This edition of the Infrastructure Software M&A Update reflects a modification in our coverage of the infrastructure software sector in response to ongoing fundamental changes in technology disrupting existing deployment approaches and business models and creating new emerging growth opportunities. We have broadened our coverage of public companies and M&A transactions from IT operations and management to also include application infrastructure. Where vendors in IT Operations & Management are focused on optimizing, monitoring and managing the IT components that support the delivery of enterprise applications and services, Application Infrastructure vendors (as we define them) are focused on application development, testing and integration.

The emergence and adoption of Services Oriented Architectures ("SOA") and software-as-a service ("SaaS") in combination with the increasing complexity and heterogeneity of IT infrastructure has resulted in renewed interest and compelling emerging growth opportunities for vendors addressing the Application Infrastructure segment. In addition, we expect to see convergence and consolidation between these two sectors providing another source of support for continued M&A in the Infrastructure Software sector more broadly.

Public Equity Performance: Infrastructure Software Companies Significantly Outperform NASDAQ
Publicly-traded companies within the Infrastructure Software sector (which we define to include two sub-sectors: IT Operations & Management and Application Infrastructure) continued to significantly outperform the NASDAQ over the past year… read more >>

M&A Activity: Shifting Buyer Universe
M&A transactions within the Infrastructure Software group as a whole have continued at a rapid pace while deal multiples have continued to expand… read more >>

Seismic Shift Toward SOA: Major Driver of Future M&A
The seismic shift toward SOA across much of IT is one of the key drivers of disruption and emerging growth within Infrastructure Software. With SOA, “services” can be combined into loosely-coupled composite applications… read more >>

IT Operations and Management Comparables
Relevant financial data for Updata’s index of publicly-traded application IT operations and management companies and recent M&A transactions, including deal values and multiples, when disclosed… read more >>

Updata Infrastructure Software Transactions
Recent infrastructure software transactions completed by Updata Advisors... read more >>

Publicly-traded companies within the Infrastructure Software sector (which we define to include two sub-sectors: IT Operations & Management and Application Infrastructure) continued to significantly outperform the NASDAQ over the past year. As depicted in Figure 1 below, for the 12 month period ending June 2007, the 11-vendor Application Infrastructure Composite increased approximately 33%, while the 14-vendor IT Operations & Management Composite increased 34.2%. During the same period, the NASDAQ Composite Index rose 23.2%.

Figure 1

Investors in public technology companies continue to reward growth, profitability and sector leadership. Solid growth and strong profitability for many of the companies comprising the two Infrastructure Software indices have driven the prices of several of the stocks to levels approaching 52-week highs supporting the strong performance of these indices. For example Opsware (OTC: OPSW), which has successfully positioned itself as a leader in data center automation, has delivered substantially above market growth. The company's year-over-year revenue growth rate of 28.8% is more than triple the median year-over-year growth rate for the IT Operations & Management sub-sector as a whole of 7.6%. As a result, Opsware shares trade at a multiple to 2007 estimated revenues of 7.6x as compared to the median multiple to 2007 estimated revenues of 2.6x for the IT Operations & Management sub-sector as a whole.

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M&A transactions within the Infrastructure Software group as a whole have continued at a rapid pace while deal multiples have continued to expand. As depicted in Figure 2, there were 78 transactions closed from Q2 2006 through Q1 2007 in the Infrastructure Software sector, with a median deal value/trailing revenue multiple of approximately 5.0x. During the previous 12 month period (Q2 2005 through Q1 2006), there were a similar number of announced closed/pending deals (78) with a median multiple of 4.4x. (Note that multiples vary widely based on individual transaction circumstances and, in many cases, are unobtainable).

Figure 2

Consolidation has been a consistent theme in Infrastructure Software for some time now as established vendors have utilized M&A to fill holes in product suites and or sought synergies by leveraging distribution channels and established customer relationships. Recent examples of this broad consolidation trend include HP's acquisition of Mercury and Symantec's acquisition of Altiris. In addition to this consistent source of demand for acquisition opportunities, we have also recently observed the emergence of several new buyers participating in the Infrastructure Software sector. New buyers include a group of emerging mid-sized private equity-backed vendors – including Attachmate, Serena, Planview, and Numara – and emerging new public vendors such as Opsware who have all recently completed acquisitions (See Figure 3 below). We believe that this group of emerging buyers will continue to be active in M&A driven by aggressive growth targets. In addition, we expect the M&A activity within the Infrastructure Software sector to continue to benefit from interest from software and system vendors that have not traditionally focused on the Infrastructure Software sector (such as EMC and Cisco). Furthermore, we expect to see the beginning signs of convergence of Application Infrastructure and IT Operations & Management as vendors focused primarily in one of these areas make acquisitions in the other.

