Software Industry Valuations Rise, Driven by Demand for Software-as-a-Service

8/19/11Follow @bvbigelow

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on major U.S. exchanges (including three foreign software companies) during the quarter are: Pandora Media (NYSE: P), LinkedIn (NYSE: LNKD), Renren (NYSE: RENN), Yandex (NASDAQ: YNDX), Ellie Mae (NYSE AMEX: ELLI), Jiayuan.com (NASDAQ: DATE), FriendFinder Network (NASDAQ: [[ticker:FFN ]]), The Active Network (NYSE: ACTV), and HomeAway (NASDAQ: AWAY).

The Software Equity Group’s quarterly software industry equity report is widely viewed as a key economic barometer. The firm, which operates as an investment bank and M&A advisory firm, tracks both public market valuations and mergers and acquisitions deals. The firm’s median valuations for public companies, which are calculated as a multiple of trailing 12-month revenue, are widely used to benchmark the value of companies in the software, SaaS, and Internet sectors. The firm’s complete quarterly reports can be downloaded here.

Some other highlights of the firm’s M&A analysis:

—M&A deal volume has been close to its historically healthy level of 400 transactions a quarter for five of the past six quarters.

—The 5.2x median valuation (enterprise value divided by trailing 12 month revenue) is the highest median since the first quarter of 2008. Forty-five SaaS companies were acquired during the second quarter, an increase from the 39 SaaS deals during the previous quarter, and 26 during the fourth quarter of 2010. In its report, the firm says the growing number of SaaS buyouts indicate that SaaS providers have “finally become an important target for acquirers, as well as an array of recent IT spending surveys showing SaaS was gaining increased acceptance among enterprise CIOs.

—Chinese-based Internet companies are gaining significant attention among investors. Fourteen of the 81 public companies in the firm’s Internet index are based in China, and are trading at a median 7.5x EV/TTM revenue. That’s in sharp contrast to the other 67 public Internet companies in the index, which are trading at a median 2.4x EV / TTM revenue.

Enterprise Value (EV) is defined as a company’s capitalization minus cash and short-term investments, plus total debt, preferred equity, and total minority interest. TTM is trailing twelve-month revenue. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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