Current Global M&A Environment

Okay, so we are facing a bit of doom and gloom these days. Wall Street is crashing and the US Congress finally passed the $700 Billion (USD) financial bailout legislation last week. As investor anxiety deepened despite the bailout package, the Fed announced that it would double its auctions of cash to banks to as much as $900 billion, pay banks interest on reserves and consider further actions as needed. In clogged credit markets, the London interbank offered rate, which banks charge one another for overnight loans, shot up in midday trade to 2.37%, from Friday's close of 2%. However, in a sign of mild improvement, the rate for three-month loans fell 5 basis points to 4.29%. Stock markets fell across Europe on fears that the financial crisis was accelerating and that European governments' uncoordinated response would leave the regions' lenders vulnerable. The increasingly drastic steps being taken by the U.S. and European Union don't appear to be having a significant effect on the psyche of bankers who have all but ended lending to each other, thereby freezing credit markets.

Where do we go from here?

Now What?

How does it effect technology M&A?

From a macro-level view, the technology industry is still alive and kicking, although slowing (in some ways).

Forrester Research cut its 2009 U.S. technology spending growth forecast to 6.1 percent from 9.4 percent, the research group said on Tuesday, but raised its 2008 growth forecast to 5.4 percent from 3.4 percent.

The economic slowdown Forrester expected in the first half of this year is now expected in the second half of 2008 or the first half of next year. "(This) means that total U.S. IT (information technology) spending for 2008 will be more robust than we first predicted, but that an expected recovery in 2009 will be postponed," Forrester said in a statement.

According to Capital IQ, deal flow in the technology sector has approached $119.32 billion and 3,666 for YTD 2008, versus $205.54 billion and 3,846 for the same period last year.

Capital IQ also reported that multiples, including Total Enterprise Value (TEV) to Revenue averaged 1.28x and the TEV to EBITDA averaged 8.47x for the trailing-twelve months ending Sept 30, 2008.  As for the latest period (Q3 2008) the average technology deal equaled a TEV / Revenue of 1.23x and a TEV / EBITDA of 7.77x, a slight drop overall.

There are still many good opportunities for both buyers and sellers in the potential slowdown. If you've got a good quality company, it's a wonderful time to sell. Private equity will have a flight to quality and still currently has a ton of money they need to use and place it before the end of the year.  For lower middle-market transactions that are not reliant on the credit markets, the environment is still decent overall.

“IPOs Hit a 30-Year Low”

In Silicon Valley, investors believe technology firms will survive the economic meltdown, but they’re concerned about the lack of IPOs.  There were zero IPO’s completed by venture backed companies in the second quarter of 2008. It's the first time since 1978 that the industry posted a goose egg, and it represents a huge drop from the 25 companies that went public during the same period in 2007. The latest data have the National Venture Capital Association warning of a "capital markets crisis." NVCA president Mark Heesen is also concerned that the total value of merger and acquisition deals, another key outlet for VC-backed companies, was 40 percent less in the second quarter than in the same period in 2007.

Not that everyone didn't see it coming, but guess what? The third quarter stank for venture capitalists seeking to reap the rewards of their investments. In fact, it was the worst period in five years for VC exits. So says new data from Dow Jones VentureSource.

According to the stats, VC-backed companies generated $4.57 billion in liquidity for their backers via initial public offerings or M&A. That's a 66% drop from the year-earlier period. There were 66 acquisitions worth $4.4 billion; the lone IPO was the $153 million debut of Rackspace Hosting Inc. That said, the median time until a VC-backed company gets bought has stretched to 6.1 years, while the price fetched has nearly been halved compared to last year. Ouch.

At its recent meeting in Silicon Valley, the National Venture Capital Association announced it will organize task forces of financial experts to come up with solutions for reviving the IPO market and present the ideas to the new White House Administration after the first of the year.

Meanwhile, we attended the recent annual Oracle OpenWorld conference and learned that Oracle president Charles Phillips suggested that over the next five years, the level of acquisition activity could be similar to what Oracle has accomplished in the past 44 months, which amounts to several Billion dollars in M&A spending. "We have access to innovation around the world because of our balance sheet and acquisition strategy." In a sense, he said, Oracle "is the IPO market for the software industry." Oracle builds on its enterprise software solution which includes databases (where its an industry behemoth), middleware and applications.

Enterprise Software Industry M&A Summary for Q3 2008

The Software industry sector remained active for Q3 2008 with a tilt towards the major software houses claiming the bulk of the number of acquisitions (and buyers).

Most recent Enterprise Software M&A transactions announced in Q3 2008 include:

Ø      Oct 6, 2008 - Document-capture software provider Kofax has acquired electronic invoice and document-processing software company OptiInvoice Digital for 2m euros ($2.71m) cash with further conditional payments in the range of 1.31m euros ($1.77m) to 10m euros ($13.6m) over four years. OptiInvoice Digital, which is headquartered in Stockholm, Sweden, develops software that allows electronic invoices and other documents to be digitally encrypted and transmitted through email and other data streams in standard text, image, and XML formats, eliminating the need to print, mail, receive, and process paper-based documents.

