June 10th, 2008
Want cash? Buy SaaS
US software vendors that want to impress their stockholders with enhanced cash inflows should look to acquire SaaS vendors, according to Jérôme Fougerat, regional director of M&A specialist Corum Group, based in Seattle WA and Zurich, Switzerland. That’s why SaaS companies have been holding their value better than other software vendors during the rocky market conditions of the past year, he told delegates attending the SIIA OnDemand Europe conference today in Amsterdam.
“Valuation for SaaS is declining, but less fast than the overall software industry,” he said. “There really is differentiation in value between SaaS and the whole industry.” Revenue multiples (ie, the acquisition price compared to annual turnover) for SaaS companies were 3.99 in September last year, rose to 4.62 in January and were still at 4.0 last month, he said, compared to 2.6 for conventional software vendors.
Although the punishingly high euro-to-dollar exchange rate makes US acquisitions especially attractive for European buyers, Fougerat argued that it can also justify US acquisitions in Europe:
“With the weak dollar, America is almost for free right now. We see a lot of small and large companies in Europe buying companies in the US. But we also see US companies buying in Europe to get strong earnings in a strong currency. They are ready to pay more to improve earnings.”
Fougerat listed several factors that make SaaS vendors an attractive acquisition target, but the ability to generate cash came top of the list. “It’s not just technology. It’s a way of generating cash flow,” he explained. In comparison to on-demand subscriptions, conventional software license models are difficult to project and more prone to volatility, he said, especially when there may be a recession looming. In contrast, SaaS offers predictable recurring cash flow with forward revenue visibility and low customer churn: “SaaS providers have the challenge of making customers happy every day, otherwise they will leave.” All of that makes it easier to plan and manage growth, he added.
Venture-funded SaaS vendors that are eager to find an exit will be heartened by his message that acquirers still have reasons to buy. It certainly made for better news than his earlier statement that “the IPO market is almost dead.”
Phil Wainewright is a commentator and strategist on emerging software industry trends. See his full profile and disclosure of his industry affiliations.
| 06/10/08
