Tuesday, July 28, 2009

IBM adds predictive analytics with $1.2bn SPSS deal; Software M&A intensifies

On 7/28/09 IBM announced its acquisition of SPSS for $50/share ($1.2 bn equity value and $1.0 bn enterprise value) representing a 42% 1-day equity premium. The predictive analytics offerings of SPSS is expected to reside in IBM's Information Management segment. Transaction represents IBM's continued execution on its Information Agenda strategy which began as data on demand for decision support and is blossoming into real-time trend forecasting and optimization capability for businesses. The deal illustrates large software vendors' interest and ability to pay up for strategic and competitive assets.

While the 42% single day premium, which is also well above the 52-week high, seems significant in today's depressed equity markets, the transaction is in line on a revenue multiple basis (3.3x EV/NTM Revenue) and is at a discount to its BI transaction comps on a maintenance revenue basis (7.7x EV/TTM Maint Rev)

SPSS has sophisticated statistical and data mining tools for structured and unstructured data, and predictive applications for enterprise business users. These products utilize algorithmic techniques to forecast potential outcomes or generate a call to action. With the proliferation of data, software vendors are trying to capitalize on opportunity to use data not just to support static decisions, but rather to leverage the data to present precise and relevant analysis that can help enterprises execute on future business opportunities. IDC estimates Business Analytics as a $25 bn market growing at 4% cagr and IBM is looking to establish its leadership. The transaction builds on earlier Analytics acquisitions including Cognos which presented general analytics and business intelligence on historical data. Wall Street expects revenue synergies from selling SPSS solutions through the enormous IBM global distribution network and expense synergies from consolidating operations into IBM's software infrastructure.

As regards Software M&A, more will follow in the footsteps of IBM/SPSS, Oracle/SUN, EMC/Data Domain. Gone indeed, are the bull market excuses of richly valued stocks and inflated private company valuations. The market today supports some of the lowest relative valuations we have seen in a long time; so why has deal flow been muted? Confidence, surprisingly is one often overlooked attribute. Confidence as defined by public market valuations of one's own stock price and, on a related note, inability to estimate revenue and earnings. How can the corporate development team credibly present target company forecasted financials and potential synergy assumptions to the Board when the CFO's office is having a hard time signing off on the company's own next year and next quarter financials. There is a lot of uncertainty in forecasting financials and since valuations in the tech world are driven by multiples on future revenue and earnings, the current market valuations and expectation of valuations remain depressed. This is true for the acquiring company as well as the potential target and this lack of confidence in self valuation drives the hesitation in pulling the "buy" trigger. We are now seeing large software vendors build up their confidence as they sit on large cash reserves and have stronger support for public market valuations. This increase in self-confidence will spark active M&A dialogue from others who have been siting on the sidelines and potentially lead to a robust Software M&A environment.

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