1Q06 Software Industry Equity Report

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

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

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 insight about industry trends -40% and industry subsector financial performance.

-120%

PUBLIC SOFTWARE COMPANY Figure 5: SEG- Other key financial performance PERFORMANCE Software Key Statistics measures for the SEG-Software Index The 262 software companies SEG - Software are enumerated in Figure 5. comprising the new SEG Software Measure 1Q06 Index reported median revenue growth EV/Revenue 2.2x As in past quarters, public software of 10.4% and median earnings growth EV/EBITDA 15.2x company financial performance 1Q06 of 25.3% over the same quarter a year EV/Earnings 25.4x varied widely by product category ago (Figure 3 and 4). But despite the EV/Free Cash Flow 24.0x (Figure 6). Relative to 1Q05, providers Current Ratio 2.1x software industry’s continued of eCommerce enablement software Gross Profit Margin 62.9% improvement in financial performance EBITDA Margin 12.8% (Art Technology Group, Cybersource, and a run up in software stock prices Net Income Margin 5.0% Immergent, Optimal Group, et.al.) and toward the close of 2005, median Revenue Growth 10.4% multimedia, graphics & digital design public software company valuations Earnings Growth 25.3% (Adobe, Avid Technology, Bitstream, enterprise value to revenue multiples InterVideo, Loudeye, et. al.) led all have for all practical purposes flat-lined at 2.2x. other software categories in 1Q06 revenue growth However, there were signs of renewed investor (+43.5% and +31.9%, respectively), while interest in software, as the median market cap of software companies providing solutions for SEG Software Index companies closed 1Q06 up entertainment (-10.9%), billing & service 8.2% from the last trading day of 2005 (Figure 2). provisioning (+0.5%) and asset management

Figure 6: SEG-Software Categories SEG - Software Index EV/Rev. EV/EBITDA Revenue Earnings Category Growth Growth Infrastructure Software Database & File Management 2.5x 12.5x 4.8% 19.7% Development Tools, Operating Systems & 1.8x 27.8x 3.7% 44.9% Application Testing Software eCommerce Enablement Software 1.3x 16.6x 43.5% 94.3% Enterprise Application Integration 1.5x 11.5x 4.1% 22.9% Messaging, Conferencing & Communications 1.5x 11.2x 6.6% -13.8% Networking & Connectivity 2.2x 22.6x 13.0% 52.3% Security 3.0x 13.8x 10.1% 37.0% Storage & Systems Management Software 3.1x 14.6x 14.9% 30.5% Wireless 2.0x 9.9x 13.9% 35.6% Application Software Accounting & Finance 4.6x 14.2x 18.3% 27.3% Asset Management 1.3x 14.8x 3.2% 14.1% Billing & Service Provisioning 2.4x 11.5x 0.5% 8.5% Business Intelligence 2.2x 11.7x 5.7% -0.2% Content/Document Management 1.3x 11.6x 10.5% 12.7% Customer Relationship Management, Marketing & 2.7x 16.6x 28.1% 40.2% Sales Software Education & Computer Based Training 2.0x 13.3x 18.9% 15.8% Electronic Design Automation 2.4x 17.6x 7.9% 51.6% Engineering, PLM & CAD/CAM Software 2.2x 17.3x 9.6% 40.3% Enterprise Resource Planning 1.6x 13.1x 6.5% -4.1% Entertainment 1.5x 12.0x -10.9% -27.3% Financial Services Software 2.5x 13.8x 7.9% 2.6% Healthcare 3.0x 18.4x 14.8% 6.1% HR & Workforce Management 3.1x 19.2x 18.1% 36.6% Multimedia, Graphics, Digital Media 2.3x 26.9x 31.9% 9.8% Supply Chain Management & Logistics 1.6x 17.6x 11.4% 75.0% Web Analytics 4.4x 19.7x 26.6% 63.2% Revenue & Earnings growth compares quarterly growth (year-over-year)

Figure 7: SEG-Software Valuation by TTM Revenue IT spending continues to have a direct and Composite SEG - significant downstream impact on software Composite SEG - Technology Index company financial performance. According to Technology Index (Profitable Companies Goldman Sachs’ March IT Spending Survey, IT Only) spending growth for 2006 will be slightly greater EV/Rev. EV/EBITDA EV/Rev. EV/EBITDA than 2005. Specific IT spending priorities for Composite SEG- 2006 are enumerated in Figure 8. Security 2.2x 15.5x 2.6x 14.3x Technology Index remains the top priority this year, while many of Revenue Greater Than $1 3.2x 13.1x 3.2x 13.0x the most talked about technologies and trends, billion such as virtualization, open source software, Revenue between $200 2.2x 14.5x 2.4x 12.3x server/storage virtualization and hosted software million and $1 billion as a service, ranked very low as IT spending Revenue between $100 2.1x 14.2x 2.6x 15.9x million and $200 million priorities. It would seem there’s more buzz than Revenue Less Than $100 budget for these technologies and trends, but 2.1x 18.9x 2.4x 15.7x million there’s more here than meets the eye. The respondents to the Goldman Sachs IT Spending Survey are predominantly Fortune 500 CIOs and (+3.2%) continued to lag far behind. As for CTOs who no longer control IT spending as they earnings, vendors of eCommerce enablement did in the past. Software-as-a-service may not software led all other categories, reporting an resonate with CTOs, but it appears to appeal to average 1Q06 earnings increase of 94.3% over department heads of large companies with P&L 1Q05, while entertainment software companies responsibility and IT spending authority, as well declined 27.3% in median earnings over the same as owners of small and mid-cap enterprises. The time period. growth of SaaS providers (Figure 9) despite the

