The Ponderings of Woodrow

Ellison's Early Xmas...

Quite the day for the world's second wealthiest software magnate. In what's been a turbulent U.S. equity market, Larry Ellison enjoyed not one, but two financial boons today:

• Oracle reported stellar Q2 financial results last night after the close; showing the world that, once again, his vision of consolidating the enterprise software industry is working. And those assailing the plan as a means of masking slowing organic growth are having to resort to the New Math in order to keep singing that song at this point. Database and middleware grew 30% in the Q; which is the best number I can recall from the company in at least 10 years [if anyone feels like confirming that as fact, I would greatly appreciate it].

• And then NetSuite, a company I've discussed quite a bit over the years, listed shares today at $26 per share, significantly above the thrice raised proposed offering range. As if that weren't enough, the stock rallied sharply late in the day to close the day at $35.50. In the process, that puts NetSuite's market capitalization at an astounding $2.1 BILLION.

Assuming the underwriter's exercised the over-allotment today, Ellison (and family + related parties) will beneficially own 65.4% of the outstanding shares; putting their one day paper gain at $1.38 BILLION.

'Tis the season and that means giving as well as getting; and so I'm sure Marc Benioff, a former Oracle acolyte, would like to say thanks today, too. You see, the lofty valuation afforded NetSuite today had a halo effect on shares of salesforce.com (CRM); as investors no doubt looked upon the relative size, profitability and cash flow generation of CRM and bid the shares up in sympathy. CRM finished the day at $65 (up 8%) at a new 52-week high.

As a shareholder of both CRM and ORCL, I too will raise a glass of eggnog tonight for the early holiday tidings.

Note: This is not a recommendation to buy or sell CRM, N, ORCL or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in N but did maintain long equity positions in both CRM and ORCL. As always, we reserve the right to alter our investment holdings at any time in the future. We also may, at times, carry derivative options on underlying positions as a hedge.

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NetManage acquired: Cheapest Nasdaq software stock no more...

As you might imagine, as technology investors, my partners and I maintain a variety of data sets that help us in our due diligence and screening processes. Two of the more basic measures used to value software companies are:

• Enterprise Value/Revenue
• Enterprise Value/Maintenance Revenue

Given the sticky nature of maintenance revenues, it's emerged as one of the main anchors for structuring software M&A over the last few years. Maturing software companies that have shown an inability to grow license revenues (or even suffered license revenue declines in many cases) have managed to maintain maintenance revenue renewals at a surprising rate (despite the best efforts of guys like Vinnie).

So what does this have to do with today's announced acquisition of NetManage (NETM) by privately held Rocket Software?

For whatever it's worth, NetManage was the cheapest (or least expensive) Nasdaq-listed software company that I knew of:

• Share price (12/11/07): $3.69
• Shares outstanding: 9.78mm
• Market cap (12/11/07): $36.1mm
• Cash and equivalents: $25.72mm
• Enterprise value: $10.38mm
• $33.79mm in TTM revenues
• $23.95mm in TTM maintenance and services revenues
  • Roughly $16mm in TTM maintenance (we use a percentage formula in our screens when maintenance isn't explicitly broken out)

For those playing at home, that implies NETM was trading at:

• 0.31x EV/Sales
• 0.65x EV/Estimated Maintenance

Today's takeout, by privately held Rocket Software, for $69mm in cash, represents a 95% premium to yesterday's closing price. Using the aforementioned financial metrics, that value the company at 1.32x EV/sales and roughly 2.8x EV/TTM (estimated) maintenance. Just to put a finer point on how "cheap" NetManage was, today's valuation would STILL put NETM at the 16th "cheapest" Nasdaq-listed software stock on a EV/revenues basis.

Don't misconstrue my comments to imply that "inexpensive multiples = good investments." In many cases, companies are "cheap" for a reason. In the case of NetManage, I don't profess to know much about the fundamentals of the business that couldn't be found in their SEC filings. But it's not everyday that you see the absolute cheapest company in one of your screens get taken out; even in this "Year of Software M&A."

Related:

• NetManage reports Q3 2007 financial results
• Q3-07 10Q Filing

Note: This is not a recommendation to buy or sell NETM or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in NETM. As always, we reserve the right to do so in the future. We also may, at times, carry derivative options on underlying positions as a hedge.

netmanage netm rocketsoftware investing m&a valuation software woodrow enterprise irregulars

Jeff gets the Microsoft/Facebook transaction exactly right...

Jeff reflects on a recent VC industry event he attended, and addresses the Microsoft/Facebook transaction; getting it exactly right.