Ø      Oct 3, 2008 - Oracle has acquired UK-based 3D retail software provider Advanced Visual Technology for an undisclosed sum. AVT's products enable retailers to design and plan retail floor space in real time with a current photo-realistic view of each store. On completion of the deal, AVT's employees will join Oracle's Retail Global Business Unit. Duncan Angove, senior vice president and general manager at Oracle Retail, said: "Adding AVT to our portfolio of retail applications further builds on our strategy of providing broad and deep industry solutions that help transform the economics of retail businesses. This will help enable retailers to gain rapid and profitable ROI from every inch of store space and help Oracle further realize its vision for insight-driven retailing."

Ø      Oct 1, 2008 - US-based private equity firm Bedford Funding has acquired talent management software provider Authoria for $63.1m. The firm, specializing in investments in the software and IT services sectors, will make an additional $8m investment in Authoria to enhance its marketing and sales initiatives and accelerate overall corporate growth.

Ø      Sept 23, 2008 - Cisco has agreed to acquire open-source instant-messaging start-up Jabber for an undisclosed sum to enhance its unified communications and collaboration product portfolio. Colorado-based Jabber provides a messaging platform that supports different devices, users, and applications and allows collaboration across Microsoft Office Communications Server, IBM Sametime, AOL AIM, Google, and Yahoo.

After the acquisition, Jabber will become a part of the Cisco Collaboration Software Group (CSG). Cisco said the acquisition will allow it to incorporate Jabber’s presence and messaging services in the network and offer aggregation capabilities to users through both on-premise and on-demand applications across multiple platforms including Cisco WebEx Connect and Unified Communications.

The acquisition is part of the company's "build, buy, and partner" strategy to move into new markets and capture key market transitions. Earlier this month, it acquired e-mail and calendaring software provider PostPath for $215m. Other recent acquisitions by the company include WebEx, IronPort, and Securent.

Ø      Sept 18, 2008 - Netherlands-based multimedia company Wolters Kluwer has acquired German tax software provider Addison Software from European private equity investor HgCapital for approximately 200m euros ($284m). Addison provides software applications for tax advisers, CPAs, and medium-sized companies. It generated 48m euros ($68.2m) revenue in fiscal 2007 and has over 340 employees.

This is the third acquisition by Wolters Kluwer this year. Earlier this month, it acquired electronic clinical information company UpToDate to strengthen its health portfolio. In March, it acquired the accountants division of MYOB UK and MYOB Ireland to expand its presence in the UK market.

Ø      Sept 16, 2008 - Enterprise systems management software vendor Quest Software has acquired NetPro Computing, a provider of optimization tools for Microsoft environments, for $78.7m. Quest said the acquisition will enable it to offer products to migrate, manage, and secure Microsoft Active Directory, Exchange, SharePoint, and SQL Server environments. It plans to retain key members of NetPro's management team and will continue to offer products from both companies independently. The companies are expected to announce the roadmap for new products on October 15. The acquisition follows Quest's January purchase of PassGo and last year's acquisition of Windows-based lifecycle management software developer ScriptLogic for $90m.

Ø      Sept 8, 2008 - Enterprise content management software vendor Open Text has acquired document-centric process automation software provider Captaris for $131m. Captaris provides document and data capture applications, as well as business information and delivery applications built on Microsoft's .NET framework that integrate, process, and automate the flow of content. Waterloo, Canada-based Open Text said Captaris's offerings will be integrated with its invoice management applications that work with SAP and Oracle.

In March, Bellevue, Wasington-based Captaris rejected a $4.75-per-share offer by private-equity firm Vector Capital. Open Text offered $4.80 per share.

John Shackleton, president and chief executive at Open Text, said: "Captaris's technology will strengthen Open Text's ECM solutions by providing another on-ramp for integrating content into our ECM solutions. We are committed to continuing Captaris's products, and partner and customer support."

In July, Open Text also acquired eMotion, a provider of hosted business applications for managing digital media assets and marketing content, and Spicer that specializes in file format viewer applications for desktop applications, integrated business process management systems, and reprographics.

Ø      Sept 4, 2008 - Oracle has agreed to acquire ClearApp, a provider of application management products for composite applications built on SOA platforms. Financial terms of the acquisition, which is expected to close in the second half of 2008, were not disclosed.

ClearApp's products identify potential problems in the code of an application and how the problem can affect other applications. The company's software works with Oracle's Enterprise Manager product line and IBM's WebSphere. Leng Leng Tan, vice president of applications and systems management at Oracle, said: "As customers deploy more SOA-based applications, the task of effectively managing them becomes paramount. With the addition of ClearApp's technology to the Oracle Enterprise Manager product family, our customers are expected to get continuous and uninterrupted top-down views of their business services and applications, helping them maximize service availability while reducing IT operations costs."

