NEW YORK (TheDeal) -- Vista Equity Partners's agreement to buy Solera Holdings Inc. ( (SLH) ) for $6.5 billion, including debt, underscores the strength of the market for enterprise software companies.
The Solera auction attracted an A-list of buyout firm suitors and opportunities for more tech deals exist, according to a recent report for Wedbush Securities LLC. In particular, a number of cloud software companies have valuations below historic M&A valuations and high levels of growth. "Especially on a growth adjusted basis, the group remains fertile ground for acquisitions," Wedbush analyst Steve Koenig said of developers that deploy a software as a service model, which bills via recurring invoices rather than through large, up-front licenses.
Marketo Inc. ( (MKTO) ), Cornerstone OnDemand Inc. ( (CSOD - Get Report) ) and Callidus Software Inc.( (CALD) ) have valuations below prior deal benchmarks. Cyber security group Proofpoint Inc. ( (PFPT - Get Report) ) is a hair under traditional multiples.
Koenig puts the recent takeouts of software-as-a-service companies at a median of 10.6 times recurring revenue from the prior year. While the 21 largest public SaaS companies have a median market value of of 9.9 times recurring revenues, Koenig said that a number of them are lower.
San Mateo, Calif., marketing software developer Marketo trades at less than 7.5 times recurring revenue, three clicks of Ebitda below the media acquisition multiple. The company develops marketing automation software that can generate leads by monitoring search engine activity, among other processes. Wall Street expects the company, which has an enterprise value of close to $1.2 billion, to post 40% revenue growth in 2015.
Human resources software group Cornerstone OnDemand also pairs growth with an under-market valuation. The company has an enterprise value of more than $2 billion, and trades at less than 6 times recurring revenue for the prior year. Clients for its recruiting and training software include Walgreens Boots Alliance Inc. (WBA) and Xerox Corp (XRX). The Wall Street consensus calls for more than 30% in 2015 growth.
Marketing software group Callidus Software Inc. trades at more than 7.5 times recurring revenues, with an enterprise valuation of about $866 million. The company develops marketing and sales management software that collects data on visitors, manages e-mail campaigns and helps generate and manage leads, among other tasks.
Proofpoint is Wedbush's top pick, based on fundamentals and not by likelihood of takeout. The company's enterprise value of nearly $2.3 billion comes to more than 10 times recurring revenue. Projected 2015 growth for the cyber security is 34.2%.
Cornerstone and Callidus declined to comment on their valuations and the likelihood of deals. Marketo and Proofpoint did not respond to queries.
Benchmark deals for software as a service targes include Salesforce.com Inc.'s (CRM) purchase of ExactTarget for $2.5 billion, or 10.8 times recurring revenue. SAP AB (SAP) paid $8.3 billion, or 10.9 times recurring revenue, for Concur Technologies Inc.; $4.3 billion, or13.2 times recurring revenue, for Ariba Inc.; and bought SuccessFactors Inc. for $3.4, or 14.5 times recurring revenues. And when Orcale Corp. (ORCL) acquired Respnsys Inc. for $1.5 billion, it paid 14 times recurring revenues.
"Large revenue-generating acquisitions will continue to happen," Koenig said.
Many of the newer generation of software companies have a higher level of recurring revenues than prior generations of tech companies. With more reliable revenue streams, higher valuations may be less daunting. With prices for several companies already below historic multiples, buyers could pay a premium without breaking M&A norms.
"Valuations don't need to hold up the consolidation," Koenig said.