Deal Multiples Grow, Suggest Market Optimism

Deal multiples for recently announced transactions  have been rising, suggesting optimism and the possible under-valuing of many tech stocks in the public market. Revenue multiples for deals tracked by Signal Hill Updata are up for every sector (except IT services, which was flat) in Q1 compared to the same period last year [see our upcoming Q1 2011 Review]. Internet, Enterprise Applications and IT Services also witnessed dramatic increases in EBITDA multiples compared to Q1 2010 – all were up at least 125%.

There were 14 transactions valued over 5.0x trailing revenue during Q1 2010, compared with only three during the same period in 2010. The highest multiples fell into the infrastructure software sector: SolarWinds paid 15.0x revenue for Virtual Environment Optimization (VEO) software provider Hyper9, while Teradata paid 14.8x revenue for data management and analytics provider Aster Data Systems. AOL also paid a healthy premium (10.4x revenue) to acquire content-provider The Huffington Post, while Salesforce.com paid 9.3x revenue for social media monitor Radian6.

These higher valuations appear to be continuing into Q2 as well. NetWitness’ acquisition by EMC-owned RSA on Monday is also rumored to have pulled in a significant valuation multiple, although terms were not disclosed. Similarly, Texas Instruments offer to acquire National Semiconductor for $6.5 billion represented a 61% premium to its 30-day trading price – well above the 30% median premium for the last 12-month period.

While the NASDAQ is up 6% year-to-date, it is only up about 3% over the past five-years. As companies sit on record cash hordes, with access to low-cost capital, it seems reasonable that they may be seeing bargains.  Pronouncement by many tech companies that they intend to be acquisitive adds encouragement.

Median Revenue Multiple, LTM 2009-2011
M&A Multiples

(Click image to enlarge)

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