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| Home - Software M&A Review - May 06 Issue |
Software M&A – Q1 2006 was The Best Since '99
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The respondents to the Goldman Sachs IT Spending Survey are predominantly Fortune 500 CIOs and CTOs who no longer control IT spending as they did in the past. Software-as-a-service may not resonate with CTOs, but it appears to appeal to department heads of large companies with P&L responsibility and IT spending authority, as well as owners of small and mid-cap enterprises. The growth of SaaS providers (Figure 9) despite the GS Spending Survey speaks to the growing market adoption of this software delivery model.
Moving forward, we will now separately track pure-play, enterprise focused SaaS providers to better assess SaaS market adoption and SaaS provider financial performance. Our SaaS index this quarter is comprised of 11 public companies (Figure 9), but will expand as additional SaaS companies enter the public market. As a group, SaaS provider median revenue growth from 2004 to 2005 was 38.7%, an outstanding performance in comparison to the software industry overall. Enterprise value to revenue and EBITDA multiples for SaaS companies represent an equally impressive improvement at 5.5x and 31.0x, respectively. Removing Kintera, a clear outlier, these valuation multiples improve to 5.7x and 32.6x, respectively.
 Public Internet Company Performance
Though the worlds of software and Internet/eCommerce/Web 2.0 are rapidly converging there are distinctions between the two in terms of business model, revenue model, solution deployment and end user requirements. We've opted for the time being to track these major categories separately to enable a more granular analysis of each world.
Broadly defined, Internet companies are primarily Internet based and their solutions are primarily – often exclusively – web deployed. Our Internet Index is comprised of companies that constitute the following four principal categories:
- Advertisers – Companies that provide key elements in the Internet advertising arena such as search marketing services, software to host and manage ads and a network of websites that run ads. Representative companies include 24/7 Real Media, aQuantive and SINA.
- New media – Companies that provide online information and content. Representative companies include CNET, Jupiter Media, Napster and WebMD.
- Search engines – Companies include Baidu.com, Google, Infospace, LookSmart, MIVA, Sohu.com and Yahoo!
- eCommerce & portals – Companies whose main line of business is conducted over the web. Representative companies include 1-800 FLOWERS.COM, Amazon.com, Bluefly, eBay and Expedia.
 The 26 companies comprising the SEG Internet Index had a much more volatile quarter than the NASDAQ, S&P 500 and the SEG-Software Index (Figure 2). Key financial performance measures for the SEG-Internet are enumerated in Figure 10.
Valuations of most SEG Internet Index companies were depressed much of the quarter. The median trailing-twelve-month revenue multiple for the group was 1.8x, while median EV/EBITDA and EV/Earnings were 17.9x and 23.7x, respectively. The median current ratio, measured as current assets divided by current liabilities, an indication of a company's liquidity was a healthy 2.7x. Median quarterly revenue for the SEG-Internet increased 29.1% compared to 1Q05, while median earnings increased 27.4% over the same period (Figure 11 and 12).
Not surprisingly, enterprise valuations of companies comprising the SEG Internet Index varied widely by Internet category (Figure 13). Internet-New Media posted an impressive 5.5x EV/Revenue valuation, while eCommerce & Portals posted a rather lackluster 1.8x. Most category valuations peaked in March, after lagging for most of the quarter. Internet-New Media companies, helped by consumers adopting digital content at increasing rates, showed the highest revenue and earnings growth compared to 1Q05.
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