This is the seventh acquisition by Oracle this year. It acquired 11 companies last year.

Ø      Aug 21, 2008 - Salesforce.com has paid $31.5m to acquire InStranet, a provider of knowledge management technology for call centers. InStranet categorizes customer information into data dimensions, such as their geographic location and the specific products they have purchased.

Salesforce.com said the acquisition will enable it to expand its Salesforce CRM Customer Service & Support portfolio and will also add approximately 350,000 global call center agents. It will continue to support InStranet customers and will integrate InStranet's management team and employees into the company.

Marc Benioff, chairman and chief executive at Salesforce.com, said: "We're excited to add this unmatched technology to our SaaS applications and Force.com platform. Not only will it make our service and support offering stronger for our customers and further their success, it will help catapult our growth in the customer service and support space."

Ø      Aug 12, 2008 - JDA Software has agreed to acquire supply chain management software and services provider i2 Technologies for $346m. Hamish Brewer, chief executive at JDA, said: "By acquiring i2 we double our addressable market in manufacturing to include discrete manufacturing, complementing our current market leadership in process manufacturing and strengthening our retail and transportation management presence."

JDA said it expects the acquisition to produce annual cost savings of approximately $20m.

Most recent Security Software M&A transactions announced in Q3 2008 include:

Ø      Sept 24, 2008 - California-based security software company McAfee has agreed to acquire Secure Computing for approximately $465m to expand its network security product portfolio and customer base. Secure Computing provides network security products including Webwasher that filters corporate web traffic, Ironmail encrypted mail servers, Sidewinder firewall appliances, and SnapGear virtual private network (VPN) devices to businesses of all sizes.

Upon completion of the acquisition by the end of the fourth quarter, Secure Computing’s technologies will be integrated into McAfee’s Network Security product business unit and will be headed by Secure Computing’s current president and chief executive Dan Ryan. McAfee said the acquisition will strengthen its position in security risk management (SRM) and will enable it to provide a complete network security portfolio including intrusion prevention, firewall, web security, e-mail security and data protection, and network access control.

The acquisition follows the company’s August acquisition of risk management tools provider Reconnex for $46m. Last year, it acquired Israel-based data protection company Onigma for $20m and encryption and access control vendor SafeBoot for $350m.

Dave DeWalt, chief executive and president of McAfee, said: "We expect the pending combination of McAfee and Secure Computing will create annual projected combined revenue of just under $500m in the network security segment of our SRM portfolio. We believe that this pending acquisition will allow us to immediately establish a leading and highly competitive position in the network security space."

Ø      Sept 24, 2008 - California-based networking equipment vendor Netgear has agreed to acquire integrated security appliances firm CP Secure for $17.5m to enhance its security applications portfolio for SMBs. As per the deal, the company will pay $14m in cash for China-based CP Secure's assets and an additional $3.5m following closure of the acquisition. CP Secure has an engineering center in Nanjing, China, and provides integrated security applications to protect organizations from internet-originated web and e-mail malware threats. As part of the acquisition expected to close in the fourth quarter, the company will acquire all the pending patents, proprietary technologies, customer base, current products, and products in development.

Ø      Aug 20, 2008 - Security and storage software company Symantec has acquired for an undisclosed sum Australia-based PC Tools, which provides privacy and security software for Windows users. On completion of the deal, which is expected by the end of the year, it will continue offering its products under the PC Tools brand and maintain separate operations within Symantec's consumer business unit. Simon Clausen, chief executive of PC Tools, will lead the operation and will report to Janice Chaffin, president of consumer products at Symantec.

Symantec said the PC Tools' PC utilities software and point security technologies will enable it to expand its reach in emerging markets with an array of go-to-market capabilities. Symantec's Chaffin said: "The combination of our two companies will provide additional value and choice for consumers worldwide to better enable and protect their digital life. By adding PC Tools, we build on the market-leading success of Symantec's consumer offerings and firmly position ourselves for continued incremental growth in a rapidly expanding market."

Earlier in August, Symantec also acquired nSuite Technologies for an undisclosed amount.

Ø      July 30, 2008 - Endpoint security and control software vendor Sophos has announced plans to acquire German enterprise data security applications provider Utimaco Safeware for 217m euros ($340m). As part of the acquisition, Sophos has acquired Investcorp Technology Partners' 24.99% stake in the company.

It said Utimaco will become a new Sophos business unit focused on data security, and Utimaco's SafeGuard brand will be retained. Steve Munford, chief executive at Sophos said: "Companies of all sizes are looking to protect against both external and internal threats, with one manageable solution. Integrating endpoint protection, network access control, and encryption provides us with a great platform for innovation as the market continues to focus on securing and controlling information."

The acquisition is expected to be completed in October.