GS Spending Survey speaks to the growing Investors are holding public software companies market adoption of this software delivery model. feet to the fire as never before, demanding top

line growth, particularly from new licenses and/or In addition to our new Software and Internet subscriptions. At the same time, investors are Tracking Indexes, we will now separately track clamoring for sustained, quarter-over-quarter pure-play, enterprise focused SaaS providers to increases in earnings and profitability, with a special emphasis on free cash flow. Public software companies that fail to both grow revenue Figure 8: CTO Tech Spending Priorities and generate significant free cash flow and • Security EBITDA returns should see little if any increase in • Application integration

valuation in the coming quarters. Those that • Compliance / risk management

exceed expectations can expect to be rewarded GH • Portal Development 1Q06 illustrates this well: the median EV/Revenue HI • Cost Cutting • Disaster recovery multiple for SEG Software Index companies • ERP posting a profit in 4Q05 was 2.6x, but only 1.4x for • Identity & Access Management

those reporting losses. • Data Storage • Server Consolidation rities o • Business Intelligence We’ve long maintained and frequently • SOA demonstrated that size matters when it comes to • Wireless Networking

ding Pri • Voice-Over-IP public company software valuations, and 1Q06 n proved no exception For the quarter, SEG- • Custom Application Development

Spe • Business Process Software companies with revenues greater than h Management/Workflow

$1 billion posted a median EV/Revenue ratio of Tec • Buying from fewer vendors 3.2x, compared to a median ratio of 2.2x for • Storage virtualization software companies with revenue less than $1 CTO • Server virtualization • Outsourced Software Development billion (Figure 7). The bigger is better valuation • Customer Relationship Man8%agem ent truism has become a principal driver of software • Mobile Computing/Remote Access

industry M&A activity. • Thin client computing • Open source software

LOW • Remote hosted/Managed Services

enable our clients and Figure 10: SEG- the following four principal categories: subscribers to better Internet Key Statistics • Advertisers – Companies that provide key assess SaaS market SEG - Internet elements in the internet advertising arena adoption and SaaS Measure 1Q06 such as search marketing services, provider financial EV/Revenue 1.8x software to host and manage ads and a performance. Our SaaS EV/EBITDA 17.9x network of websites that run ads. index this quarter is EV/Earnings 23.7x Representative companies include 24/7 EV/Free Cash Flow 12.0x comprised of 11 public Real Media, aQuantive and SINA. Current Ratio 2.7x companies (Figure 9), but Gross Profit Margin 43.4% • New media – Companies that provide will expand as additional EBITDA Margin 16.8% online information and content. SaaS companies enter the Net Income Margin 43.4% Representative companies include CNET, public market. As a Revenue Growth 29.1% Jupiter Media, Napster and WebMD. group, SaaS provider Earnings Growth 27.4% • Search engines – Companies include median revenue growth Baidu.com, Google, Infospace, from 2004 to 2005 was 38.7%, an outstanding LookSmart, MIVA, Sohu.com and Yahoo! performance in comparison to the software • eCommerce & portals – Companies industry overall. Enterprise value to revenue and whose main line of business is conducted EBITDA multiples for Saas companies represent over the web. Representative companies an equally impressive improvement at 5.5x and include 1-800 FLOWERS.COM, 31.0x, respectively. Removing Kintera, a clear Amazon.com, Bluefly, eBay and Expedia. outlier, these valuation multiples improve to 5.7x and 32.6x, respectively. The 26 companies comprising the SEG Internet Index had a much more volatile quarter than the PUBLIC INTERNET COMPANY PERFORMANCE NASDAQ, S&P 500 and the SEG-Software Index Though the worlds of software and (Figure 2). Key financial performance measures internet/ecommerce/Web 2.0 are rapidly for the SEG-Internet are enumerated in Figure 10. converging there are distinctions between the two in terms of business model, revenue model, Valuations of most SEG Internet Index companies solution deployment and end user requirements. were depressed much of the quarter. The median We've opted for the time being to track these trailing-twelve-month revenue multiple for the major categories separately to enable a more group was 1.8x, while median EV/EBITDA and granular analysis of each world. EV/Earnings were 17.9x and 23.7x, respectively. The median current ratio, measured as current Broadly defined, internet companies are primarily assets divided by current liabilities, an indication internet based and their solutions are primarily – of a company’s liquidity was a healthy 2.7x. often exclusively – web deployed. Our Internet Median quarterly revenue for the SEG-Internet Index is comprised of companies that constitute increased 29.1% compared to 1Q05, while Figure 9: Pure Play Software as a Service (SaaS) Public Software Companies Revenue Earnings Category EV/Rev. EV/EBITDA Growth Growth Concur (NASDAQ: CNQR) 7.3x 55.5x 27.1% - DealerTrack (NASDAQ: TRAK) 5.5x 20.5x 74.7% -89.2% Digital Insight (NASDAQ: DGIN) 5.0x 17.9x 15.9% 95.8% Kenexa (NASDAQ: KNXA) 6.1x 34.2x 39.3% - Kintera (NASDAQ: KNTA) 1.2x -1.6x 17.0% - RightNow (NASDAQ: RNOW) 5.3x 46.4x 38.7% 130.9% Salesforce.com (NYSE: CRM) 12.6x - 66.8% 66.1% Taleo (NASDAQ: TLEO) 4.4x 50.9x 29.9% - Vocus (NASDAQ: VOCS) 5.9x - 40.9% - WebEx (NASDAQ: WEBX) 3.5x 11.2x 23.6% -13.8% WebSideStory (NASDAQ: WSSI) 7.4x 31.0x 79.8% 632.1%

Median: 5.5x 31.0x 38.7% 81.0% Revenue & Earnings Growth compares quarterly growth (year-over-year)

Figure 11: SEG-Internet Quarterly Revenue category valuations peaked in March, after Growth (Year-Over-Year) lagging for most of the quarter. Internet-New 120% Media companies, helped by consumers adopting digital content at increasing rates, showed the highest revenue and earnings growth compared to 1Q05. MEDIAN: 29.1% 40% MERGERS AND ACQUISITIONS: THE NUMBERS

The M&A momentum of 2005 carried over to the first quarter of 2006, with healthy increases in -40% deal volume and dollars spent. Domestic M&A activity across all industry sectors in the first quarter totaled 2,640 transactions with an aggregate purchase price of $345 billion (Figure 14). The total number of deals in 1Q06 increased -120% 32.9% from 1Q05, while total M&A dollars Figure 12: SEG-Internet Quarterly Earnings Growth increased 41.8% over the same time period. (Year-Over-Year) 120% Software represented 16.1% of total M&A deal activity in 1Q06, leading all other industry sectors as in quarters past. There were 426 software transactions, a 14.8% increase over 1Q05’s tally (Figure 15). In terms of total M&A dollars spent, 40% MEDIAN: 27.4% the software sector placed eighth with $13.7 billion - well behind first place communications.

