IBM Reaches Into The App Layer For Varicent

Apr.15.12 | About: International Business (IBM)

by Brenon Daly

IBM (NYSE:IBM) has mostly stayed away from acquiring application vendors, reaching instead for companies that typically either bolster its sprawling Global Services division or infrastructure software business, particularly in the management layer. Big Blue stepped a bit out of its regular acquisition area on Friday with the purchase of sales performance management (SPM) vendor Varicent Software. IBM is adding Varicent, which helps companies manage quotas and incentives for sales agents, into its Smarter Analytics division.

Although IBM didn't disclose terms of the deal, we estimate that nine-year-old Varicent was generating about $35m in sales, give or take a few dollars. That would make it less than half the size of its publicly traded SPM rival, Callidus Software (NASDAQ:CALD), which increased revenue 18% in 2011 to $84m. Callidus currently trades at slightly north of 3 times trailing sales. Slapping that multiple on Varicent gives a price in the neighborhood of $100m, which is probably a reasonable starting point for valuation.

Of course, Callidus' current valuation doesn't reflect any acquisition premium that an acquirer would have to pay. Also, we would probably make the case that Callidus has a more valuable revenue stream, given that more than half of its revenue comes from subscriptions. (Last year, Callidus reported that SaaS revenue hit $45m of the $84m in total sales. More importantly, the subscription business grew twice as fast as the company's overall revenue.) Varicent was more of a traditional software provider, with license and maintenance plus a bit of consulting. Finally, one other SPM vendor to keep an eye on is Xactly. We understand that company, which has raised roughly $70m in venture backing, may be looking to go public in 2013.