ($ Bil.)

Transaction volume

Transaction Volume

The software industry has seen significant increase in deal flow during the past few years. From 2012 to 2014, total software M&A transaction volume increased 18% while the value of transactions increased 76%. PE transactions have made up more than 40% of the dollar value of deals so far in 2015 despite accounting for just 18% of transaction volume.

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Increasing Valuation Multiples: The median EBITDA multiple of all software deals has increased from 11.3x in 2012 to 20.7x in the first half of 2015. Revenue multiples have increased more steadily from 2.1x in 2012 to 2.8x in the first half of 2015.

EBITDA Multiple

Analysis: Rising multiples also suggest a high level of market confidence in that the software business may provide a higher

20 15

2.2

2

1.9

2.2

2.1

2.3

2.6

10

10

11.2

2009

2010

12.9

11.3

11.7

1

12

0.5

0

return relative to other

2 1.5

15.5

5

3 2.5

20.7

1.5 16.9

2.8

Revenue Multiple

Past 8-Year Multiples 25

0 2007

2008

2011

2012

2013

2014

investments. EBITDA Multiple

2015 (1st half)

Revenue Multiple

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Large Strategics Have Cash to Invest: While some companies paused to realign their near-term goals with competitive market shifts, the top technology companies like Microsoft and Oracle maintain tremendous war chests of cash in excess of $370 billion providing ample ammunition for strategic acquisitions.

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Middle Market Expansion: A number of very large high-profile deals, which have often involved Oracle as the buyer, have dominated total software M&A transaction volume in recent years. However, the real growth has been the in the number of lower and middle market transactions and the steady increase in multiples.

Key Drivers in Software Deal Activity Despite the high multiples associated with software company acquisitions, Private Equity has increased its appetite for the sector for a number of reasons, including: “Software companies have lots of recurring revenues, and

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there's nothing better for a private equity investor than recurring revenues” – Peter Alternative ACG Boston President

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Recurring Revenue: Most software companies, especially those employing a Software-as-a-Service (SaaS)have a very high degree of recurring contracted revenue. To the extent future cash flow is highly predictable, lenders can be very aggressive and therefore a high acquisition multiple can be applied to current EBITDA and Revenue. High Growth Rates: PE firms have traditionally favored large, slow-growing, cash-generating infrastructure software companies. With growth hard to come by in many industries, PE firms have veered toward high growth software applications rather than infrastructure software companies. These software deals range from enterprise resource planning, supply chain management and customer relationship management, to industry-centric applications.

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High Margins: A typical middle market software company enjoys gross margins of 50%+ and EBITDA margins of 20%+. Once a PE firm swallows the high multiple need to acquire a large software platform company, the high gross margins mean they can afford to also pay up for add-on acquisitions. "The thing about the subscription model, the SaaS model, is almost by definition the gross margins are pretty high. They can be in the 90's, or the 70s or the 80s," said David Spitz from Pacific Crest Securities. Ability to Maximize Leverage: Banks and non-traditional lenders are able to provide leverage of 5 – 8x EBITDA on software company acquisitions given the recurring revenue and high margins. Double that to assume a 50/50 debt/equity capitalization and it’s no wonder acquisition multiples have skyrocketed.

Revenue Multiple By Size ($ Mil.) 10-20 20-40 40-80 80-160 160+

Analysis: Revenue multiple increases are most prevalent at the lower mid-market range of $80-$160 million in revenue.

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2009 1.7x 1.5x 2x 2.1x 3.2x

2014 1.9x 2.4x 2.5x 2.6x 3.4x

2015 2.3x 2.4x 2.5x 4.1x 3.6x

Added-Value and Leveraged Growth Potential through Acquisitions: Large public or private software companies, especially those with private equity backing, can reap tremendous synergies with strategic acquisitions. A target with $5 million in reported EBITDA for example may translate to $8 million in marginal EBITDA to the buyer. As a result, overall acquisition multiples increase.

Niche Software Segment Expansion The niche software segment, which is targeted to specific vertical markets, is the biggest winner of this season with five of the overall industry’s top ten highest " There are a lot of reasons valued deals. Niche software deal volume has increased 12% during Q1 2015.

that software is attractive to PE,

such as high returns, resilience in downturns if they are critical to operations and low capital expenditure.” – Raj Seth GE Capital Managing Director

Of note, four of these five transactions were located in the finance vertical, including:  SS&C Technologies’ acquisition of Advent Software, a provider of portfolio management software, for $2.7 billion;  Davis + Henderson’s acquisition of FundTech, a payments and transaction banking software company, for $1.3 billion;  Bridgepoint’s acquisition eFront SA, which offers software solutions focused on alternative investments and risk management, for $327 million; and

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PayPal’s acquisition of Paydiant, a cloud-based payment processor, for $280 million.

Segmentation by Transaction Volume 2015 (Projected)

2014

2009 15%

11%

13%

10% 18%

51%

49%

13%

24%

54% 20%

22%

Total Volume: 819

Total Volume: 1840 Niche

Business

Consumer

Total Volume: 1900 Infrastructure

Recent Transactions Highlights Commentary: iPipeline’s advantageous market position and attractive underlying cloud computing industry made the deal a

Thoma Bravo/iPipeline Transaction: On August 5, 2015, Thoma Bravo LLC announced the acquisition of iPipeline for undisclosed terms. The investor Thoma Bravo LLC is a San Francisco-based, technology-focused private equity firm. The firm currently manages a series of funds representing more than $8.5 billion of equity commitments. The target iPipeline is a leading provider of cloud-based software solutions for the life insurance industry. Through its SaaS solutions, it accelerates and simplifies insurance sales, compliance, operations and support. Thoma Bravo envisions that the cloud computing industry will continue to see exceptional growth

valuable investment

GI Partners/MRI Software Transaction: On June 3, GI Partners announced a definitive agreement to acquire MRI Software LLC for an undisclosed amount. GI Partners is a SF-based private investment firm that is active in a number of key sectors, including Technology, Media & Telecommunications, Healthcare, Retail & Leisure, and Financial & Real Estate Services. MRI is a leading provider of real estate enterprise software applications and hosted solutions to the global property management and investment industries. GI Partners was drawn to MRI's unique and leading position in the real estate industry. The management team has expanded the enterprise through both organic growth and the successful integration of several strategic add-on acquisitions. Moreover, the PE firm has also identified several significant growth opportunities for the company, including expansion into new geographies and applications.

