KUHN CAPITAL Tuesday, March 20, 2018
Dispatches from the front

Business Intelligence & SAP Vendor Values Today

Introduction (and Disclaimer)
Because of our recent client activity in three software and technical services sectors -- Business Intelligence Software, Business Intelligence Technical Services, and SAP Technical Services -- we thought you’d find interesting some of our observations about valuations in these sectors.

We examined the three sectors from two perspectives: M&A deal values (or what companies sold for) and public company market capitalizations.

For each sector we calculated the ratio of transaction price or market cap to sales, a.k.a. the "multiple" of value to sales. Of course, this single metric is merely a guide. In a thorough comparables valuation, many other factors are considered: the object is to draw on data as relevant as possible then adjust the target’s value based on differences.

Even this effort is insufficient unto itself: a full analysis also considers other valuation techniques in addition to comparables like discounted cash flow, the value of unexploited intellectual property, the cost to a prospective buyer of duplicating the resources of a target, etc. For more on how to value a company, see last month's Dispatch on this subject.

Business Intelligence (BI) Software
BI Software Transactions
The BI software segment is the largest we tracked for this analysis by far, with 38 deals closed from 2002 to date that featured targets with average sales of about $200 million; and 23 public companies with average sales of about $150 million. For the transactions on which we have applicable data, the combined sales of BI Software companies bought since 2002 were $525 million and these companies were purchased for about $1.2 billion.

When sold, BI software vendors generated the reliably highest multiple of price to sales of the three sectors considered here, averaging 2.4x. As a group, these purchased vendors boasted just marginally positive EBITDA. Nonetheless, the sector has seen persistent and recently rising rates of consolidation or M&A activity despite (or perhaps because of) the low profitability of the targets purchased.

BI Software Public Company Market Caps
The combined market cap of the seven public companies in this sector was about $7.6 billion and they generated sales of about $3.2 billion. The average multiple of market cap to sales for public BI software vendors, about 1.8x, is somewhat lower than the sector’s transaction value multiples, though these public company valuations are still among the highest multiples of the three we examined. Most of the public companies making up this sample are losing money (altogether about $320 million in EBITDA), more so than their purchased brethren, a fact that may explain why the public company average market cap multiple falls short of the average transaction multiple.

BI Technical Services
BI Technical Services Transactions
The three deals for which we have sufficient data show a multiple of price to sales of about 1.2x. Such deals have been small, averaging about $11 million each and the targets were also generating sales averaging about $11 million.

BI Technical Services Public Company Market Caps
The three BI Tech Services public companies we tracked together account for sales of about $1.6 billion with a respectable EBIDTA averaging about 8.5%. Their market cap to sales multiple is 1.9x, a higher value than that fetched by the purchases of BI technical services vendors.

SAP Technical Services
SAP Technical Services Transactions
The three purchases for which we have sufficient detail generated revenues of about $39 million and fetched a price of 1.0x sales. That’s the lowest multiple for purchases occurring throughout all three sectors.

SAP Technical Services Company Market Caps
The average revenue for the seven companies we tracked in this sector was about $20 million, and on average they lost $11 million. In fact, all but one of these companies is losing money. Their market cap of about $90.5 million produces a market cap to sales multiple of about 0.6x, the poorest valuation of any sector. Considering their miserable profitability, the low multiple isn’t surprising.

In Sum…
Our sample of public companies generated sales of about $5.4 billion and were as a group unprofitable. Considering this, values in general appear too high for our investing tastes: the public companies’ market cap is $11 billion.

However, among the sectors, values vary widely. The BI Software sector is obviously “hot”, with rapid consolidation underway and rich values. If we owned an independent BI software vendor, we’d want to attract purchase offers now.

The BI Technical Services sector, with its market cap to sales multiple of 1.2x, occupies a middle valuation range and most of these companies are at least somewhat profitable. BI Tech Services vendors are probably enjoying some of the valuation heat generated by their BI Software vendor cousins, so selling now, for the same reasons, may be a good idea.

SAP Tech services look like a relative weak sister, particularly the case considering their illustrious past. We think the survivors of this sector will figure out a way to offshore at least a substantial portion of their service production to India or some other cheaper labor location, while retaining an American “front-end” consisting of sales/marketing and strategic or business process consulting. Otherwise, RIP.

In contrast, the BI Tech Services area strikes us as less vulnerable to offshore price competition, since the sector still requires rather sophisticated business process analysis and even strategic consulting mixed with technical expertise.

Want More?
If you’re a principal in a selling or buying sector player and would like a detailed spreadsheet carrying the data behind this analysis, we’d be happy to e-mail you a copy. Contact us at 312/236-0100.

Ryan Kuhn

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