1Q06 Software Industry Equity Report
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ABOUT OUR FIRM Software Equity Group is the nation’s leading investment bank and M&A advisory for privately- held software companies, e-businesses and IT service providers. Founded in 1992, our firm has provided advice and representation to hundreds of such firms throughout the United States and Canada, as well as Europe, Pacific-Asia, Africa and Israel. We primarily represent sellers – established, successful companies with revenues of $5 million to $50 million that seek to be acquired at a highly attractive valuation. We also provide M&A advisory services to public companies in search of strategic acquisitions. Software Equity Group is known and respected worldwide by public software company CEOs, CFOs and Corporate Development executives, first tier U.S. venture capital and private equity firms and software entrepreneurs. Software Equity Group’s Quarterly Reports are read by decision makers in twenty-six countries and members of our firm are quoted widely in such leading publications as The Daily Deal, Barrons, Reuters, Mergers & Acquisitions, USA Today, Softletter, Software Success, Software CEO Online and Software Business Magazine. Software Equity Group’s senior bankers have keynoted and spoken at more than one hundred software industry conferences and seminars, including Software Business, SoftExpo, Culpepper, VAR Conference, and the Arizona, Colorado, Chicago, Southern California, Denver, San Diego and Boulder Software Associations. Our clients span virtually every software technology, including e-commerce, data analytics, development tools, call center management, digital rights management, embedded systems, wireless apps, supply chain, ERP, CRM, middleware, CAD, internet infrastructure, as well as some 57 different vertical markets. We know these technologies and these software subsectors intimately, and we track closely software market trends and directions. We also have intimate understanding of software company finances and operations, Though every member of our professional team is an experienced investment banker, several are experienced entrepreneurs, as well with strong operating backgrounds. Our firm is highly strategic when positioning a client in the market, and when structuring transactions, but we’re also process driven. We have a database of software company buyers and software M&A transactions which is second to none, a carefully targeted and aggressive marketing and sales methodology, an extraordinary knowledge of software company finances, operations and valuations, and demonstrated skill at the negotiation table. We are absolutely committed to both client satisfaction and results. Our values are clear and deeply embedded: Every client is highly valued. We listen carefully, talk straight and communicate often. We are committed to exceeding expectations. Integrity and professionalism characterize all that we do. CONTENTS U.S. ECONOMY: MACROECONOMICS...............................................................................................1 PUBLIC MARKETS AND PUBLIC SOFTWARE & INTERNET COMPANY PERFORMANCE .........................2 - Public Software Company Performance ................................................................................3 - Public Internet Company Performance..................................................................................5 MERGERS AND ACQUISITIONS: THE NUMBERS.................................................................................6 MERGERS AND ACQUISITIONS: THE DRIVERS ..................................................................................9 SOFTWARE AS A SERVICE: IMPLICATIONS, BENEFITS & RAMIFICATIONS.........................................11 APPENDIX A: MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS..............................................14 APPENDIX B: MERGERS AND ACQUISITIONS, SELECT 1Q06 SOFTWARE TRANSACTIONS................15 i| Fist Quarter 2006 SOFTWARE INDUSTRY EQUITY REPORT Copyright © 2006 Software Equity Group, L.L.C. Software Equity Group, L.L.C. U.S. ECONOMY: SOFTWARE INDUSTRY Figure 1: U.S. Gross Domestic Product MACROECONOMICS 6% 4.9%* Despite the relentless advance of crude oil prices, 5% 4.3% 4.1% the Iraq quagmire, and concerns about a nuclear 4.0% 3.8% 4% capable Iran, the U.S. economy showed 3.5% 3.3% 3.3% continued strength and noteworthy growth in the 3% first quarter of 2006. Gross Domestic Product (GDP), a key economic indicator and broadest 2% 1.7% measure of economic activity, is projected to grow oss Domestic Product at a rate of 4.9% in 1Q06 versus the modest 1.7% 1% recorded in 4Q05 (Figure 1). While this growth is Real Gr 0% encouraging, the specter of inflation continues to 2004 2005 2006 loom on the horizon. 