Tuesday, February 10, 2009

SAP and Adobe M&A presentations (sponsored by SIIA with Credit Suisse)

Ken Wasch and his team over at the SIIA, have really put together a quality program aimed at providing exit insights to venture capitalists, and visibility to the software/internet's most prolific M&A players. Their Private Equity forum is worth a look.

Following are notes from the session held yesterday:


Monty Gray- Director M&A SAP

Company overview
11.5B Euros of Revenue
51,000 Employees (reducing headcount to 48,000)
12mm users across 120 countries
1.5mm community partners
15 Industry Value Networks

EMEA 60% of Revenue
Americas 30% of Revenue
Other 10% of Revenue

View the US as the early adopter market that is a precursor for global adoption of innovative products/technologies.

SAP has completed 27 deals in the past 5 years, including their largest acquisition, and the 4th largest in the history of the software industry at $7B+, Business Objects. Though that transaction has exceeded expectations, they are not similarly focused as Oracle, with a drive to consolidate market share.

Historically, viewed the Company as a packaged software business with maintenance (33% of revenue) driving the profit engine. The core SAP Business Suite has spawned vertical Industry Solutions, a horizontal Business Process (middleware) platform, and a Small Business offering. Finally, Business Objects is the core of a Business User Solution Group (addressing White Collar workers).

Look at acquisitions in 4 buckets:

1. Game Changer- Move to position SAP as player in a new segment (e.g. BOJ brought them scale in providing product to white collar workers). Large transactions usually >500B Euros. SAP does these infrequently
2. Market Extension-Expedite time to market or small market extensions for an existing market focus. Transaction size between 20-500mm Euros
3. Direct Tuck-in- Same criteria as market extension, but smaller transaction size. Deal size is under 20mm Euros and will do 3-5/year
4. In-Direct Tuck-in- New technology that enables new use cases or user experience. Deal size is under 20mm Euros and will do 3-5/year

In the Business User Solution (white collar) area looking for market extensions and Tuck-in's

SME- Happy with what they have, may do some tuck-in's

Business Process Platform- Organic Growth

Industry Solutions- Looking for market extensions and tuck-in's

Prefer to pay a bit more for companies doing well, and will shy away from turn-around situations. With that said, they are conservative buyers and unlikely to purchase high growth companies at a significant premium.

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Paul Weiskopf SVP-Corporate Development Adobe

"Adobe's mission is to create enabling technologies to create and enable growing markets through democratizing technology"

First growth phase for Adobe was around desktop publishing, next around electronic documents (PDF), 3rd was around Interactive media/websites (Flash), now looking at the rapid adoption of rich internet applications as their growth engine. Sees the industry at an inflection point around devices, smart documents, and rich media that fundamentally changes the way people interact with the internet. He thinks our computing experience is changing radically. The largest problem they see needing to be solved is to provide a consistent application and viewing experiences around multiple devices.

Sees Adobe uniquely positioned to add value in the application development tools, run times, and deployment arenas. He did mention, in a response to a question from the audience, that P2P is a technology they are looking at to facilitate the provisioning of live events.

Customer Segmentation

Creatives and Prosumers
Knowledge Workers
Enterprises
Consumers
OEM & Service Providers
Web Application

Creative Solutions- 58% of Revenue
Business Productivity- 30% of Revenue
Other 9%
Mobile 3%

Americas's represent 46% of Revenue and is growing slower than the rest of the world.

Expect to continue doing 2-4 M&A deals/year and may be more aggressive in an environment where they see enhanced value through lower prices. Generally focused on smaller technology companies that have a culture of innovation, cutting edge technology and strong engineering teams.

Have completed more than 50 transactions over the past 10 years. The core M&A activity is around buying smaller technology oriented companies. They will pursue larger, Company transformative deals if they can attain a leadership position in an important target market. Macromedia was the last transformative deal they completed (2005).

Complementing its M&A activity, Adobe employs an active venture investment program. Adobe does not lead these investments, but will participate taking a minority ownership stake and holds board observer positions. The motivation is driven by strategy and measured with financial returns. If there is not an opportunity for a tangible commercial relationship, they typically do not engage.

Have invested cross-stage from seed to expansion, with B round the typical stage. $1mm is the often the minimum target amount invested, with $2mm the mean and $5mm the to date maximum.

Since 2006, have made 17 investments including:

Veoh &56.com- web video discovery
iMeem- content driven social networking
Bunchball- driving and measuring user engagement
ScanR & ColorZip- mobile information capture
DemandBase- marketing automation/lead generation

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Steve West- Managing Director and Co-Head of Global Software Credit Suisse

Only 4 Technology IPO's in 2008. Prior to the mess we have in our financial system, the main issue is that not many private companies today fit the current institutional interest profile requiring cash flow growth and business model stability...with critical mass.

Dow Jones data from time of funding to exit:
78 months to M&A
99 months to IPO

The public software market is contracting, and the 'middle market' is disappearing with:

275 public software companies in 2004; with 35% below $100mm market cap
182 public software companies in 2009; with 80% below $100mm market cap

Looking at the near term health of the industry:

Public company revenue growth expectations have fallen dramatically as total software growth expectations in June '08 was 17%; now it's 6%. Expectations for firms with >$1B revenue went from 9% to 0. Firms under $100mm went from 29% to 9% (he expects this to come down further).

Consistent with the compression in expected growth, revenue multiples have fallen 55-70% from 2007 averages to a mean of 1.5x expected revenues. EBITDA multiples are down a similar amount to 5-6x (Saas is an outlier at 10x).

Clearly sobering news for venture portfolios heavy with software investments made in a different economic and valuation environment. Also hard to reconcile with an average pre-money venture valuation of $22mm during 2008.

If this trend holds, venture funds that follow FAS 157 (mark to market), and have software investments, will likely show some serious write-downs in their portfolios.

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