Commentary: Individual PE firm’s investment philosophy might vary and can materially affect their funding decision.

GTCR/Rx30 Transaction: On June 16, GTCR announced a strategic equity investment in Rx30 to help accelerate the Company’s new product development and continuing growth. Terms of the deal were not disclosed. Rx30 is a leading developer and supplier of pharmacy management software solutions to the independent, hospital, long-term care and specialty pharmacy markets. For its investment, GTCR partnered with the company’s existing CEO, Steve Wubker, who will continue to head the business. The strategy is consistent with the GTCR focus on partnering with management teams to build companies.

5 Marlin Equity/IBS Transaction: On June 26, private equity firm Marlin Equity Partners announced the acquisition of International Business Systems AB (IBS) from Symphony Technology Group for an undisclosed amount. Marlin Equity Partners is a global investment firm focused on investing in businesses across multiple industries. IBS develops distribution resource-management software for the wholesale, distribution and manufacturing markets. IBS participates in a rapidly growing market with strong brand recognition. Marlin Equity looks to be able to help IBS grow the business organically, as well as through strategic acquisitions, and to support the company in delivering worldclass products and services to its diverse client base.

Commentary: Social Solutions’ strategic acquisition of Community TechKnowledge is highly synergetic and will help both companies expand their customer base and product range.

Commentary: The public sector software space has seen tremendous growth in deal activities in the past few years.

"Our significant experience investing in software businesses, as well as our extensive experience with carve-out transactions, positions us well”

SSG/CTK Transaction: On June 22, Social Solutions Global Inc. (SSG) announced the acquisition of and Community Techknowledge Inc. (CTK). SSG is a leading provider of outcomes management software. Its Efforts to Outcomes software helps clients make data useful to staff at all levels. CTK is an Austin-based technology company that helps nonprofits streamline work through outcomes management and reporting software and services. The deal extends and solidifies SSG’s position in the market and provides unparalleled capabilities to its customers. Current CTK customers will benefit from SSG’s global presence, name recognition, expansion into the public sector, and broad investment in infrastructure. Image API: On April 20, 2015, private equity firm Milestone Partners announced it was actively seeking add-on acquisitions for portfolio company Image API, which it acquired in 2012. Based in Tallahassee, Florida, Image API provides electronic content management solutions and related business process outsourcing services primarily to state and local government entities. Through its proprietary, technology-based solutions, Image API enables organizations to more effectively store, manage and analyze large amounts of information in digital form. API will be able to leverage its leadership in the public software industry to accelerate the growth of companies it acquires. The add-ons will also help Image API to solidify its market share in this expanding sector. Insight Venture Partners/TriTech Transaction: On November 21, 2014, TriTech Software Systems, a leader in public safety software, announced a recapitalization led by Insight Venture Partners, a NY-based technology-focused private equity firm. Founder and CEO Chris Maloney retained a significant equity interest and has continued to run the Company. Insight Venture Partners sees TriTech as the leader in their industry and has an executive team that can manage strategic growth and effectively integrate multiple add-on acquisitions Carlyle/Veritas Transaction: On August 29, 2015, Carlyle Group LP agreed to buy Symantec Corp.’s Veritas data-storage unit for $8 billion (3.1x revenue) in the biggest U.S. leveraged buyout this year. The Carlyle Group is a prominent U.S.-based global asset management firm, specializing in private equity. Veritas is a leading provider of storage and server management software solutions. Key highlights of this transaction include: 

– Cam Dyer Carlyle Group LP Managing Director

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The Veritas sale will provide cash for Symantec, which has seen its dominance of the cyber-security business eroded as hackers have found ways to thwart its key security product, antivirus software. Symantec needs the cash to fund acquisitions and build costly security services such as incident response. A sale of Veritas, bought in 2005 for more than $13 billion, is symbolic of Symantec’s refocusing on the security market as it tries to lessen its dependence on antivirus.

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Veritas will have more flexibility to execute growth strategies and value creation as a privately held company. They believe that partnering with an experienced private equity firm will allow them to maintain their industry leadership position while accelerating growth by re-energizing its product platform and by capitalizing on emerging and next generation technology as the data center evolves.

Conclusion M&A activity in the software industry has increased significantly over the past two years in part due to increased Private Equity investment. Valuation multiples and deal volume has risen significantly, especially in the middle market. Niche software businesses and those with SaaS business models are especially of interest to buyers.

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Calabasas Capital Our comprehensive services include:     

Sell-Side and Buy-Side Mergers & Acquisitions Advisory Private Equity & Debt Capital Raising Acquisition Financing Financial Restructuring Sales of non-core assets/divisions of larger public and private companies

Software Transaction Experience

Contact Us   

David Bonrouhi, Managing Director, [email protected] Brandt Blanken, Managing Director & Principal, [email protected] Leslie Lum, Vice President, [email protected]

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