2004 – 2005 Source: Bureau of Economic Analysis * Preliminary Estimate from Standard & Poors Report of Street Median The consensus of economists surveyed by the consistent. Over the quarter, the Fed continued Wall Street Journal is growth will slow to 3.3% in to be proactively anti-inflation by raising the key 2Q06 and will slow further during the remainder of Federal Funds rate 25 basis points to 4.5% at the the year. Goldman Sachs is projecting a 4.5% end of January and another 25 basis points to annual target for 2006. On the inflation front, 4.75% in March. The Fed has raised its energy prices are expected to take their toll. The benchmark interest rate 15 times since June Wall Street Journal’s survey predicts the 2004. Minutes from the March meeting indicate consumer price index will rise 3.2% in May and an that Fed officials expect the economy to slow to a additional 2.5% in November, up from 3.0% and more sustainable pace after a strong first quarter. 2.3% from their prior survey. In spite of the recent rise in the Consumer Price Index, Fed Governors concluded that except for The Conference Board’s index of leading food and energy prices, the inflation rate was "not economic indicators, however, is less in the process of moving higher." The Wall Street encouraging for the next two quarters. After rising Journal panel of economists project that the Fed by 0.4% in January, the index has fallen the last Funds rate will rise to 5.0% in June and hold at two months, down 0.5% in February and down that level through the balance of the year. another 0.1% in March. This key barometer signals slower growth through the balance of On the employment front, the Labor Department 2006. The price of oil and slowly rising interest reported that employers added an impressive rates are cited as catalysts for the decline. Five in 211,000 nonfarm jobs in March, only slightly fewer ten indicators that comprise the leading index than the 225,000 jobs created in February. Over decreased in March. The positive contributors – the past year, employers have added 2.1 million beginning with the most positive contributor - were jobs, but the pace has increased to an average of vendor performance, stock prices, index of 197,000 a month since December. The consumer expectations, manufacturer’s new unemployment rate in March was down to 4.7% orders for consumer goods and services, and from 4.9% at the end of 2005 and while the interest rate spread. Negative contributors – average hourly wage for production workers rose beginning with the most negative – were building at a lesser rate than the inflation rate over the permits, average weekly initial claims for past year, that trend is changing in 2006. The unemployment insurance (inverted) Wall Street Journal panel of economists projects manufacturers’ new orders for nondefense capital stabilization at 4.7% unemployment for both their goods, and real money supply. May and November targets. While this quarter marked the transition from longtime Federal Reserve Chairman Alan Greenspan to newly appointed Fed Chair Ben Bernanke, the markets reacted positively, concluding that monetary policy will remain 1| First Quarter 2006 SOFTWARE INDUSTRY EQUITY REPORT Copyright © 2006 Software Equity Group, L.L.C. Software Equity Group, L.L.C. Figure 2: 2005 Major Market Indices Compared with SEG-Software and SEG-Internet Indices 9.0% SEG – Software 2006 f Index 6.0% o g innin g NASDAQ Be 3.0% e from g 0.0% S&P 500 SEG – Internet Index -3.0% Percent Chan -6.0% January February March Figure 3: SEG-Software Quarterly Revenue PUBLIC MARKETS AND PUBLIC SOFTWARE & Growth (Year-Over-Year) INTERNET COMPANY PERFORMANCE 120% After ending 2005 with modest gains of 3% and 1.4%, the S&P 500 and tech heavy NASDAQ picked up momentum in 1Q06, posting quarterly gains of 3.7% and 6.1%, respectively (Figure 2). 40% MEDIAN: 10.3% That made 1Q06 the best first quarter for the S&P 500 since 1999 and the best first quarter for NASDAQ since 2000. NEW SEG TRACKING INDEXES FOR PUBLIC -40% SOFTWARE AND INTERNET COMPANIES In response to requests from our clients and subscribers, we have greatly expanded our public software company tracking index effective this issue of our Quarterly Report. Our former index, -120% the SEG-100, was comprised of 109 companies in Figure 4: SEG-Software Quarterly Earnings 17 principal product categories. Our new SEG Growth (Year-Over-Year) Software Index became effective January 1, 2006 120% and is comprised of 262 public software companies in 27 distinct product categories. We’ve also added a second new tracking index, the SEG Internet Index, comprised of 26 public 40% companies in 4 distinct categories. The SEG MEDIAN: 25.3% Software Index and SEG Internet Index will facilitate even greater software industry micro- and macro-analysis, and will enable our readers to glean additional