The median valuation of software industry M&A -40% transactions (based on TTM revenue and the seller’s equity value) continued to advance in 1Q06 (Figure 17). 2005’s median software company M&A valuation of 2.6x TTM revenue climbed to 2.8x in the first quarter and showed -120% few signs of abating.

median earnings increased 27.4% over the same Cash continued to be the preferred deal currency period (Figure 11 and 12). in 1Q06, but a resurging NASDAQ and tech

sector boosted the attraction of stock (Figure 18). Not surprisingly, enterprise valuations of In the first quarter, 57% of software transactions companies comprising the SEG Internet Index were all cash, down markedly from 76% in 4Q05. varied widely by internet category (Figure 13). In 1Q06, 32% used a combination of cash and Internet-New Media posted an impressive 5.5x stock as deal consideration, and 11% were all EV/Revenue valuation, while eCommerce & stock. Portals posted a rather lackluster 1.8x. Most Figure 13: SEG-Internet Categories SEG - Internet Index EV/Rev. EV/EBITDA Revenue Earnings Category Growth Growth Advertising 5.3x 21.0x 33.0% 50.4% eCommerce & Portals 1.8x 27.8x 27.1% 17.8% New Media 5.5x 26.5x 34.2% 62.3% Search Engine 4.2x 16.1x 26.6% 60.0% Revenue & Earnings growth compares quarterly growth (year-over-year)

Figure 14: U.S. Merger & Acquisition Activity 15,000 $1,500 $1,426B $1,378B Q1: $344.6B $1,326B $1,283B $1,223B 12,000 11,123 $1,200 10,884 10,560

10,198 Q1: 2,640 V

9,278 9,514 a l 8,554 u 9,000 8,281 $900 e

8,047 (

$820B $ B i l er of Deals $654B l i 6,000 $600 o $526B n s )

$452B Numb 3,000 $300

0 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Deals Value Source: Mergerstat *: 2006 Annualized

Figure 16: U.S. Software M&A by Dollar Volume There were a noteworthy number of private $25B $22.8B buyers of software companies in 1Q06, a trend $21.5B that is now in its third year. During the past two $20B years, 34% of all acquirers were private. In 1Q06, private buyers accounted for 31% of all software $15.7B $13.7B M&A transactions, a decline from 4Q05’s 35%, $15B $13.8B but still indicative of the market’s changed buyer mix (Figure 19 and 20). Venture capitalists, $10B private equity firms and venture-backed private companies were all quite active, occasionally $5B paying public buyer strategic multiples to acquire private and public software companies that satisfied their investment criteria. Far more often, $0B though, financial buyers adhered to their value Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Source: Mergerstat pricing models, insisting on large, proven markets with huge potential and offering at or below software companies, usually with revenue of $10 market valuations. Many sought “platform” million to $100 million, a compounded annual growth rate of 25% or better, and the capacity to Figure 15: U.S. Sector-Specific M&A Activity grow tenfold in five to seven years through rapid 500 organic growth and smaller strategic acquisitions. 426 410 472 454 Others sought private software companies that 400 371 d could add needed product functionality,

ce technology, markets or customers to an existing n u 300 portfolio company, thereby bettering its IPO prospects or exit valuation. 200

s Anno 115 102 110 102 100 101 93 The software industry has long used median 77 64 54 Deal 30 multiple of trailing twelve months (TTM) revenue 0 to measure M&A valuations. We’ve been no Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 exception, but for years we’ve cautioned against Software Life Science Comm. using the median deal multiple as anything other Source: Mergerstat

Figure 17: U.S. Software M&A Valuation as Figure 19: U.S. Public vs. Private Software M&A Multiple of Revenue Buyers 4.0x 100%

yers

ue 80% 2.9x 2.8x 69% 71% 69% en 3.0x 2.7x

v 65%

e 2.4x 58% R 2.1x 60% e)/

c 2.0x Software Bu 42% f 35% 40% 31% 31% e o e Pri 29% s 1.0x 20% (Purcha 0.0x Percentag 0% Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Public Private Figure 20: U.S. Public vs. Private Software M&A than a point of reference – and a misleading one, Sellers at that. In Figure 21, we dissect the median 100% software company exit valuation for 1Q06 (2.8x 92% 96% llers 93% trailing twelve month revenue) to provide greater 91% 91% 80% insight into software company valuation. Our analysis considers the affect on valuation of equity structure (private vs. public company), 60% target market, software product category, and size Software Se of buyer and seller. f 40%

e o As a first step, we separated public and private 20% 9% software company sellers to ascertain any 8% 7% 9% disparity in exit valuation. Unsurprisingly, the 4%

Percentag 0% disparity was significant. Using the software M&A Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 transactions we were able to ascertain a revenue Public Private multiple for, public company sellers accounted for 15% of all software M&A transactions in 1Q06 sellers (24%) having a valuation of 2.8x TTM and had a median exit valuation of 2.0x TTM revenue and private sellers (76%) having a revenue. Private company sellers accounted for valuation of 2.4x TTM revenue over 2004 and 85% of all transactions during the same period 2005. Why the difference? and had a median selling price of 3.0x TTM revenue. This starkly contrasts what we reported First, we have cut our sample size from eight in our 2005 Annual Report which showed public quarters to one, which allows for short-term Figure 18: Software M&A – Form of Payment aberrations that may not be trends. As important, 100% 1Q06 transactions included a greater number of undervalued or distressed OTC and foreign public companies, a blip that will not likely become a 76% ge 75% 74% norm. 67% 61% 57% Next, we separated software company sellers 50% specializing in vertical markets (e.g. retail, t Percenta

n 32% financial services, telecom, manufacturing, etc.) 25% from those companies with horizontal software 25% 22% 19% 19% 17% 11% solutions. In 1Q06, 23% of software company Payme 8% sellers were focused on a vertical market and 7% 5% yielded a median 2.5x TTM revenue valuation. 0% Those sellers offering a horizontal solution Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Cash Stock Cash & Stock 8| First Quarter 2006 SOFTWARE INDUSTRY EQUITY REPORT Copyright © 2006 Software Equity Group, L.L.C. Software Equity Group, L.L.C. Figure 21: Median Software M&A Valuations 1Q06

