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."
Note: This is not a
recommendation to buy or sell NETM or any other
security, but is
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.
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