Software M&A Muddles Along in Q2

Software M&A in the second quarter of 2008 was one of the only bright spots in an otherwise dismal quarter for M&A activity. According to a report released Wednesday from technology investment bank and advisory firm Software Equity Group, there were 379 acquisitions of software and IT services companies, or 19% of the 1,984 M&A deals made in the quarter. Deal valuation of software companies totaled $21.9 billion in the quarter, slightly below the $25.5 billion spent in the first quarter and $25.4 billion spent in the second quarter last year.

But total dollar value was skewed by three mega-deals in the sector that totaled $17.1 billion, predominantly Hewlett-Packard Co.'s (HPQ) outstanding $14.4 billion offer for Electronic Data Systems Corp. (EDS).

According to Software Equity Group, there were a total of 1,984 M&A deals valued at $192 billion in the second quarter in North America compared to 2,084 deals with a valuation of $182.9 billion in the first quarter. However those numbers pale compared to the 2,464 seen in the second quarter of 2008 with a valuation of $470.3 billion. The investment bank cites the dropoff in private equity for the precipitous decline. Domestic acquisitions by private equity firms dropped 89% in the second quarter to $23.2 billion.

Small- and mid-market software M&A (those deals valued at less than $500 million) continued to comprise the bulk of transactions, with buyers focused on strategic tuck-ins and bolt-ons. Of the 379 acquisitions in the quarter, all but three were small- and mid-market, with a total value of $4.8 billion. That compares to 373 worth $10.8 billion in the first quarter of 2008 and 401 for $6.8 billion in the second quarter of 2007. The average size of those deals was $12.8 million in the quarter, down significantly from $28.8 million in the first quarter and $16.9 million in the second quarter of 2007.

Valuation of software companies declined slightly in the second quarter due to undervalued public companies being acquired. On a multiple to revenue basis, the median enterprise value in the second quarter was 2.0 compared to 2.1 in both the first quarter of 2008 and second quarter 2007. The best valuations came from acquisitions of database and file management software companies, which averaged an 11.4 multiple to revenue. Software as a Service providers also continued to be highly attractive acquisition candidates in the quarter and extracted a higher premium than their perpetual license counterparts.

To the surprise of no one, the IPO market for software companies in the second quarter was non-existent, yet four companies did file regulatory documents indicating they were preparing to go public -- medical software maker Epocrates Inc., website performance monitoring firm Gomez Inc., enterprise software maker Metastorm Inc., and financial trading software company Open Link Financial Inc -- adding to the three that filed S-1s in the first quarter of 2008.

Of the most recent four, Software Equity notes, only Gomez is not profitable, which could bode well for the companies if and when they do go public. Software Equity expects only eight to 10 software IPOs in 2008 compared to 26 in 2007, with most of those expected in the fourth quarter. It anticipates that companies that are not profitable will withdraw their offerings or let them expire.

Comments

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2008 Jul 18 01:42 PM

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2008 Jul 24 01:11 PM