Public Sellers 2.0x Median Multiple represented 77% of software M&A activity in the (Equity Value) first quarter and yielded a 3.0x TTM valuation. 15% We then decided to ascertain how the current M&A market values infrastructure software 85% companies as compared to enterprise application software companies, and analyzed the median Private Sellers exit valuation multiples for each category. There 3.0x Median Multiple was little valuation disparity between the two, with (Equity Value) application software company sellers garnering a slightly better median M&A valuation (3.0x) than infrastructure companies (2.9x). Vertical Seller 2.5x Median Multiple Finally, we analyzed median exit valuations in (Equity Value) 1Q06 based on the size (revenue) of the buyers 23% and sellers. Simply put, size continues to have a material impact on purchase price. Buyers with 77% revenue greater than $200 million are more likely to pay a significantly greater (possibly more than double) price than a buyer with revenues below Horizontal Seller the $200 million threshold. 3.0x Median Multiple (Equity Value) The lesson of Figure 21 is for software industry buyers and sellers to be highly circumspect when Software M&A applying the industry median exit valuation. Seller Focus: Applications Median Multiple: Consider the following example: A private 2.8x (Equity Value) 3.0x Median Multiple (Equity Value) software company, looking at the median exit multiple for 1Q06 might well estimate its selling 31% price to be 2.8x TTM revenue. But according to 46% Figure 21, if the company is in a infrastructure category, offering a superb network security or storage management solution and generating Seller Focus: Infrastructure more than $20 million in annual revenue, it could 2.9x Median Multiple well fetch 3.7x TTM or better. Conversely, if the (Equity Value) company has revenue of $15 million and attracts a $100 million buyer with its computer aided Buyer Greater Buyer Less Than design tools or e-supply chain solutions, a Than $200 million $200 million multiple of 1.8x is far more likely in the current 3.6x Median 1.8x Median market. We don’t anticipate this scenario will Multiple (Equity Multiple (Equity Value) Value) change anytime soon.

50% 50% MERGERS AND ACQUISITIONS: THE DRIVERS

Were buyers in 1Q06 driven by the same motives as in prior quarters? Has buyer thinking changed? Precisely what motivated first quarter buyers to Seller Greater Seller Greater acquire this particular company; to spend cash, Than $20 Than $20 dilute equity, allocate precious resources and Million*: 1.8x Million*: 3.8x assume sometimes formidable risks? What were Seller Less Seller Less the deal drivers in 1Q06, how were they different Than $20 Than $20 from quarters past, and how did they impact Million*: 3.4x Million*: 1.8x valuations and purchase prices? *: Revenue NOTE: Data derived from a universe of 50 1Q06 software M&A transactions 9| First Quarter 2006 SOFTWARE INDUSTRY EQUITY REPORT Copyright © 2006 Software Equity Group, L.L.C. Software Equity Group, L.L.C.

Product Extension Figure 22: U.S. Public vs. Private Software M&A A deal-by-deal analysis of the 180 software Buyers transactions we analyzed in 1Q06 reveals 51% 6% 8% of the buyers sought to enhance their current Financial 4% product suite by acquiring small and mid-cap 4% companies targeting the same markets with highly complementary, best-of-breed, market 10% proven products and technology (Figure 22). 15% Market Expansion Sellers providing such product extension 9% leverage commanded a 3.0x TTM revenue 22% multiple. There were a host of product extension acquisitions. Mercury Interactive acquired 23% 18% application integration provider Systinet to Vertical Markets 25% obtain a better SOA platform; BEA beefed up its 15% SOA product offering by purchasing Fuego, a developer of best-of-breed business process 11% management solutions; and security appliance Product Category 9% provider Blue Coat acquired Permeo, a VPN Consolidation 11% security software company. 11%

51% Market Expansion Product 50% Since 2003, we’ve noted a surprising number of Enhancement 52% buyers (20% in 4Q03) that venture far from 49% home, acquiring software companies in entirely new product categories, new territories and new 0% 10% 20% 30% 40% 50% 60% vertical markets in an effort to accelerate growth. The trend moderated in 2004, with 2Q05 3Q05 4Q05 1Q06 market expansion acquisitions comprising about sought to capitalize on valuations that remained 16% of all software M&A transactions. 2005 saw depressed due to stagnant healthcare IT the same average percentage of market spending and strong pressure to reduce expansion deals (15% in 4Q05). In 1Q06 healthcare costs. Nevertheless, the largest transactions in this category declined to 10% of all vertical transaction of the quarter was in the deal activity and posted a median 2.8x TTM healthcare vertical, with Allscript Healthcare revenue multiple. Representative market acquiring A4 Health, a provider of clinical and expansion transactions this quarter included: practice management systems for hospitals and Sage, a leading provider of small business physicians, for $272 million (3.6x). Other notable accounting software, acquired Visma, an vertical software deals included iSqFt’s $50 accounting software provider serving the Nordic million acquisition of Northstar Exchange region; BasWare, a financial software provider, (construction) and SS&C’s acquisition of Cogent strengthened its position in Finland by acquiring for $12.3 million (financial services). Anlayste; Emblaze a telecom technology provider expanded into China by picking up SenseStream, Product Category Consolidation a developer of multimedia management Consolidation (the acquisition of a software technology; and speech recognition provider company by a typically larger industry player to Nuance acquired Dictaphone to further expand its gain market share and eliminate a competitor) presence within the healthcare vertical. continued in 1Q06 at a pace consistent with 2005 and represented 11% of all deal activity. Deals Vertical Markets within this category included Dassault/MatrixOne Approximately 23% of 1Q06 M&A transactions (3.4x), PlanitHoldings/Pathtrace (0.8x) and involved software companies serving vertical Allegiance/SilentWhistle. markets, compared to 18% of all software M&A transactions in 4Q05. Healthcare software was once again the most active category, as acquirers

