Q1 2012 - Software M&A Update

Q1 2012 – Software M&A Update

We noted approximately 420 M&A transactions announced in the software sector for Q1 2012 for a combined total of $74.6 billion.

The median exit EV/Revenue multiple inched up to 1.9x TTM revenue in Q1 2012 from 1.8x the previous quarter. While the exit multiple is virtually the same as the software industry’s ten year average of 2.0x TTM revenue, it does suggest that buyers are hesitant to overpay for a target, most likely because of ongoing concerns about IT spending and the economy. In the first quarter, 9.4% of M&A deals with listed exit multiples had a 5.0x or greater EV/Revenue multiple.

The median EV/EBITDA multiple for publicly traded software company exits was 12.2x TTM EBITDA in Q1 2012 as compared to 13.4x in the previous quarter.

Size is a factor in valuations.

 

The median average deal size was $43.4 million for Q1 2012.

 

Another key driver of exit multiples is size – of both buyer and seller. As testament, in Q1 2012, buyers with TTM revenue greater than $200 million paid a median EV/Revenue multiple of 3.0x, while buyers with TTM revenue less than $200 million paid only 1.3x TTM revenue. Equally noteworthy - sellers with less than $20 million TTM revenue received a median EV/Revenue multiple of 4.6x from buyers with $200 million of revenue or more, while sellers with greater than $20 million TTM revenue were paid a median exit valuation of 2.9x.

Vertical (industry specific) software is a key focus in Q1 2012.

In Q1 2012, providers of vertical software accounted for 32% of all software M&A, confirming vertical providers remain attractive acquisition targets primarily because of their predictable recurring revenue, deep domain expertise, and highly defensible market positions. The most active verticals were Healthcare and Financial Services, each capturing 18% of total vertical M&A volume.

Software as a Service (SaaS) M&A Deal Volume and Valuations

The number of SaaS M&A transactions continues to climb. In Q1 2012, 65 SaaS companies were acquired, a 61% increase from 39 transactions in Q1 2011.  SaaS company acquisitions accounted for 16.2% of all software industry acquisitions in 1Q12, compared to only 2.3% of all software M&A deals just two years ago.

SaaS exit valuations are also climbing. The median EV/Revenue exit multiple for SaaS providers in the first quarter was 3.9x, up 54% from the previous quarter, and 15% from the previous year.  Q1 2012’s median exit valuation is more than double the median 1.9x TTM EV/Revenue exit multiple of on-premise software companies in Q1.

And size is beginning to matter. An analysis of SaaS M&A transactions over the prior two years reveals that the revenue of SaaS targets seemed to dramatically impact their exit valuations. SaaS sellers with TTM revenue below $10 million received a median EV/Revenue multiple of 2.5x, while those with TTM revenue greater than $50 million were awarded a median EV/Revenue multiple of 5.6x.

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Generation Equity Advisors, LLC is an independent investment bank and M&A advisory firm focused exclusively on the global Software, IT Services and Digital Media industry sectors. We advise buyers and sellers of companies and efficiently execute transactions to increase shareholder value. Our professionals have advised on $20+ billion in M&A transactions to date and have current relationships globally with technology and media companies as well as leading private equity firms.