THE PREMIER PROVIDER OF M&A SERVICES TO TECHNOLOGY COMPANIES WORLDWIDE

2004 M&A Review

&
2005 M&A Forecast

Bruce Milne
David Keith
Corum Group Ltd.
www.corumgroup.com
 THE PREMIER PROVIDER OF M&A SERVICES TO TECHNOLOGY COMPANIES WORLDWIDE

Agenda

• Opening Remarks
• Stock Market & IPO Review
• Venture Capital Climate in 2004
• M&A Review
• What Drove Deals in 2004?
• Sector Analysis
• M&A Valuation Trends
• What Will Drive Deals in 2005?
 THE PREMIER PROVIDER OF M&A SERVICES TO TECHNOLOGY COMPANIES WORLDWIDE

Corum Group
• M&A specialists since 1985
• Software and IT experts
• Offices in USA, Canada, and Europe
• 25% of transactions international
• Recognized industry leaders/experts
• Sponsor of Selling Up Selling Out Conferences
• Sponsor of World Financial Symposiums Conferences
• Publisher of Merge newsletter
• Publisher of industry leading M&A research
 THE PREMIER PROVIDER OF M&A SERVICES TO TECHNOLOGY COMPANIES WORLDWIDE

2004 – The Comeback Year for Tech

• Innovative consumer products – iPod
• Google IPO
• Firefox gains on Explorer
• Open source (Linux) gains acceptance in the data center and makes
inroads into to the enterprise
• Oracle/PeopleSoft
• Worldwide adoption of 3G cell phones – the next platform play
• Internet/ecommerce/online advertising thrives
• The Internet as a political fundraising tool
• Blogs & instant messaging
• Desktop searching
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2004 – A Year of Optimism and Opportunities

• Global equities markets at 2 year highs

• Best IPO market in 4 years
• Venture Capitalists active again
• Merger activity at 4 year highs
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Global Equity Markets Rebound

Country Index 52-wk Change

Brazil Bovespa 48%

Hong Kong Hang Seng 31%
U.S. NASDAQ 24%
Australia All Ordinaries 21%
Germany DAX 18%
Japan Nikkei 225 18%
Canada TSX Composite 15%
France CAC 40 13%
U.K. FTSE 100 13%
U.S. DJIA 12%

This has led to a renewed sense of optimism

among executives, investors and advisors
Source: Corum Group Research
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M&A Activity Mirrors the Direction of the

Stock Market
120 2,200

110

100

90 2,100
# of Software Transactions

80

70

NASDAQ
60 2,000

50

40

30 1,900

20

10

0 1,800
Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04

NASDAQ # of M&A Announcements

Source: Corum Group Research

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IPO Markets Improve

2003 2004 % Change

# of IPO Pricings 68 215 216%

IPO Volume $15B $43B 187%

New IPO Filings 105 315 200%

Source: IPOhome.com
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Top Performing Tech IPO’s

Company Business YTD Gain

Shanda Interactive Online games in China 261%

51 Jobs Human resources s/w in China 259%
Marchex Ecommerce 207%
eCOST.com Online discount retailer 180%
Cogent Fingerprinting technology 175%
Volterra Semiconductors Semiconductors 167%
Interchange Paid search services 136%
Rightnow Technologies Customer service s/w 130%
Google Internet 127%

Source: Corum Group Research

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M&A is the Primary Source of Liquidity

In Dollar Volume – All Industries

$1,700
$1,600
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
In Billions

$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

M&A Dollar Volume IPO Amount Raised

Source: Corum Group Research

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Improving IPO and M&A Markets Leads to

More VC Investment
Total Investment in Software Industry

$1,700

$1,500
In M illio n s

$1,300

$1,100

$900

$700

$500
3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04

Source: PricewaterhouseCoopers/Venture Economics/NVCA/MoneyTree survey

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Where Are VC’s Placing Their Bets?