Investment Acquisitions elsewhere if the solution or its provider proves More than one in three software company buyers inadequate. in 1Q06 were private. Most were venture-backed private software companies spending VC and SaaS also offers the first cost-effective software private equity investor cash. However, in six delivery model for penetrating the SME market, percent of software M&A transactions in 1Q06 which has neither the budget nor the IT staff to VCs and private equity firms, awash in cash and acquire, install and deploy costly enterprise under growing pressure to invest it, acquired software. SME and large enterprise resistance to directly – opting primarily for large, established having mission critical and sensitive data reside and relatively safe companies. New to this on a third party’s server has abated over time with category, however, are Special Purpose the widespread use and acceptance of Yahoo, Acquisition Companies (SPACs) which can be eBay, Amazon, Google and online banking. And thought of as publicly traded VC firms that offer an technical advances such as services oriented accelerated path to liquidity for privately held architectures (SOA), metadata models and AJAX companies. SPACs have traditionally stayed away have vastly improved the user’s web-based from technology until recently. Deals within this application experience. category include CEA Acquisition Corporation’s merger with eTrials Worldwide a provider of IDC Research estimates the worldwide SaaS clinical trial management software; and Israel market will reach $10.7B by 2009, up from $6.8B Technology Acquisition Corporation’s merger with in 2006, and that SaaS makes up 10% of all IXI Mobile, a provider of mobile communications software sales – growing to 25% in the next 5 to devices, services and software. The most notable 10 years. Perhaps, but we always take these deal within this category was Hellman & prognostications with several grains of salt. Friedman’s acquisition of Activant, a vertically Among enterprises, we see SaaS gaining specific enterprise resource planning provider with considerable traction in the the non-mission approximately $266 million in revenue. In June critical horizontal app arena, primarily with apps 2005, Activant filed to raise $200 million in an that don’t require significant integration or IPO. customization. Good examples are sales automation/CRM, corporate purchasing, HR SOFTWARE AS A SERVICE: IMPLICATIONS, BENEFITS benefits management, travel and expense & RAMIFICATIONS management, email/message management,

payroll/time & attendance, website It appears VCs, private equity firms, the trade marketing/analytics and web conferencing. We press, public market investors and industry also predict small and mid-sized businesses pundits have found the true Holy Grail, and this (SMBs) will harken to the SaaS call in ever- time it’s called Software as a Service, better growing numbers over the next 12 – 24 months. known by the acronym moniker of “SaaS”. A Other factors that will drive SaaS market adoption growing number of VC’s now eschew investing in include the growing trend to allow line managers any software company that has not implemented to acquire IT solutions without IT department a SaaS delivery platform and subscription approval, and the ability of the SaaS model to revenue model. Using Salesforce.com as the provide ISV’s with improved customer intelligence benchmark, investors laud the business model, and usage patterns, enabling them to be more which portends faster growth and significantly responsive to market requirements. greater recurring revenue, free cash flow and earnings. Customers love SaaS, as well, That said, we believe SaaS adoption will be slow because their initial investment can be markedly where use of the SaaS app requires extensive smaller and they’re seemingly free to go Figure 23: Select 1Q06 SaaS Mergers & Acquisitions Deals Buyer Seller Transaction Date Purchase Price Seller Revenue Revenue Multiple Click Commerce Elance 2/8/2006 $15,000,000.00 $0.00 - Autodesk Constructware* 2/7/2006 $46,000,000.00 $15,000,000.00 3.1x Concur Technologies Outtask* 1/23/2006 $67,000,000.00 $12,500,000.00 5.4x Chinadotcom JRG Software 1/20/2006 $0.00 $0.00 - Blue Coat Systems Permeo Technologies* 1/3/2006 $60,800,000.00 $4,100,000.00 14.8x *: Seller Revenue is an Estimate 11| First Quarter 2006 SOFTWARE INDUSTRY EQUITY REPORT Copyright © 2006 Software Equity Group, L.L.C. Software Equity Group, L.L.C.

integration with an enterprise’s on-site, server two to three times longer to get there. VCs are deployed, perpetually licensed apps and beginning to factor this into their funding model, databases. And despite the fact many large but many bootstrapped SaaS providers, as enterprises have overcome privacy and security discussed in our 2005 Software Industry Annual concerns about providing a third party access to Report, may not survive until subscription cash sensitive and proprietary information, many others flow reaches historical perpetual license levels. remain very reluctant to do so. We also anticipate the revenue growth and The SaaS model remains very problematic for a earnings accretion of today’s more visible SaaS great many private ISVs. Perpetual licenses, providers will not be sustainable over time. A key though difficult to forecast, generate a significant value proposition of SaaS is the flexibility and risk amount of up-front cash most software companies reduction it offers end-users, but that may well be rely upon, together with annual maintenance and a double-edged sword for the SaaS provider. In support, to fund ongoing development and meet some cases, the SaaS model can drastically payroll. When perpetual license and annual M&S reduce the customer’s switching cost in the event revenue are replaced with considerably smaller the ROI is disappointing or a better solution from monthly or periodic payments, many ISVs will another vendor becomes available. We suspect struggle mightily to cover operating costs while many of these SaaS vendors will be abandoned, providing state-of-the-art solutions and after incurring substantial up-front costs but infrastructure, 24x7 world-class support and before the recurring revenue exceeds the complex implementation and integration perpetual license fee. However in many cases, assistance – to say nothing of implementing a the ease of switching may be more perception new sales model. It’s been estimated that early than reality, particularly where there is significant stage SaaS companies require 70% to 100% integration, customization and end-user training more capital to fund to breakeven, and it takes involved.

