M&A valuation trends.(Mergers, IPOs, and Venture Finance: Data Points)(Professional standards)

Our colleague Bruce Hadley of SoftwareCEO.com has been tracking software mergers and acquisitions for several years, and he's just finished analyzing valuation data for 2001. Not surprisingly, Hadley reports, there was a "sobering" drop in M&A activity last year--only 83 transactions where financial details were announced, compared to 136 during the deal-making frenzy of 2000. Moreover, median deal size also dropped, "from a lofty $50.4 million in 2000 to $27.9 in 2001."

A few other trends:

* Revenue multiples are down: Revenue multiples for software deals (sale price divided by annual revenues) fell by more than half during 2001, says Hadley. In 2000, the median multiple for the deals he tracked was an "unrealistic"4.0; last year, the median was 1.8. The valuation collapse especially impacted sale prices among the top quartile of deals--for this group, median valuations plunged from 11.5 times revenues in 2000 to just 3.1 in 2001.

* The Internet is still hot: Despite the dot-com meltdown, Web and e-commerce companies still command a premium: Median sale price for 15 deals last year was 3.4 times revenues, and the top quartile hit a multiple of 9.4.

* Sellers still get a premium for all-stock deals: "There's always a risk in taking stock in lieu of cash," Hadley notes, but sellers who take this risk typically see a much higher payoff--a median multiple of 2.3 for stock-only vs. 1.3 for cash-only sales.

Software Industry M&A and IPO Roundup/2001, $195. Bruce Hadley, Software CEO.com, 5545 NW Sixth St., Tillamook, Ore. 97141; 503/842-7208.

E-mail: hadley@softwareceo.com.

 2001 Software Valuations-Revenue Multiples                                          Lowest                     Top                                       Quartile     Median     Quartile  All companies (83 deals)                   0.7        1.8          3.1 Primarily software (52 deals)              1.1        1.8          3.2 Primarily services (16 deals)              0.3        0.5          1.1 Web/e-commerce (15 deals)                  2.0        3.4          9.4 All-cash deals (30 deals)                  0.9        1.3          2.0 All-stock deals (29 deals)                 0.6        2.3          6.8 Cash + stock deals (24 deals)              0.9        1.9          3.1 Seller was private (46 deals)              0.8        2.1          4.0 Seller was public (37 deals)               0.7        1.5          2.2 Seller's revenue more than $14 mm          0.9        2.0          3.7   (43 deals) Seller's revenue less than $14 mm          0.7        1.4          2.4   (40 deals)  Source: SoftwareCEO.com