•Wireless
Device management/security, synchronization,
data services,
multimedia entertainment, WAN
security, messaging/content delivery
•Next generation communications
Voice/telephony applications, VoIP services
•RFID
Readers, chips, tags, antennas
•Solutions that simplify IT management
•Solutions that increase networking capacity
•Semiconductor technology
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Tech M&A: Fewer Deals, But Higher Value

2003 2004 % Change
# of Deals 1,300 1,000 -23%
Deal Value $24B $29B 20%

Valuation Offers 1.5x – 2.0x 2.0x – 3.0x

Time to Close 12+ months 10 -12 months

LOI to Close 120+ days 90 – 120 days*

*Due to more comfort with SOX, both buyers & sellers better prepared

Source: Corum Group Research

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Top Buyers in 2004

Cisco Systems - 12
IBM - 10
Kintera – 8
HP - 7
Bentley Systems - 5
Broadcom Corporation - 5
Allen Systems Group - 4
aQuantive - 4
InfoSpace - 4

Source: Corum Group Research

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Cash was King in 2004

2004 Deal Consideration

40%

51%

9%

All Cash All Stock Mix

Source: Corum Group Research

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More Buyer Competition in 2004

• Abundant liquidity in markets
– Low interest rates
– High cash balances
The S&P 500 - $2 trillion in cash & short term assets
– Strong stock market

• Pent up demand, buyers must do something to stimulate growth

– 113 buyers acquired 2 companies
– 28 buyers acquired 3 companies
– 13 buyers acquired 4 companies
– 4 buyers acquired 5 companies

• More competition for deals

– Return of strategic buyers
– Private equity putting money to work
• Recapitalizations
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Recapitalizations – A Driving Force in 2004

• Over $100B of committed capital

• $32.5B raised in the 1st nine months of ‘04

• Recent deals involving Private Equity:

– Apex Partners/Cartesis
– Made2Manage (Battery Ventures)/DTR Software
– Consortium of PE Firms/ Payroll processing BPO
Company
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The Mega Deals of 2004

Juniper Networks/NetScreen Technologies ($4B)
Networking & security converging - moving and inspecting
packets a natural fit
JNPR needed to move beyond Telcos and ISPs and into the
Enterprise
Oracle/PeopleSoft ($10.3B)
Every company is for sale at the right price
Acquiring revenue growth & customers
Symantec/Veritas Software ($13.5B)
Security & storage converging - need for integrated solutions
SYMC seeking EPS Growth and to lessen reliance on consumer
market
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Most Firms are a Collection of Acquisitions

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Case Study: Symantec

Symantec has acquired 36 companies since its IPO in June
1989

Significant M&A Deals:

DMA PC anywhere (1991)

Fifth Generation Systems Backup and security utilities (1993)
Binary Research Disk cloning technology (Ghost) (1998)
AXENT Technologies Enterprise security software (2000)
Veritas Software Storage software (2004)
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Case Study: Symantec

Recent Acquisitions:

Veritas Software Storage Management

Brightmail, Inc. E-mail services and anti-spam software
Turn Tide Anti-spam routers
Nexland, Inc. Internet security appliances
SafeWeb, Inc. SSL VPN appliances
PowerQuest Inc. Automated deployment and recovery
ON Technology Corp. Software distribution/configuration
Recourse Technologies Advanced intrusion detection solutions
SecurityFocus Enterprise security threat management
RIPTech Managed security services provider
Mountain Wave Software used to detect security incidents
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Case Study: Symantec

Has Symantec Created Value through Acquisitions?

Over a 10-Year Period:

• Market Capitalization has grown to $15.0B
• Revenue has increased to $2.0B
• Cash flow has increased to $1.0B
• Over 4,000 new jobs have been created
• The company has tactically used M&A to enter new
markets, supplement its own R&D, and acquire cutting
edge technology
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M&A Sector Coverage
Business Intelligence
Connectivity
Digital Media
Engineering
Enterprise Applications
Enterprise Content Management
Enterprise Infrastructure
Gaming
Internet Infrastructure
Internet Pure Plays
IT Services
Software Development Tools
Security
Storage
Supply Chain Management
Vertical Market – Financial Services
Vertical Market – Healthcare
Vertical Market – Telecom
Vertical Market – Other
Wireless
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Consolidation - Enterprise Applications

Changing market dynamics driving consolidation
• IT customers want to buy from fewer vendors
• Customers want integrated solutions
• IT purchases smaller & taking longer

The result:
• Vendors are trying to bulk up
• Fill in product gaps
• Harder for small vendors to survive – forcing many to
sell
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Consolidation – ERP Market 1999

Top Tier Vendors Mid Tier Vendors 3rd Tier Vendors

ACCPAC AccountMate Software
Baan
Harper and Shuman
Oracle Best Software
Maxwell Business Systems
Daamgard
PeopleSoft Myob Limited
Exact
SAP PWA Group
Epicor
JD Edwards Great Plains PeachTree Software
Lawson Real World Corp.
Sesam
Macola
State of the Art Inc.
Navision
Sage
SBT Accounting Systems
Scala
Soloman
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Consolidation – ERP Market 2005