Figure 24: 2005 Software IPOs

Offering First Day Year-End EV / EV / Company Category Offer Date Amount Return Return Rev. EBITDA Enterprise Value Chinese Language Baidu.com Internet Search 8/5/2005 $109,100,000 353.85% 133.04% 66.6x - $1,391,049,200 Provider Automotive DealerTrack Dealership 12/12/2005 $170,000,000 13.24% 23.41% 5.4x 19.1x $570,713,000 Software Healthcare Vertical Emageon 2/9/2005 $65,000,000 15.00% 22.31% 4.1x 63.6x $266,663,000 Software Workforce Kenexa Management 6/24/2005 $60,000,000 0.42% 75.83% 5.4x 32.7x $329,545,000 Corporation Software SSA Global Enterprise Resource 5/26/2005 $99,000,000 0.00% 65.36% 1.9x 11.3x $1,363,986,500 Technologies Planning Software Workforce Taleo Management 10/4/2005 $93,800,000 -2.86% -5.14% 3.5x 40.2x $252,701,200 Corporation Software Airline Industry Transaction TRX 9/27/2005 $61,200,000 0.00% -13.00% 1.0x 15.5x $115,079,500 Processing and Data Management Marketing Unica Management 8/3/2005 $48,000,000 26.30% 17.10% 2.6x 21.1x $167,935,500 Corporation Software Public Relations Vocus 12/7/2005 $45,000,000 11.11% 15.44% 4.3x N/A $110,154,200 Software Online Health WebMD 9/29/2005 $120,750,000 39.43% 66.00% 9.2x 88.3x $1,466,402,500 Information MEDIAN: $65,000,000 12.18% 22.86% 4.2x 26.9x $298,104,000 Average: $84,750,000 45.65% 40.04% 10.4x 36.5x $603,422,960

For now, many enterprise ISVs will opt will opt for For those who are able to navigate the rocky a dual revenue model consisting of customer shoals and survive the ramp-up years, hosted perpetual license solutions with annual accelerated revenue growth and greatly enhanced M&S, and vendor hosted web-based solutions. It profitability are the likely reward. Perhaps as won’t be easy. Prospects may be confused about important, the SaaS model should greatly the best option for them, adding further delay to enhance the provider’s liquidity and exit sales cycles. The dual model will place additional prospects. Today’s software IPO market, such as burdens on the ISV/SaaS provider’s customer it is, clearly favors SaaS businesses. Of the 10 support, professional services and development software and web businesses that went public in teams, and especially on the sales organization. 2005, only SSA Global, an ERP provider, and How will the ISV/SaaS provider sufficiently incent Emageon, a provider of software within the a sales rep accustomed to earning $10K on a healthcare vertical, lacked a true SaaS offering $100K perpetual license sale to sell a $2K/month (Figure 24). SaaS subscription? Should the ISV bifurcate the sales team into SaaS and perpetual? And what if Similarly, in the current equity funding market, the ISV utilizes VARs to distribute its traditional pure play, enterprise-focused SaaS providers may software? Rolling out a SaaS model could create well receive from VCs three times the valuation of significant channel conflict. their traditional license model counterparts. The same holds true for M&A valuations, as buyers place inordinate value on the SaaS providers’ recurring revenue streams. SaaS providers acquired by strategic buyers can receive as much as pay five to seven times revenue from the appropriate candidate. Figure 23 lists select SaaS deals from 1Q06.

APPENDIX A: MERGERS AND ACQUISITIONS, MOST ACTIVE BUYERS

Buyer Seller Seller Product Category Borland Software Gauntlet Systems Developer tool / testing Segue Software Developer tool / testing CEGID SA GTI Industrie Manufacturing vertical PMI Soft Manufacturing vertical Chinadotcom 17game Network Multiplayer online gaming JRG Software On-demand supply chain Computer Associates Control-F1 Corporation IT systems management Wily Technology IT application management Emblaze Ltd. SenseStream Ltd Wireless infrastructure software Smart Content Wireless infrastructure software Google @Last Software Design software Upstartle On-demand word processing IBM CIMS Lab IT resource management INFICON Semiconductor software Language Analysis Systems Name recognition technology Microsoft Apptimum Application management MotionBridge Mobile search Onfolio Online content management Seadragon Software Visualization / viewing software Vexcel Corp. Aerial mapping / GIS WinTarget Software based SAN NeoMedia Technologies HipCricket Wireless tools software Mobot Wireless tools software Sponge Ltd. Wireless app development Oracle 360Commerce Retail software HotSip AB Telecom infrastructure software Sleepycat Open source database RedPrairie Alta A/S Auto industry supply chain MARC Global Holdings Supply chain management Spirent QuadTex Systems Test and measurement software SwissQual Holding AG Test and measurement software Symantec Imlogic Instant messaging Relicore Enterprise systems management The Sage Group Verus Financial Mgmt Payment processing Visma ASA ERP software VeriSign CallVision Billing / business intelligence Kontiki Video storage and distribution m-Qube Wireless technology platform Snapcentric Fraud detection

APPENDIX B: MERGERS AND ACQUISITIONS: SELECT Q1 2006 SOFTWARE M&A TRANSACTIONS

Allscripts Healthcare Solutions (NASDAQ: resources against its main rivals Lombardi, MDRX) acquires A4 Health Systems Pegasystems and Savvion. This is BEA’s sixth Category: Vertical Software (Healthcare) acquisition since 2005, three of which aimed at Purchase Price: $290,900,000 bolstering its SOA offering. Companies with a Seller Revenue: $74,500,000 (estimate) stated focus on SOA management, governance or Seller EBITDA: $15,900,000 (estimate) integration have commanded a premium valuation Revenue Multiple: 3.9x (estimate) in 1Q06. While BEA’s valuation for Fuego is EBITDA Multiple: 18.3x (estimate) steep, both Mercury Interactive (Systinet 4.6x* TTM revenue) and Progress Software (Actional Payment Terms: Cash, Stock for 4.5x*) paid well above the software industry’s