Lot’s of grumbling about Facebook being valued at $15 billion and “how could Microsoft do this to us?”. Let’s be clear about something, Microsoft didn’t pay $15b, they paid $240 million out of their well stocked bank vault for pole position and, as Jim Long speculated, it doubtful they spent much time on the valuation. Will Price made the most salient point about this in questioning why FB would do this to themselves considering they have made their future employees options worthless.

Think about that for just a minute, if you already have options in FB the news that the company is worth $15b in that calculation (and it’s unavoidable irrespective of what people think FB is really worth, company valuation insofar as options calculation is a rigid event driven process) is great. I would imagine there were a lot of private wealth managers descending on FB HQ to tell employees how they could collar their options even though there is no market for them at the moment.

If you have yet to be hired by FB this news is no good news because it’s not like FB is going to give you $10m in options for being a senior product manager. I can only imagine some of the awkward conversations FB has been having with prospective employees about options these days. Basically, FB made it a lot harder for themselves to hire good people who understand cap table math.

I was on a blog hiatus at the time of the Microsoft's investment in Facebook but I can tell you that I was baffled at how many people were looking at that transaction through the wrong lens. I kept hearing about the "absurdity" of the $15B valuation as though that valuation has any real-world value. As Jeff says so well, the REALITY is that Microsoft used an infinitesimal amount of its cash hoard to secure:

• A relationship with the fastest growing social network
• A call option on potential future negotiations with Facebook
• A much needed "win" against Google

Now, there are also plenty of reasons why Facebook agreed to the deal, but Jeff (channeling Will Price) does bring up an interesting point as to what this does for Facebook's ability to hire in the future. Then again, that's a problem that all companies face that scale. I'm not a VC, but intuitively it strikes me that it's rare for employee #500 to get rich on stock options at any company. Maybe my VC friends can put some meat on those bones?

Note: This is not a recommendation to buy or sell MSFT or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did maintain a long equity position in Microsoft but reserve the right to alter our holdings at any time. We also may, at times, carry derivative options on underlying positions as a hedge.

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Beauty is in the eye of the beholder: Why Scoble is right AND wrong about enterprise software

Robert Scoble, made quasi-famous for blogging early and often while an employee at Microsoft, now rarely revisits topics that revolve around enterprise computing. But this weekend, in reaction to comments recently made by Bill Gates, Scoble opines about why enterprise software isn't sexy or more specifically why it doesn't garner the attention that consumer-centric software does.

He comes to the following conclusions:

1. Bill Gates is right, bloggers and journalists DO prefer to talk about consumer technologies
2. The buyers of enterprise software are a minority that doesn't consult with the majority of the users before making decisions
3. Media are paid to deliver eyeballs; and talking about consumer topics generates a lot more of them

He concludes his missive with a question:

Any of you have any ideas on how to make business software sexy?

Finally, he asks for we Enterprise Irregulars to weigh in on the topic:

I wonder what the Enterprise Irregulars think about this? (They are a group of bloggers who cover business software).

Scoble asked what we Irregulars thought, and boy did he get some answers:

• Michael Krigsman, one of the newest Irregulars, offers a passioned response and suggests that Scoble is asking the wrong question
• Dennis Howlett reminds Scoble that sexy is far, far different from influential
• Vinnie Mirchandani is "damn proud to be unsexy"
• Anshu Sharma offers five types of software that turn CIOs on
• Sadagopan also emphasizes that that blog traffic in no way equates to influence in the real sense
• Dan Farber explains that enterprise topics are worth blogging about, quality of readership trumps quantity
• Ross Mayfield thinks enterprise software developers can/must and will do better
• Craig Cmehil reminds us that those consumer technologies everyone gushes about are provided to us by enterprises
• Phil Wainewright reminds us that software is boring, and always will be, for most of the population

I am really proud of the diversity and thoughtfulness that many of my fellow Irregulars brought to bear on this topic over the last 48 hours.

At the end of the day, beauty really is in the eye of the beholder.

<=== I'm no George Clooney, but my wife finds me sexy (I hope!). Heck, even Bea Arthur managed to get married...TWICE!

The consumerization of software is underway; but it's absolutely a SLOW GOING process within large enterprises. I think it's vitally important to keep perspective.

Good software, whether it's sold for millions of dollars to a Fortune 500 CIO or distributed freely to millions of users directly and paid for by advertising, is only as good as the processes it enables.

It can't be said enough...it's not about the code, it's about the PROCESS!

Make users lives easier. Sounds simple, but it's really not.

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