San Diego’s Software Equity Group Sees Software M&A Deals Ramping Up in 2011

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their current product lines, and about 30 percent—especially the bigger companies—are focused on extending their reach into adjacent product categories or territories like the Far East.

Bender and Brad Weekes, an associate at the Software Equity Group, also provided some highlights from the 2010 Software Industry Equity Report:

—The report includes several indexes that track public software companies, Internet companies and software-as-a-service (SaaS). In 2001, the software index was comprised of 332 public companies doing one or more deals a year. In 2010, the same index consists of 161 public companies. The annual median valuation of these companies is 2.3 times trailing 12-months revenue—the highest valuation level since 2007.

—The annual median valuation of 21 companies in the SaaS index is 3.6 times their trailing 12-month revenue figures. “After 11 consecutive quarters of declining revenue,” Weekes says, “the trailing twelve-month revenue growth rates for SaaS rose in the third quarter of 2010, and gained more in the fourth quarter.”

—Thirty percent of buyers in the firm’s 2011 survey believe that it is “very important” that a target be all or substantially SaaS/subscription based, more than double the 13 percent in the 2010 survey. Only 17 percent said that SaaS was “unimportant” in 2011, a sharp decline from the 47 who expressed such disinterest in 2010. Nevertheless, Bender says the big question is how far big companies like Procter & Gamble and Coke are willing to go in terms of adopting a SaaS-based model in their businesses, as they have no intention of using SaaS for corporate financial management and other confidential and sensitive data.

—Big software companies were hit by the recession, and have tightened their operating expenses, Bender says. Median revenue growth for the software industry has historically hovered around 15 percent. But it fell to 5 percent in 2009 and was 4.5 percent last year. Revenue growth has been recovering, but it’s still unclear whether the median growth rate will return to the industry’s historic norm.

—The annual median valuation for the 56 companies in the Internet index is 1.6 times trailing 12-month revenue.

The Software Equity Group also put together an abbreviated chart that highlights some key data from the report:

Enterprise Value (EV) is defined as a company’s capitalization minus cash & 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.

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

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