median valuation to gain SOA expertise. SEG’s Perspective: *: Estimates Allscripts, a provider of software and information TTM: Trailing Twelve Month solutions for physicians, acquires A4 Health, a Blue Coat (NASDAQ: BCSI) acquires Permeo developer of practice management and electronic Technlogies health record solutions for small and medium size Category: Security Software physician groups. Allscripts picks up a company Purchase Price: $60,800,000 with a 27% CAGR (organic and acquisition) since Seller Revenue: $4,100,000 (estimate) 2001 and a 21% EBITDA margin. A4 Revenue Multiple: 15.0x (estimate) shareholders are likely thrilled. After being valued Payment Terms: Cash, Stock at approximately $12 million in 1999, the struggling 30 year old A4 brought in new SEG’s Perspective: management that engineered its current success. Blue Coat, a fast growing network security Since the beginning of 2005, more than 50 appliance provider, acquires Perrmeo, an NEC healthcare software companies have been spinoff and provider of On Demand remote acquired, 11 of them for more than $100 million. access and information security solutions. While Among the more notable healthcare transactions Blue Coat has a strong presence at the gateway, it hasn’t had an endpoint solution capable of were GE/IDX ($1.4 billion), Aetna/ActiveHealth protecting enterprises with a large number of ($400 million), Wolters Kluwer/NDC ($382 million) mobile/remote workers outside the firewall. With and Nuance/Dictaphone ($357 million). Permeo, Blue Coat has extended into endpoint security and SSL VPN, enabling it to compete BEA Systems (NASDAQ: BEAS) acquires against Symantec after its recent acquisition of Fuego Sygate and Whole Security and Cisco with its Category: Business Process Management NAC initiative. Permeo may be having some Purchase Price: $87,500,000 seller’s remorse. After accepting Blue Coat stock Seller Revenue: $12,500,000 (estimate) as the predominant deal consideration, investors Revenue Multiple: 7.0x (estimate) brutally punished Blue Coat a month after the Payment Terms: Cash transaction for missing its revenue and earnings projections. The original deal, valued upon SEG’s Perspective: announcement at $60.8 million, was worth $43.2 The service oriented architecture (SOA) platform million at closing. continues to fuel software M&A activity. This time it’s BEA, a leading provider of application server software, acquiring Fuego, a profitable and growing business process management provider for SOA environments. The acquisition will provide key SOA technology for BEA in its fight against key competitors Oracle, IBM and Microsoft to win large distributed computing contracts while Fuego will leverage BEA’s

Borland Software (NASDAQ: BORL) acquires the increasingly competitive BI category, as BI Segue Software (NASDAQ: SEGU) vendors look to capitalize on anticipated IT Category: Developer Tools/Utilities spending increases in this area. Infromatica Purchase Price: $85,510,000EV acquired Firstlogic competitor Similarity Systems Seller Revenue: $36,440,000 two weeks before this acquisition and both BI Seller EBITDA: $3,350,000 providers will compete with IBM’s newly acquired Revenue Multiple: 2.3x EV Ascential subsidiary (which acquired Vality in EBITDA Multiple: 25.5x EV 2002). Business Objects is paying approximately 1.4x trailing-twelve-month revenue for Firstlogic, Payment Terms: Cash versus the more than 5.0x Informatica paid for

Similarity. The disconnect between the two SEG’s Perspective: valuations may have to do with Firstlogic’s Amid mounting financial losses, Borland Software, reported slower growth rate compared to a provider of application lifecycle management, Similarity. Still, the $69 million Firstlogic will acquires Segue Software, developer of software receive is a nice premium to the $50 million the quality and testing solutions. With its integrated company was offered by Pitney Bowes in 2005. development environment (IDE) facing growing competition from open source software tools CA (NYSE: CA) acquires Wily Technology (Eclipse Foundation), Borland decided to divest its Category: Application Performance Management IDE product line (estimated to be worth between Purchase Price: $375,000,000 $60 and $100 million) and focus on IT lifecycle Seller Revenue: $53,000,000 (estimate) management. Segue will help both functionally Revenue Multiple: 7.1x (estimate) and financially. For 2005, Borland posted a $28.4 Payment Terms: Cash million net loss (down from an $11.3 million profit) on a 10.3% decline in revenue while Segue SEG’s Perspective: posted a $2.9 million net profit on a 10.0% Continuing its growth strategy through acquisition, increase in revenue. The purchase price CA, one of the largest IT management software represents a 25% premium to Segue’s pre- companies, acquires Wily, a provider of enterprise application performance management (APM) announced closing share price. With $175 million solutions. Wily’s focus on enterprise web in cash and no debt, Borland has the resources to application management is an important make strategic acquisitions while it competes complement to CA’s IT management vision of against the likes of Mercury Interactive, integrating the management of systems, security, Compuware, IBM and Serena. storage, applications and the like. CA’s leverage and resources will better enable Wily to compete Business Objects (NASDAQ: BOBJ) acquires against larger rivals Mercury, Quest and Firstlogic Symantec (via Veritas). Not that Wily needed Category: Data Management Software help. The company was growing at 75% before Purchase Price: $69,000,000 the acquisition, which is estimated to be three Seller Revenue: $50,000,000 (estimate) times as fast as the overall growth of its market. In Revenue Multiple: 1.4x (estimate) 2005, CA acquired six companies with combined revenue of $203 million* for $745 million*. Payment Terms: Cash *: Amounts are estimates

SEG’s Perspective: Business Objects, a leading provider of business intelligence (BI) and business productivity management solutions, acquires Firstlogic, a provider of data quality solutions. Founded in 1984, Firstlogic’s initially focused on postal data but has since broadened its offering to include software that cleanses and standardizes data while monitoring and analyzing the quality of database information. The deal is yet another in