Top Tier Vendors Mid Tier Vendors 3rd Tier Vendors

ACCPAC AccountMate Software
Baan
Oracle Best Software Harper and Shuman
PeopleSoft Daamgard Maxwell Business Systems
SAP Exact Myob Limited
JD Edwards PWA Group
Epicor
Great Plains PeachTree Software
Lawson Real World Corp.
Macola Sesam
Navision State of the Art Inc.
Sage
SBT Accounting Systems
Scala
Soloman

Implications: Limited buyers who may already have what you sell
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Enterprise Infrastructure
Technology Trend: Utility Computing

M&A Deals: HP/Novadigm & Consera

Veritas/Ejasent
Sun Microsystems/Center Run

Technology Trend: Service Oriented Architecture

M&A Deals: CA/Adjion Solutions

HP/Talking Blocks
Oblix/Confluent Software
Actional Corp/Westbridge Technologies
Digital Evolution/Flamenco Networks
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Security – Access/Identity Management

Technology Trend: Who gets access and to what?

Automatic provisioning

M&A Deals: HP/TruLogica

Netegrity/Business Layers
Computer Associates/Netegrity
Sun/Waveset
IBM/Access360
BMC Software/Calendra
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Storage

•Document management & storage converging

– EMC/Documentum
•Storage & security converging
– Symantec/Veritas
•Storage technology for the mid-market
– EMC/Danz
•Converging of SAN, NAS & Direct Attached storage
technologies
– Adaptec/Snap Appliance
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Factors Affecting M&A Valuations in 2004

•Historical Financials
– Revenue growth
– Historical margins
•What does business look like going forward
– Projected revenue growth
– Value of sales pipeline
– Value of customer base
•Strategic importance to buyer
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M&A Valuation
Valuations constrained by buyer’s own valuation multiples
and prior deals

M&A Transaction Multiples - Software Industry

7.00
6.7
6.00

5.00
P/S Multiple

4.00
2.9 3.0
2.7 2.7
3.00 2.3 2.3
2.0 1.6 1.8 2.1 2.2
1.5 1.5
2.00

1.00

0.00
1H:98 2H:98 1H:99 2H:99 1H:00 2H:00 1H:01 2H:01 1H:02 2H:02 1H:03 2H:03 1H:04 2H:04

Source: Corum Group Research

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Valuation Study: 2003 - 2004

Private software firms with revenue under $10 million

• 21% of transactions were less than 1.25x

• 60% of transactions were greater than 2.00x
• 33% were greater than 3.00x
• High growth companies
• High margin companies
• Next generation technologies
• Security software
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2004 Valuations – Security Software

Multiples driven by VC
investment

Software Security Security

Industry Software Software
M&A Public M&A Multiples
Multiples Multiples

2.0x – 3.0x 3.0x – 7.0x 10.0x +

Price to Sale Multiples

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2004 Valuations – Niche Applications

Multiples held back by
size of market opportunity

Niche
Software Software
Firms Industry
M&A M&A
Multiples Multiples

1.25x – 2.00x 2.0x – 3.0x

Price to Sale Multiples

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2004 Valuations – IT Service

Valuations depend on
where you are in the value
chain

High
Application/
Rellers/ Gov’t IT Value
Systems
Distributors Service BPO
Integration
M&A M&A
Low Value M&A
Multiples Multiples
BPO Multiples

0.60x 0.80x – 1.10x 1.20x – 1.50x 1.50x – 2.00x

Price to Sale Multiples
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What Will Drive M&A in 2005?

• IT spending predicted to be weak – more pressure on vendors
• Strong Euro will contribute to more overseas buyers
• If interest rates rise – more pressure to do deals now
• US firms will go international for acquisitions – need to capitalize on
growing IT markets/opportunities
• Fear - recent deal activity increases pressure on all to keep pace -
acquire or be acquired
• Innovation - small start-ups developing the most cutting edge solutions
• Technology convergence
Storage/security, ECM/storage, systems management/security,
networking/security
• Friendly capital markets & high cash balances
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How To Improve Your M&A Success

• Prepare early and do it thoroughly

• Align shareholder interests
• Agree to valuation range/expectations
• Understand your company’s value proposition
• Create an environment of trust
– Personal trust between buyer and seller is the key
to getting deals done today
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Contact Information
Corum Group Ltd.
10500 NE 8th Street, Suite 1500
Bellevue, WA 98004
USA
(425) 455-8281

Corum Group International

Hottingerstrasse 21
CH-8032 Zurich
Switzerland
+41 1 251 82 65

www.corumgroup.com