Figure 3

($ in millions)

Announce Date	Seller	Buyer	EV	LTM Rev	EV/Rev
Mar-07	iConclude Co.	Opsware, Inc.	$65.5	NA	NA
Feb-07	Business Engine, Inc.	PlanView, Inc.	NA	$27.0	NA
Jan-07	Altiris, Inc.	Symantec Corp.	$852.2	$214.6	4.0x
Oct-06	Pacific Edge Software, Inc.	Serena Software, Inc.	NA	NA	NA
Sep-06	UniPress Software, Inc.	Numara Software Holdings, Inc.	NA	$9.3	NA
Jul-06	CreekPath Systems, Inc.	Opsware, Inc.	$15.0	$4.5	3.3x
Apr-06	NetIQ Corp.	Attachmate WRQ, Inc.	$431.3	$189.4	2.3x

Mean Median

3.2x 3.3x

The seismic shift toward SOA across much of IT is one of the key drivers of disruption and emerging growth within Infrastructure Software. With SOA, “services” can be combined into loosely-coupled composite applications. Each service represents a distinct piece of functionality. Because services are only loosely tied together, they can be easily mixed and matched as business needs change and processes evolve. This marks a significant improvement over the large, monolithic, and inflexible applications prevalent in the client-server era.

Although SOA represents a major, disruptive architectural shift, it should not be confused with a "killer app" in the mold of ERP software in the 90s, which opened up new business processes to automation, leading to massive growth in end users and new software licenses, and boosting the software industry as a whole. Rather, SOA adoption is expected to significantly impact the economics of software development, deployment, and maintenance, decreasing enterprises’ unwilling reliance on large application vendors and increasing their overall business flexibility and responsiveness.

One measure of the adoption of SOA is the penetration and growth of the SaaS market. SaaS, or on-demand or single instance, multi-tenant software, is enabled by SOA. The market for SaaS solutions has established itself quickly and is expected to continue its rapid growth. According to Gartner, spending on SaaS will outpace spending on traditional on-premise perpetual license software by 3x. According to IDC, spending on SaaS will increase from $1.6 billion in 2004 to $5.1 billion in 2009.

While SOA enables greater flexibility, shorter development times, and more rapid introduction of new IT-enabled services and applications, it also introduces greater complexity into IT – an environment already made more complex by other recent trends, including:

• Virtualization
• Increased Outsourcing
• Increased Heterogeneity

Rapid changes in IT environments, increased complexity and increased reliance by businesses on the services that are being delivered are all ingredients that contribute to compelling growth opportunities for emerging companies and future M&A activity. Several areas that we expect to be impacted by SOA adoption include the following:

• Testing and Modeling: Demand for rapid introduction of new composite services and applications delivered via complex, distributed infrastructure will drive demand for improved capabilities around testing and modeling of applications and operating environments to improve reliability and performance of newly introduced services/applications.
  
• Service Level Assurance: Improved visibility into the complex and changing components comprising the service/application and the supporting infrastructure and improved ability to identify and avoid problems in this environment will be required to meet user’s demand for high levels of service and performance.
  
• Automation: Automation across multiple IT processes including provisioning, optimization and fault resolution will become increasingly important as enterprises seek to realize the full potential value of SOA implementations.
   

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For more information, contact:

Joel Strauch: jstrauch@updata.com
Akshay Arabolu: aarabolu@updata.com

Updata Advisors, Inc. Disclaimer
The information and opinions in this report were prepared by Updata Advisors, Inc. ("Updata"). The information herein is believed by Updata to be reliable and has been obtained from and based upon public sources believed to be reliable, but Updata makes no representation as to the accuracy or completeness of such information. Updata may provide, may have provided or may seek to provide M&A advisory services to one or more companies mentioned herein. In addition, employees of Updata may have purchased or may purchase securities in one or more companies mentioned in this report. Opinions, estimates and analyses in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Updata and are subject to change without notice. Updata has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, estimate, forecast or analysis set forth herein, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.

Data cited herein is sourced from Updata’s database and derived from publicly available sources – additional information is available on request.