Dassault (NASDAQ: DASTY) acquires consolidation has been most visible. With public MatrixOne (NASDAQ: MONE) market valuations for manufacturing software Category: Product Lifecycle Management (PLM) providers well below the overall industry, Infor has Purchase Price: $309,400,000EV been able to acquire customers on a relatively Seller Revenue: $118,780,000 cheap basis. Since 2005, Infor and Golden Gate have acquired five profitable software businesses, EBITDA: ($24,280,000) EV EV Revenue Multiple: 2.6xEV most notably Mapics (1.9x ) and GEAC (1.8x ), Payment Terms: Cash to gain customers and scale. As for Datastream, the purchase price represents a modest 14% SEG’s Perspective: premium to its pre-announced closing share price. Dassault, a billion dollar revenue CAD/PLM Datastream’s long-term investors should be software developer, acquires MatrixOne, a pleased. In December of 2001 the company was offered $96.6 million EV from competitor MRO provider of PLM solutions. MatrixOne primarily EV addresses Dassault’s relative weakness in the Software at a valuation of 1.1x TTM revenue. product data management and collaboration segment of the PLM category. The acquisition Mercury Interactive (NASDAQ: MERQ) also brings significant cross sell opportunities with acquires Systinet only 40% customer overlap. Where Dassault has Category: Enterprise Application Integration traditionally focused on automotive, aerospace & Purchase Price: $105,000,000 defense, and industrials/capital goods, MatrixOne Seller Revenue: $23,000,000 (estimate) brings expertise in high tech (49% of software Revenue Multiple: 4.6x (estimate) revenues), apparel, life sciences and medical Payment Terms: Cash devices. MatrixOne, along with Dassault’s 2005 acquisition of Abaqus (in the simulation category SEG’s Perspective: of PLM), provide Dassault with more revenue Mercury Interactive, a leader in business from higher growth segments of the broader PLM technology optimization, acquires Systinet, market. Dassault will now generate 50% of its provider of governance and lifecycle management revenues from businesses that have end market solutions for service-oriented architectures (SOA). growth of approximately 15% with the remaining Systinet’s core product is a registry that manages 50% of its revenue generated from its traditional the lifecycle of an SOA-based service, specifying CAD business, where the market is growing at who can publish and when, and what policies approximately 5%. govern the service. Industry pundits anticipate SOA architectures will receive an increasing Infor Global Solutions acquires Datastream share of IT spending and Systinet will help (Pink Sheets: DSTM) Mercury capitalize on this trend. If it can move on Category: Asset Mangagement Software from its troubling accounting issues, Mercury’s Purchase Price: $147,037,000EV leverage and resources will differentiate Systinet Seller Revenue: $101,620,000 from its main rivals, privately held SOA Software EBITDA: $12,460,000 and Infravio. Founded in 2000, Systinet raised an Revenue Multiple: 1.4x EV estimated $27.4 million in VC financing; investors EBITDA Multiple: 11.8x EV should be pleased at the outcome. Payment Terms: Cash

SEG’s Perspective: Venture capital backed Infor (formerly Agilisys), provider of enterprise software primarily to the manufacturing vertical, acquires Datastream, a developer of software that helps manage capital assets such as factories, truck fleets and machinery. Infor and its primary investor Golden Gate Capital have been on an acquisition spree in the manufacturing vertical where software

Pitney Bowes (NYSE: PBI) acquires Emtex expertise. While the 4.1x revenue multiple is a Category: Document Management Software premium to the software industry, Actional’s Purchase Price: $41,000,000 investors might not be pleased. Actional had Seller Revenue: $15,000,000 raised an estimated $78 million since its inception Revenue Multiple: 2.7x in 2000. Payment Terms: Cash Verisign (NASDAQ: VRSN) acquires CallVision SEG’s Perspective: Category: Billing & Service Provisioning Software Pitney Bowes, provider of mail automation and Purchase Price: $30,000,000 document management technology, acquires Seller Revenue: $6,600,000 (estimate) Emtex, developer of document management Revenue Multiple: 4.6x (estimate) technologies to large volume mail handlers. Payment Terms: Cash Pitney Bowes will use Emtex to extend further beyond mail meters to encompass electronic SEG’s Perspective: communication, online commerce, document Verisign, a provider of security and infrastructure management, mail tracking software, and related services for internet and telecommunications sorting services. Content and document networks, acquires CallVision, a provider of online management software has garnered significant analysis applications. CallVision clients (T-Mobile, M&A attention (20 deals1, 3.0x2) since 2005, most Qwest, TelstraClear) use its applications to derive notably Autonomy/Verity ($483 million), business and customer intelligence from billing EMC/Captiva ($289 million), PTC/Arbortext ($190 information. CallVision’s applications will be million) and Macrovision/eMeta ($35 million). This incorporated into Verisign’s Wireless Commerce would have been Pitney Bowes third software Suite. Verisign’s communications and commerce acquisition since December 2004 had it not group, as opposed to its high flying Internet dropped its $55 million bid for Firstlogic, a Services Group (28% growth YOY), had roughly provider of data management software recently flat revenue growth in 2005 (down 5% YOY). acquired by Business Objects. CallVision had been an active acquirer itself, 1: Data Source: Software Equity Group 2: Content & document management software median M&A multiple buying competitor OneLink in 2003 and in 2004 OmniChoice, a provider of analytic applications. Progress Software (NASDAQ: PRGS) acquires Actional WebSideStory (NASDAQ: WSSI) acquires Category: Web Services Management Software Visual Sciences Purchase Price: $29,000,000EV Category: Data Analysis & Visualization Software EV Seller Revenue: $7,100,000 (estimate) Purchase Price: $54,300,000 Revenue Multiple: 4.1xEV (estimate) Seller Revenue: $8,784,160 Payment Terms: Cash, Stock Net (loss) Income: $(131,951) Revenue Multiple: 6.2xEV SEG’s Perspective: Payment Terms: Cash, Stock Progress Software, supplier of application infrastructure software, acquires Actional, provider SEG’s Perspective: of web services management software for WebSideStory (WSSI), a web analytics and digital distributed IT systems in a service-oriented marketing vendor, acquires Visual Sciences, architecture (SOA) environment. Progress, and provider of streaming data analysis and the software industry at large are hoping that SOA visualization software. Where WSSI is focused on and Web 2.0 will accelerate industry growth and web analytics, Visual Sciences provides multi- improve public software company valuations. With channel data analytics which extracts data from high growth rates hard to come by in the software such sources as call centers, IVR systems and sector, well-positioned companies such as electronic mail systems. Expanding beyond the Actional command very high premiums. Mercury Web will help WSSI assuage investor fears that Interactive (Systinet; 4.6x TTM revenue) and BEA Google’s free web analytic software (Urchin (Fuego; 7.0x) paid well above the software acquisition in 1Q05) will preempt WSSI’s core industry’s median valuation to gain SOA offering. With little product overlap and an

average sale of $200 thousand to mostly large trailing revenue growth, made Visual Sciences a customers (compared to WSSI’s approximate compelling acquisition candidate. Since its IPO in average sale of $70 thousand), WSSI will benefit September of 2004, WSSI has used $97 million of from lucrative cross-sell opportunities. These cash and stock to acquire two companies (Atomz factors, combined with Visual Sciences 40% in 1Q05).

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