Software Industry Valuations Rise, Driven by Demand for Software-as-a-Service

on major U.S. exchanges (including three foreign software companies) during the quarter are: Pandora Media (NYSE: [[ticker:P]]), LinkedIn (NYSE: [[ticker:LNKD]]), Renren (NYSE: [[ticker:RENN]]), Yandex (NASDAQ: [[ticker:YNDX]]), Ellie Mae (NYSE AMEX: [[ticker:ELLI]]), Jiayuan.com (NASDAQ: [[ticker:DATE]]), FriendFinder Network (NASDAQ: [[ticker:FFN ]]), The Active Network (NYSE: [[ticker:ACTV]]), and HomeAway (NASDAQ: [[ticker:AWAY]]).

The Software Equity Group’s quarterly software industry equity report is widely viewed as a key economic barometer. The firm, which operates as an investment bank and M&A advisory firm, tracks both public market valuations and mergers and acquisitions deals. The firm’s median valuations for public companies, which are calculated as a multiple of trailing 12-month revenue, are widely used to benchmark the value of companies in the software, SaaS, and Internet sectors. The firm’s complete quarterly reports can be downloaded here.

Some other highlights of the firm’s M&A analysis:

—M&A deal volume has been close to its historically healthy level of 400 transactions a quarter for five of the past six quarters.

—The 5.2x median valuation (enterprise value divided by trailing 12 month revenue) is the highest median since the first quarter of 2008. Forty-five SaaS companies were acquired during the second quarter, an increase from the 39 SaaS deals during the previous quarter, and 26 during the fourth quarter of 2010. In its report, the firm says the growing number of SaaS buyouts indicate that SaaS providers have “finally become an important target for acquirers, as well as an array of recent IT spending surveys showing SaaS was gaining increased acceptance among enterprise CIOs.

—Chinese-based Internet companies are gaining significant attention among investors. Fourteen of the 81 public companies in the firm’s Internet index are based in China, and are trading at a median 7.5x EV/TTM revenue. That’s in sharp contrast to the other 67 public Internet companies in the index, which are trading at a median 2.4x EV / TTM revenue.

Enterprise Value (EV) is defined as a company’s capitalization minus cash and short-term investments, plus total debt, preferred equity, and total minority interest. TTM is trailing twelve-month revenue. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.

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Author: Bruce V. Bigelow

In Memoriam: Our dear friend Bruce V. Bigelow passed away on June 29, 2018. He was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Bruce Bigelow joined Xconomy from the business desk of the San Diego Union-Tribune. He was a member of the team of reporters who were awarded the 2006 Pulitzer Prize in National Reporting for uncovering bribes paid to San Diego Republican Rep. Randy “Duke” Cunningham in exchange for special legislation earmarks. He also shared a 2006 award for enterprise reporting from the Society of Business Editors and Writers for “In Harm’s Way,” an article about the extraordinary casualty rate among employees working in Iraq for San Diego’s Titan Corp. He has written extensively about the 2002 corporate accounting scandal at software goliath Peregrine Systems. He also was a Gerald Loeb Award finalist and National Headline Award winner for “The Toymaker,” a 14-part chronicle of a San Diego start-up company. He takes special satisfaction, though, that the series was included in the library for nonfiction narrative journalism at the Nieman Foundation for Journalism at Harvard University. Bigelow graduated from U.C. Berkeley in 1977 with a degree in English Literature and from the Columbia University Graduate School of Journalism in 1979. Before joining the Union-Tribune in 1990, he worked for the Associated Press in Los Angeles and The Kansas City Times.