Hidden Treasures
Strategic technology giants are digging deep into their war chests to buy mid-market SaaS companies at a premium
December 30, 2011
“If you’re a private company in the SaaS market, you’re golden,” said Martin Wolf, the founder and president of the mid-market IT services M&A advisory firm Martin Wolf Securities. Most of the SaaS (Software as a Service) targets coming to market are generating revenues within the $10 million to $30 million range with enterprise values between $25 million to $250 million.
Less than six months ago Oracle picked up RightNow Technologies for $1.5 billion in cash and debt. SAP AG got a piece of the action with its $3.4 billion purchase of SuccessFactors in December. Wolf found both of the transaction quite intriguing.
He broke down the numbers on the RightNow deal and pointed out that Oracle was trading close to 4 times Ebitda, 4 times revenues and 4 times book value at the time of the deal. It wound up shelling out close to 7 times revenues for the cloud-based customer service provider.
The SuccessFactors transaction was almost a mirror image to Oracle. SAP was trading at 3.75 times trailing 12 months revenues and bought the cloud computing business for 11 times revenue. As SAP went through the motions of closing on the deal, SuccessFactors quickly wrapped up its acquisition of Jobs2Web for $110 million. The recruitment software developer generated $10 million in revenues for 2010, give or take $15 million for 2011.
“The reason why these small companies are more valuable than the large companies is because they spend 65 percent of their SG&A on selling and marketing and SAP only spends 25 percent,” Wolf says. Companies like SAP are willing to pay up for SaaS assets because they assume they can bring the SG&A down towards a number that looks more like their own, given that they already have sales people, commission and all the benefits of leverage, he explained.
Private equity firms are also finding their hidden treasures in mid-market SaaS companies. Nearly a week after the SuccessFactors transactions, Thoma Bravo LLC added Blue Coat Systems, a security and network software business to its collection for $1.3 billion in cash.
“It was a big premium,” said Seth Boring, a partner at the Chicago-based firm.
Historically, public market premiums usually sit within the range of 25 to 35 percent, but Boring said the firm doesn’t center its attention on that.
“We really focus on absolute value and what we think we can do with the business after we own it.”
Accell-KKR, Frontenac Co. and WestView Capital Partners are also among the active SaaS investors.
Dealmakers believe that the premium acquisition spree will continue but Wolf believes the SAP and Oracle deals are not the primary reason for why there is consolidation in the SaaS world.
“The market is just a perfect storm. The people that get to market in the next six to 12 months will yield the highest returns, and our phones have been ringing off the hook.”
For more information on related topics, visit the following:
