Tech MA Outlook 2010 FINAL

Analyzing the Business
of Enterprise IT Innovation
TECH M&A OUTLOOK 2010
JANUARY 2010
THE 451 GROUP: M&A KNOWLEDGEBASE
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ii TECH M&A OUTLOOK 2010

TABLE OF CONTENTS
SECTION 1: INTRODUCTION 1
1.1 THE NEW NORMAL . . . . . . . . . . . . . . . . . . 2
1.2 CASH FOR CLUNKERS . . . . . . . . . . . . . . . . . 5
1.3 A REBOUND IN THE BACK HALF . . . . . . . . . . . . . . 7
1.4 VALUATION INFLATION . . . . . . . . . . . . . . . . . 9
1.5 BUYOUTS BUILDING UP? . . . . . . . . . . . . . . . . 10
1.6 WHAT TO WATCH FOR IN 2010 . . . . . . . . . . . . . . 11
SECTION 2: ENTERPRISE SOFTWARE 14

2.1 MACRO-LEVEL DRIVERS . . . . . . . . . . . . . . . . 20
2.2 MICRO-LEVEL DRIVERS . . . . . . . . . . . . . . . . 21
2.3 IPO CANDIDATES . . . . . . . . . . . . . . . . . . 27
SECTION 3: SECURITY AND NETWORKS 28

3.1 MACRO-LEVEL DRIVERS FOR SECURITY AND NETWORKING . . . . . 34
3.2 MICRO-LEVEL DRIVERS FOR SECURITY AND NETWORKING . . . . . . 37
3.3 IPO CANDIDATES IN SECURITY AND NETWORKING . . . . . . . . 42
SECTION 4: STORAGE AND SYSTEMS 43

4.1 MACRO–LEVEL DRIVERS . . . . . . . . . . . . . . . . 45
SECTION 5: MOBILITY 50
5.1 MACRO–LEVEL DRIVERS . . . . . . . . . . . . . . . . 51
SECTION 6: IT SERVICES 54
6.1 OVERVIEW . . . . . . . . . . . . . . . . . . . . 54
6.2 OUTLOOK . . . . . . . . . . . . . . . . . . . . 55
6.3 DATACENTER ACTIVITY . . . . . . . . . . . . . . . . 55
THE 451 GROUP: M&A KNOWLEDGEBASE iii

6.4 KEY DEALS IN 2009 . . . . . . . . . . . . . . . . . . 56
6.5 MACRO-LEVEL M&A DRIVERS . . . . . . . . . . . . . . 58
6.6 MICRO-LEVEL M&A DRIVERS . . . . . . . . . . . . . . . 59
APPENDIX 1: TECH BANKING IS BACK 61

A1.1 OUTPACING THE MARKET . . . . . . . . . . . . . . . 61
A1.2 THE ROAD TO RECOVERY . . . . . . . . . . . . . . . 62
A1.3 REPLENISHING THE RANKS . . . . . . . . . . . . . . . 63
A1.4 STAYING BUSY . . . . . . . . . . . . . . . . . . 64
A1.5 IPO WINDOW OPENS A CRACK . . . . . . . . . . . . . . 65
A1.6 BUYOUTS ARE BACK . . . . . . . . . . . . . . . . . 66
APPENDIX 2: COMPANIES ARE BACK IN BUSINESS FOR M&A 67

A2.1 REBOUND, IF NOT RECOVERY . . . . . . . . . . . . . . 68
A2.2 VALUATION INFLATION . . . . . . . . . . . . . . . . 69
A2.3 COMPETITIVE FIELD . . . . . . . . . . . . . . . . . 70
A2.4 RISKY BUSINESS . . . . . . . . . . . . . . . . . . 71
APPENDIX 3: THE VANISHING PUBLIC SOFTWARE COMPANY 72

A3.1 THE BIG GET BIGGER . . . . . . . . . . . . . . . . . 73
INDEX OF COMPANIES 78
iv TECH M&A OUTLOOK 2010

TABLE OF FIGURES
SECTION 1: INTRODUCTION 1
FIGURE 1.1: OVERALL TECH M&A . . . . . . . . . . . . . . 1
FIGURE 1.2: RECENT QUARTERLY TECH M&A ACTIVITY . . . . . . . . 2
FIGURE 1.3: 10-DIGIT TRANSACTIONS . . . . . . . . . . . . . 3
FIGURE 1.4: SCRAP SALES . . . . . . . . . . . . . . . . . 4
FIGURE 1.5: HOW DO YOU EXPECT YOUR OWN COMPANY’S DIVESTITURE
ACTIVITY TO CHANGE OVER THE NEXT 12 MONTHS? . . . . . . . . 5
FIGURE 1.6: TECH VALUATIONS . . . . . . . . . . . . . . . 6
FIGURE 1.7: US PUBLIC COMPANY M&A ACTIVITY . . . . . . . . . . 7
FIGURE 1.8: TECH VALUATIONS DURING THE RECESSION . . . . . . . . 9
FIGURE 1.9: PRIVATE EQUITY M&A . . . . . . . . . . . . . . 11
SECTION 2: ENTERPRISE SOFTWARE 14

FIGURE 2.1: SOFTWARE M&A, 2002-2009 . . . . . . . . . . . . 14
FIGURE 2.2: SIGNATURE SOFTWARE DEALS OF 2009 . . . . . . . . . 15
FIGURE 2.2: SIGNATURE SOFTWARE DEALS OF 2009 (CONTINUED) . . . . . 16
FIGURE 2.3: LESS, MORE OR THE SAME? . . . . . . . . . . . . 20
FIGURE 2.4: IPO CANDIDATES IN ENTERPRISE SOFTWARE . . . . . . . 27
SECTION 3: SECURITY AND NETWORKS 28

FIGURE 3.1: THE TOP FIVE SECURITY DEALS OF 2009 . . . . . . . . 29
FIGURE 3.2: THE TOP FIVE NETWORKING DEALS OF 2009 . . . . . . . 33
FIGURE 3.3: SECURITY AND NETWORKING: LESS, MORE OR THE SAME? . . . 34
FIGURE 3.4: SECURITY IPO CANDIDATES . . . . . . . . . . . . 42
FIGURE 3.5: NETWORKING IPO CANDIDATES . . . . . . . . . . . 42
SECTION 4: STORAGE AND SYSTEMS 43

FIGURE 4.1: THE TOP FIVE STORAGE AND SYSTEMS DEALS OF 2009 . . . . 44
FIGURE 4.3: IPO CANDIDATES . . . . . . . . . . . . . . . . 49
THE 451 GROUP: M&A KNOWLEDGEBASE v

SECTION 5: MOBILITY 50
FIGURE 5.1: SIGNATURE MOBILITY DEALS OF 2009 . . . . . . . . . 50
FIGURE 5.3: MOBILE IPO CANDIDATES . . . . . . . . . . . . . 53
SECTION 6: IT SERVICES 54
FIGURE 6.1: IT SERVICES M&A . . . . . . . . . . . . . . . 54
FIGURE 6.2: LESS, MORE OR THE SAME . . . . . . . . . . . . . 58
APPENDIX 1: TECH BANKING IS BACK 61

FIGURE A1.1: CHANGE IN DOLLAR VALUE OF TECH MANDATES . . . . . 61
FIGURE A1.2: OVERALL TECH M&A ACTIVITY . . . . . . . . . . . 62
FIGURE A1.3: RECENT TECH VALUATIONS . . . . . . . . . . . . 63
FIGURE A1.4: EXPECTED HEADCOUNT CHANGE . . . . . . . . . . 64
FIGURE A1.5: PROJECTED YEAR-OVER-YEAR CHANGE
IN SELL-SIDE MANDATES . . . . . . . . . . . . . . . . 64
FIGURE A1.6: PROJECTED NUMBER OF TECH IPOS . . . . . . . . . 65
FIGURE A1.7: PROJECTED YEAR-OVER-YEAR CHANGE
IN DOLLAR VALUE OF PE MANDATES . . . . . . . . . . . . 66
APPENDIX 2: COMPANIES ARE BACK IN BUSINESS FOR M&A 67

FIGURE A2.1: PROJECTED CHANGE IN M&A ACTIVITY IN THE COMING YEAR . 67
FIGURE A2.2: QUARTER-BY-QUARTER M&A TOTALS, 2008-09 . . . . . . 68
FIGURE A2.3: PROJECTED CHANGE IN PRIVATE COMPANY
VALUATIONS IN THE COMING YEAR . . . . . . . . . . . . 69
FIGURE A2.4: EXPECTED CHANGE IN COMPETIVENESS
FROM OTHER MARKET PARTICIPANTS IN 2010 . . . . . . . . . . 70
vi TECH M&A OUTLOOK 2010

APPENDIX 3: THE VANISHING PUBLIC SOFTWARE COMPANY 72
FIGURE A3.1: ACQUISITIONS OF PUBLICLY TRADED
ENTERPRISE SOFTWARE COMPANIES, 2002-2009 . . . . . . . . . 72
FIGURE A3.2: AND THEN THERE WERE… 85: INDEPENDENT
PUBLIC ENTERPRISE SOFTWARE COMPANIES BY SHARE
OF TOTAL MARKET CAPITALIZATION . . . . . . . . . . . . 73
FIGURE A3.3: PUBLIC ENTERPRISE SOFTWARE ACQUISITIONS . . . . . . 74
THE 451 GROUP: M&A KNOWLEDGEBASE vii

viii TECH M&A OUTLOOK 2010
SECTION 1
Introduction
Analyst: Brenon Daly
With the US economy mired for much of 2009 in the worst economic slowdown since
the Great Depression, nobody was in the mood to go shopping. Just as consumers
put off purchases of items last year that they once added to their cart without much
thought, tech buyers passed on deals that they once would have snapped up, even at
much higher prices. As a result, spending on M&A in 2009 came in at just one-third of
the level that it hit in the years when tech acquirers were spending freely.
Unlike a few years ago, when we regularly registered quarterly deal flow worth more
than $100bn, 2009 saw a return to tallying deal spending in the tens of billions of
dollars each quarter. For the full year, we recorded 3,010 transactions worth just
$152bn. That equals just half the level of spending of even 2008, the year that saw the
beginning of the sub-mortgage debacle that erased trillions of dollars in shareholder
value from US equity markets and toppled once-venerable Wall Street institutions.
FIGURE 1.1: OVERALL TECH M&A

$500 5,000
$457
$432
$400 4,000
$373 4,029
3,640
Total Volume
$301
Total Value ($B)
$300 3,000
3,040 3,014 3,010
$226
$200 2,000
2,081
1,921 $152
1,508
$100 1,000
$83
$62
$0 0
2002 2003 2004 2005 2006 2007 2008 2009
Source: The 451 M&A KnowledgeBase
This financial downdraft in 2009 came after a decidedly buoyant period in both the
equity markets and M&A environments. (The two are closely correlated, after all.)
For instance, in 2006, spending hit $457bn, boosted largely by telecom deals and
several mega-buyouts. The big spending continued into 2007, with $432bn in aggre-
gate deal flow. Another way to compare the M&A activity in the boom years to what
we’re seeing now is that the acquirers would spend, on average, the same amount each
quarter as what we saw, collectively, in the first three quarters of 2009.
THE 451 GROUP: M&A KNOWLEDGEBASE 1

1.1 THE NEW NORMAL
All of this has led us to characterize tech M&A in terms of a ‘new normal,’ to borrow
a term that has been applied to a wide range of the tech economy, from IT spending
projections to VC investment activity to leverage ratios in buyouts. What this essen-
tially means is that M&A spending isn’t as low as it has been, but it’s nowhere near as
high as it once was, either. Since the crisis erupted in the late summer of 2008, spending
has basically ranged from $30-50bn for each quarter. (The one notable exception was
the first quarter of 2009. Aggregate spending during the first three months of last year,
which saw the Nasdaq sink to its lowest level since early 2003, hit just $10bn.)
FIGURE 1.2: RECENT QUARTERLY TECH M&A ACTIVITY

$500 1,000
$173
$400 800
814
768
753
Total Volume
719 733 724
Total Value ($B)
$300 657 600
$200 400
$55
$48
$100 $38 $36 200
$32
$10
$0 0
Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008 2008 2008 2009 2009 2009 2009
One of the key characteristics of this new normal in tech M&A is that there are fewer
deals, and those that do get done tend to be smaller. Consider this fact: in 2009, we
recorded just 33 transactions valued at $1bn or more. While that matches the level from
2008, it’s less than half the level of the ‘old normal’ years. From 2005-2007, we saw
more than 70 10-digit deals in each year.
2 TECH M&A OUTLOOK 2010

FIGURE 1.3: 10-DIGIT TRANSACTIONS
80
79
70 74
70
Number of deals worth $1bn+
60
50
40
30 33 33
28
20
14
10 12
0
2002 2003 2004 2005 2006 2007 2008 2009
Along with the reluctance to take on big-ticket purchases, tech buyers – even the giants,
with billions of dollars in cash on hand and shares that seem to get more valuable every
day – are inking tiny deals for bits of companies. Microsoft, IBM and Oracle are among
the firms that have inked transactions in the past worth more than $1bn that did at least
three asset purchases in 2009.
These deals, which generally involved picking up intellectual property but not employees,
were viewed as easier additions to make at a time when most businesses were trimming
payrolls. (Microsoft, for instance, undertook the first round of layoffs in the company’s
history in 2009.) For the most part, these assets were picked up from venture portfolios,
with the sale returning pennies for every dollar in funding. The reason for the VC cleanout
was that funding for all but the most-promising startups dried up.

FIGURE 1.4: SCRAP SALES
$1,000 985 35%
33%
$800 30%
% of overall deals
Number of asset deals
599
$600 560 555 25%
530
$400 20%
20%
18%
$200 15%
15%
14%
$0 10%
2005 2006 2007 2008 2009
In addition to the wind-down sales of startups, the other significant contributor to the
near-record level of asset transactions in 2009 came from companies themselves in the
form of divestitures. During last year’s unforgiving recession, vendors found that unpro-
ductive business units – both those built and those bought – that had been carried along
by an overall buoyant market for several years suddenly turned into cash burners that
couldn’t be maintained.
Last year saw major tech firms – including Compuware, Verisign, Intuit and others – all
shed chunks of their business. And the rate of divestitures is expected to remain high,
according to The 451 Group’s annual Corporate Development Outlook Survey in December.
Half of the respondents said the pace of divestitures in 2010 would be about the same as
in 2009. Of those who did anticipate a change in activity, the number that projected an
increase in divestitures was twice as high as the number that projected a decrease.

FIGURE 1.5: HOW DO YOU EXPECT YOUR OWN COMPANY’S DIVESTITURE
ACTIVITY TO CHANGE OVER THE NEXT 12 MONTHS?
11%
INCREASE
13%
64%
NO CHANGE
57%
2009
25%
DECREASE 2008
30%
0% 20% 40% 60% 80% 100%

Percent of Respondents
Source: The 451 Corporate Development Outlook Survey
Taken together, the surge of divestitures and wind-down sales meant that in 2009, one out
of every three deals involved an asset purchase. That’s twice the level of scrap sales of any
time in the previous half-decade, which was a fairly healthy time for tech M&A. In fact,
the only period that comes close to matching the current rate of divestitures is back in the
early 2000s, when the tech industry was emerging from its self-inflicted recession.
1.2 CASH FOR CLUNKERS

Even though the tech industry wasn’t hit nearly as hard as some of the other sectors of
the economy during the credit crisis, tech firms nonetheless got dragged down in 2009.
In some cases, the recession knocked profitable businesses into the red. Executives joked
throughout the first part of the year that ‘flat is the new growth’ when talking about the
outlook for their businesses. Startups that had been living round to round found their VC
lifelines pulled away and were sold for scraps. Well-established tech companies – most of
which had survived the bursting of the Internet bubble earlier this decade – nonetheless
found themselves ground down by the recession. More than a few of these struggling old-
line players took any offer that came their way.
All of those factors had a predictably strong influence on the prices that companies
sold for in 2009. Essentially, the median valuation for deals throughout the year sank to
slightly more than 1x sales. That’s a drop of a little more than one-third the median valu-
ation of the previous three years. Obviously, there are a number of factors that help to
explain the paltry M&A multiples in 2009, not the least of which is the fact that, in many
cases, the firms that sold last year did so largely because they had run out of cash and had
no other option.

FIGURE 1.6: TECH VALUATIONS
2.0
1.8
Median price-to-sales multiple 1.7 1.7 1.7
1.5
1.2
1.0
0.5
0
2005 2006 2007 2008 2009
We have already described how the cash crunch among VC-backed startups led to
distressed sales that put pressure on overall M&A valuations. But we should add that a
similar scenario played out in early 2009 among the startups’ big brothers, the public
companies. In these cases, high-profile tech bankruptcies (Nortel Networks, Bearing-
Point, Spansion and SGI, among others) also threw more scrap sales onto an already
large heap. Consider the plight of Nortel, a vendor that once commanded a quarter-tril-
lion-dollar market capitalization that has been carved apart since declaring Chapter 11
bankruptcy in January 2009. Over the past year, the courts supervising Nortel’s bank-
ruptcy approved the sales of a half-dozen businesses at the firm. For the most part, the
divestitures have valued Nortel’s units at 0.5-1x sales.
Meanwhile, other public players that had limped along for years but found new levels
of suffering during the depths of the recession in early 2009 found themselves put out
of their misery in what we took to calling ‘mercy M&A.’ (Another wag joked that the
deals were part of an unofficial ‘cash for clunkers’ program on the Nasdaq.) Whatever
we call the trend, an unprecedentedly large number of underperforming companies were
erased from the public market in 2009. Sun Microsystems, Borland, Entrust, Silicon
Storage Technology, InFocus, SumTotal Systems and many other firms all announced
sales with valuations of 1x trailing revenue or lower. That’s just half the median valua-
tion garnered in the sales of US public companies in both 2007 and 2006.

FIGURE 1.7: US PUBLIC COMPANY M&A ACTIVITY
$100
$100 2.5
$88 $90
$80 2.0
Median Price-To-Sales Multiple

2.0 2.0
Median Deal Size ($M)
1.9
$60 1.5
$43
$40
1.2
$40 1.0
1.0
$20 0.5
$0 0
2005 2006 2007 2008 2009
Of course, even in a year of lowball deals, some targets garnered premium valuations.
However, we would note that those transactions generally featured unusual situations
that not many other companies could realistically hope to reproduce as a way to boost
their own price. Take the case of Data Domain. Despite the recession, the data de-duplica-
tion vendor was growing at a phenomenal clip. In the first quarter of 2009, Data Domain
boosted revenue by 50% and gave a conservative projection that overall sales would
climb 36% for the year. That bullish outlook came at a time when most tech vendors
were looking to grow sales at a mid-single-digit percentage rate, if they anticipated any
increase at all during the year.
Add to Data Domain’s fast growth the fact that two deep-pocketed public suitors both
wanted to acquire it, and it’s no wonder that the company fetched an exceptional price.
In fact, Data Domain’s sale to EMC for 7.4x trailing sales last July stood as the highest
price-to-sales multiple paid for a US-listed public company since March 2008. Other rich
exits include Omniture’s lightening-quick $1.8bn sale to Adobe at 5.2x trailing sales and
SpringSource’s $420m sale to VMware. SpringSource, which raised just $25m in venture
backing, sold for 14x trailing sales, according to our estimates.
1.3 A REBOUND IN THE BACK HALF

It’s noteworthy that all of those high-multiple deals took place in the second half of
2009, when stability and even a bit of optimism broke through the otherwise fairly bleak
financial environment. (For what it’s worth, they also occurred after the US economy
officially started growing again after a year and a half of decline.) Overall, M&A

spending in the back half of the year came in 50% higher than the combined spending
in the first two quarters. That has been driven by a number of large transactions
announced since last summer that probably would have been inconceivable even a few
months earlier. Consider this selection of high-profile deals announced since the start
of the third quarter:
• Xerox emerged as the unlikely buyer for Affiliated Computer Services, a transfor-
mative acquisition for the 103-year-old company and the largest IT services deal
in more than a year.
• Dell’s purchase of Perot Systems is the largest transaction by the hardware vendor,
totaling more than it has spent on M&A in its entire history.
• Cisco Systems announced a pair of $3bn acquisitions in October, including one

that required that it raise its offer. The topping bid was a rarity for the acquisitive
networking giant.
• Adobe and CA Inc both announced in September their largest buys in four-and-a-
half years and three-and-a-half years, respectively.
• IBM acquired analytics firm SPSS in July, Big Blue’s first transaction worth more
than $1bn since November 2007.
• Amazon and VMware both announced the largest purchases in their respective
histories.
• Hewlett-Packard reached for 3Com in a move designed to bulk up in its fight

against Cisco. The $3.1bn acquisition was HP’s largest in 18 months.
• A buyout shop led the $2bn carve-out of Skype in September, the single-largest
PE deal since May 2008.
• In a consolidation deal, Equinix agreed to pay $689m (80% in equity) for rival
colocation player Switch & Data Facilities Company. It stands as the largest
purchase in more than two years by Equinix.
This dealmaking isn’t quite the ‘big and bold’ purchases that we noted in our 2007
report on M&A. (In that year, Microsoft, SAP, IBM and Nokia, among others, all
announced the largest deals in their respective histories. The price for each of those
high-water transactions topped $5bn for each acquirer.) Nonetheless, the willingness
of major corporate buyers to spend (relatively) large amounts of money has helped the
M&A market rebound as 2009 headed to a close.

1.4 VALUATION INFLATION
The fact that a few marquee transactions in the second half of 2009 garnered premium
multiples has helped to boost valuations across the broader market. We recently calcu-
lated the median valuation in fourth-quarter transactions at 1.4x trailing sales, the
highest multiple since the credit crisis erupted. That’s a not-insignificant increase when
compared to where valuations were earlier last year. Put into real-world terms, a startup
that was running at $10m in revenue that sold for $9m in early 2009 was worth $14m
closer to the end of the year.
FIGURE 1.8: TECH VALUATIONS DURING THE RECESSION

2.0
1.7
1.6
1.5 1.4
1.3
Median Valuation
1.2 1.2
1.0
0.9
0.5
0
Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008 2008 2008 2009 2009 2009 2009
And valuations are expected to continue to get richer, at least according to the respon-
dents to a pair of surveys we sent out in December. In one survey, nearly two-thirds of
senior investment bankers told us valuations of targets are ‘somewhat likely’ to increase,
with another 23% saying an increase is ‘very likely.’
However, the bankers we queried didn’t foresee the rising prices getting in the way of
closing deals. The gap between the price offered by buyers and what the targets thought
they were worth was often unbridgeable in the early part of last year, a key reason for
the sluggish rate of M&A in 2009. That doesn’t appear likely to block deals in 2010. In
our December survey, eight out of 10 investment bankers told us that the ‘valuation gap’
would have little or no impact on dealmaking in the coming year.
That outlook on valuation appears to have been confirmed by the results from our survey
of corporate development executives, who serve as the main buyers of startups. Nearly
six out of 10 respondents told us they see valuations for targets increasing in the coming

year. Granted, the increase is almost certainly coming off a lower base valuation for many
startups, but it’s a still a notable uptick even from the summer. In fact, the number of
corporate development executives who said they expected to pay more for startups in our
survey at the end of 2009 is twice as high as the number in our mid-2009 survey.
The current outlook is an even more stunning turnaround from the expectations of corpo-
rate development executives just one year ago. In our December 2008 survey, nine out
of 10 respondents said they expected the valuations of private technology companies to
sink, with the responses equally divided between ‘declining substantially’ and ‘declining
somewhat.’ That sentiment goes a long way toward explaining why terms were difficult
to hammer out in the early part of 2009. If we surveyed the ‘supply side’ in late 2008, we
highly doubt that VCs who backed the startups or the entrepreneurs who ran them would
have agreed that in nine out of 10 cases, their companies would be worth less in the
coming 12 months.
Interestingly, corporate development executives told us that even though they expect to
pay more for startups in 2010, they plan to do more shopping. More than two-thirds said
they expected to accelerate the pace of M&A at their company, compared to just 5% who
said the rate would decline. In the December 2008 survey, just four out of 10 said the pace
would pick up in the coming year, with 20% predicting a slowdown of acquisition activity.
We would attribute the anticipated increase in activity in 2010 compared to 2009 more
to a sense of stability returning to the overall market than to a narrowing of the bid/ask
spread. In our just-completed survey, eight out of 10 corporate development executives
said bridging the valuation gap remains difficult.
1.5 BUYOUTS BUILDING UP?

While strategic acquirers have returned to the market (at least in some small part), the
same can’t exactly be said for their private equity (PE) brethren. Obviously, the continuing
tightness in the credit market goes a long way toward explaining the slower pace of
buyouts. Although we would hasten to add that buyout shops, collectively, are sitting on
hundreds of billions of dollars in committed capital, so the option is there for writing full
equity checks for purchases. But for the most part, returns on straight equity deals are
falling a bit short of the return threshold that most PE shops set for themselves. In any
case, it’s a lot harder to hit those performance marks now compared to two or three years
ago, when credit was flowing freely and cheaply.
This has meant that PE activity sank to a level that it hasn’t seen in a half-decade. In
2009, financial acquirers spent just $22bn in 300 tech transactions. The level lags even
the rate in 2008, when the credit crisis erupted and cash flow at all businesses started to
dry up. More dramatically, aggregate PE spending for 2009 is just one-quarter the level
that it was in either 2006 or 2007. To get a sense of this spectacular decline, consider this:
a single leveraged buyout (LBO) in 2007 (Kohlberg Kravis Roberts’ $29bn buyout of First
Data) exceeded the collective spending by PE shops in each of the past two years.

FIGURE 1.9: PRIVATE EQUITY M&A
YEAR TOTAL PE DEALS TOTAL PE SPENDING PE VALUE, AS % OF

TOTAL M&A
2002 106 $2bn 2%
2003 78 $5bn 8%
2004 139 $23bn 10%
2005 258 $56bn 15%
2006 324 $98bn 21%
2007 299 $118bn 27%
2008 246 $26bn 9%
2009 300 $22bn 15%
It’s not just that PE activity is down simply because overall acquisition spending is down.
The buyout shops’ slice of the overall tech M&A market has actually shrunk. In 2009, PE
deals accounted for 15% of all spending, compared to 27% and 21% in 2007 and 2006,
respectively. Keep in mind that during the LBO boom era, buyout firms were often able to
outbid strategic acquirers, which should have had advantages in cost savings over finan-
cial buyers. But in those days, leverage trumped synergy.
Still, there is a sense that the PE freeze is thawing. The PE-led $2bn carve-out of Skype
in September stands as the largest buyout deal since the credit crisis began. And the
LBO activity should continue, according to the results of our surveys. The percentage
of corporate development officers who told us they anticipate ‘more competition’ from
buyout firms in the coming year was 10 times higher than the percentage that reported
the same thing in our December 2008 survey.
And when we asked investment bankers to look at their pipelines and project LBO activity
(on a dollar basis) for the coming year, the difference between 2008 and 2009 was
striking. Last year, basically half of the respondents said they expected their business with
PE firms to fall by at least 10%. It’s a complete switch this year, with half of the bankers
saying their PE activity will increase at least 10%.
1.6 WHAT TO WATCH FOR IN 2010

Despite the unprecedented economic upheaval in 2009 and the slowing effect that had on
M&A, there were a number of trends that emerged last year that we expect to carry over
and spur deals in 2010:
Continued blurring of hardware and software offerings – Perhaps the highest-profile

example of this development is Oracle’s pending $7.4bn acquisition of Sun, which
recently received approval (finally) from the European Commission. One key consider-
ation of these deals, however, is that hardware and software vendors typically have much
different financial profiles. The Oracle-Sun transaction offers a stark illustration of that.

Largely through consolidation and ruthless cost-cutting at the acquired companies, Oracle
has been able to push its operating margins into the high-30% range. On the other side, Sun
has posted negative operating income for more than a year. While these types of transactions
don’t typically require complex technological integration, they can be challenging when it
comes to explaining them to Wall Street.
Shifting technology allegiances – Vendors that once offered small slices of datacenter tech-
nology are now looking to offer full suites of products. This trend has brought companies into
competition in areas where they once cooperated. For instance, HP’s $3.1bn reach for 3Com in
November would have been almost inconceivable if Cisco hadn’t antagonized its longtime ally
HP by introducing its own blade server a half-year earlier.
One broader knock-on effect of this shifting battlefront is that potential pairings that were
once deemed off-limits because of possibly upsetting long-standing tacit agreements are
now being entertained. This has sparked M&A speculation, for instance, around F5 Networks,
Riverbed Technology and other networking vendors that would immediately bring the acquirer
into direct competition with Cisco, among others. Such concerns are no longer deal breakers.
Equity as currency – At a time when cash is tight, companies are understandably looking
to preserve that precious resource and instead use shares to cover at least some of their
purchases. We would point to deals such as Xerox’s $6.4bn purchase of Affiliated Computer
Services and JDA Software Group’s $556m consolidation of i2 Technologies as representative
of this trend.
However, we also noticed another type of equity deal in 2009. In these transactions, promising
startups agreed to trade their privately held paper for the acquirer’s already-printed shares,
rather than look ahead to a possible offering of their own. For instance, Zappos, AdMob
and Pure Digital Technologies, among others, all took their paydays in the paper of buyers
(Amazon, Google and Cisco, respectively).
Premium sales of startups – As we have noted, 2009 was largely a time of cleanout for VCs.
While that culling of their portfolios was necessary – and in some ways, overdue – it didn’t do
much to enhance returns. This will be a key concern in the coming year, since we anticipate
that many venture firms will look to raise a new fund in 2010. (Most firms had the good sense
not to try fundraising in 2009, particularly in the early part of the year when many endow-
ments were down 30-40%.)
If indeed some venture firms do look to fundraise in 2010 after skipping last year, we suspect
that some of the limited partners in these funds will want to see a few solid gains in the
existing funds before committing to a new one. So the pressure will be on VCs to realize some
solid exits. We’ve seen a few of these already, including all of the trade sales mentioned above
(Zappos, AdMob and Pure Digital). In addition, we would highlight SpringSource’s sale to
VMware, Playfish’s sale to Electronic Arts and LifeSize Communications’ sale to Logitech as
VC-backed deals that generated returns that would get limited partners interested.

Dual-track deals – With the IPO market beginning to stir, a number of companies are
getting ready to file their paperwork to go public. However, as we saw in the case of
Gomez in October, not all of the candidates on file will actually go out. Gomez kept its
S-1 alive throughout the recession after initially putting in its IPO paperwork in May
2008, but then sold to Compuware in October.
As the Gomez exit indicates, however, there’s a ‘new normal’ in dual-track processes,
too. Gomez sold for an above-market valuation of 5.5x trailing sales. While that’s a
handsome – and relatively risk-free – exit in today’s market, it’s a far cry from what
companies used to get by pitting a corporate buyer against the public market. Danger
Inc commanded 8.7x trailing sales in its sale to Microsoft two years ago and Equal-
Logic got more than twice Gomez’s valuation (12x trailing sales) when the storage
vendor agreed to scrap its planned offering and take Dell’s bid in November 2007.
Transatlantic deals – From the perspective of the rest of the world, the dollar has been
on sale for some time now. However, that didn’t necessarily translate into a shop-
ping spree by European-based tech players looking to pick up US companies, which,
from the buyers’ perspective, are dollar-denominated assets. There certainly were a few
notable transactions, including the reach across the Atlantic by Britain’s Autonomy
Corp for Interwoven and Micro Focus, also of the UK, picking up Borland.
But for the most part, the economic recovery in Europe has lagged behind the recovery
in the US, making European acquirers reluctant to ink big deals. As Europe begins to
regain its economic health, we could well imagine that companies based there will look
to take advantage of currency arbitrage and pick up US firms for less than they would
otherwise pay.

SECTION 2
Enterprise Software
Analysts: Nick Patience, Matt Aslett, Dennis Callaghan, Rachel Chalmers, William Fellows,
China Martens, Kathleen Reidy, Krishna Roy, Katey Wood
Most were glad to see the end of 2009, certainly those in the investment banking industry
and their counterparts in corporate development at IT vendors. The value of deals in soft-
ware was sharply down compared to 2008’s total, which had plummeted from the year
before that (but then, 2007 was an unusual year). The largest software acquisition of
2009 was just $1.8bn (Adobe-Omniture), compared to Oracle’s $8.5bn purchase of BEA
Systems in 2008. The disappearance of big deals is one of the main reasons why M&A
spending sank dramatically in 2009, both in software and the broader IT market.
But overall, it’s clear from the data that the average deal size was down sharply, which
more than anything caused the overall software deal value to sink to its lowest level in
five years. However, there’s still plenty of cash around, with large software vendors collec-
tively holding tens of billions of dollars in their treasuries. As the economy crawls out of
the recession, we think there will be some major consolidation coming our way as buyers
opt to move before the valuations of the targets they are looking at get too expensive.
FIGURE 2.1: SOFTWARE M&A, 2002-2009

$80 1,200
$69.98
1,023
$60 1,000
Total Volume
Total Value ($B)
848 $38.89 765

$40 758 800
$29.34
729 $36.44
$23.71
$20 $17.53 $14.77 600
$14.17
568 555
460
$0 400
2002 2003 2004 2005 2006 2007 2008 2009

FIGURE 2.2: SIGNATURE SOFTWARE DEALS OF 2009
ACQUIRER TARGET VALUE COMMENTS

ADOBE Omniture $1.8bn Probably the most surprising software transaction
was the content creation tools vendor's purchase
of the aggressively acquisitive publicly traded
Web analytics company. It highlighted Adobe's
desire to get into the SaaS game and close the
loop between content creation and analytics.
ALERI Coral8 Not Aleri acquired fellow complex-event-processing
disclosed (CEP) firm Coral8 to expand its addressable
market.
AUTONOMY Interwoven $775m Picking up Interwoven was another step
CORP in Autonomy's plan to build a dominant
information governance and e-discovery portfolio
via acquisition.
CA INC Cassatt Not This was a fire sale of the once-promising
disclosed application fabric vendor.
CISCO Tidal $105m Is this the first of many moves that Cisco will
Software make to manage the datacenter?
COMPUWARE Gomez $295m With this deal, Compuware extends monitoring
beyond the back-end infrastructure.
CONSONA SupportSoft $20m The apps player that has grown through
(enterprise acquisition returned a third time to the publicly
business) traded CRM arena to buy the enterprise assets of
the support automation software player.
CSG OPENLINE BlueRoads Not This is not the fate that we had anticipated for
disclosed the feisty SaaS partner opportunity management
startup as it was swallowed by the channel
partner programs specialist.
EMC Kazeon Not Another information-governance-related deal,
disclosed this could be the first in a series of acquisitions
by larger infrastructure vendors looking to better
manage and discover distributed data.
EMC Configuresoft $86.8m Change and configuration management are
critical to virtual infrastructure.
EMC FastScale Not EMC obtains highly optimized application
Technology disclosed deployment technology.
IBM SPSS $1.17bn This deal launched Big Blue into the predictive
analytics fray and made it a more viable
competitor to SAS Institute.

FIGURE 2.2: SIGNATURE SOFTWARE DEALS OF 2009 (CONTINUED)

INFOR SoftBrands $76.1m Like Consona, Infor is another keen serial
acquirer that returned to the M&A arena in 2009
to pick up more vertical ERP expertise in the
manufacturing and hospitality sectors.
INFORMATICA Agent Logic Not With this buy, Informatica expanded its data
disclosed integration portfolio into the emerging CEP space.
MICROSOFT Sentillion Not Microsoft picks up healthcare technology that
disclosed includes vThere, a client virtualization platform.
ORACLE GoldenGate Not This transaction gives Oracle a real-time
Software disclosed integration story and bolsters its all-important
heterogeneous data management credentials.
ORACLE Sun $7.4bn This deal was held up by the European
Microsystems Commission’s investigation into competition in
the database market.
PERVASIVE ChanneLinx $2.6m This buy rounds out Pervasive's portfolio with an
SOFTWARE (assets) offering for last-mile integration.
RIGHTNOW HiveLive $6m Putting community software in the context of
TECHNOLOGIES CRM makes a lot of sense, and this may be the
first of a wave of similar deals.
SAP Coghead Not This was just a scrap sale.
disclosed
SOFTWARE AG IDS Scheer $679m Software AG makes another move to beat the app
server vendors on BPM.
SUN Q-Layer $60m* Q-Layer will be incorporated into Sun's Open
MICROSYSTEMS Cloud.
TALEND Amalto Not Talend acquires master data management (MDM)
Technologies disclosed assets to pioneer commercial open source MDM.
(assets)
TIBCO DataSynapse $28m TIBCO eyes PaaS with this deal for the grid
SOFTWARE pioneer.
VMWARE SpringSource $420m This move demonstrates the importance to
VMware, as a platform vendor, of a loyal
developer community.
XACTLY Centive Not The SaaS sales performance management (SPM)
disclosed player made a key move with its first-ever
purchase, acquiring its primary rival in the SMB
arena.
Source: The 451 M&A KnowledgeBase *451 Group estimate

Applications
• RightNow-HiveLive – The SaaS CRM player’s purchase of the small community
platform startup was all about gaining some new technology to build a third line of
business in addition to its e-service and contact-center offerings. Many of Right-
Now’s users are looking for ways to ensure that they can more actively partic-
ipate in customers’ online conversations about their products and those of their
rivals. RightNow sees HiveLive’s community platform as a potential differenti-
ator from its CRM rivals in the same way as afforded by its 2005 purchase of voice
automator Convergent Voice. Acquiring HiveLive reflects a general trend among
CRM vendors to both go further into customer service automation and to add more
collaboration features into their offerings. For instance, salesforce.com has made
its 2008 purchase of InStranet the basis of its Service Cloud and recently unveiled
a new push around enterprise collaboration with Salesforce Chatter.
• Xactly-Centive – We had anticipated further consolidation in the SMB SPM

applications arena given both the number of vendors in the space and the amount
of time many still spend evangelizing rather than selling their software. Xactly
and rival Centive had been in talks for some time about combining their SaaS
pure-play forces, not least to enable them to concentrate on one particular rival,
Callidus Software, which has steadily added on-demand and midmarket offerings
to its established on-premises, enterprise-focused SPM apps suites. Xactly has so
far retained a fair number of Centive customers and employees and has used some
of the acquired firm’s UI thinking for its latest product, Force.com-based Incent
Express, which may have appeal for smaller Centive Compel users. We would also
contrast the acquisition with another purchase in the SPM arena in 2009 that saw
SaaS human capital management player Salary.com buy Makana Solutions, an
SMB-focused startup that attracted customers but apparently not a needed second
institutional investor.
Information Management
• Adobe-Omniture – This deal was interesting partly because it was so unexpected.
Omniture had been an active acquirer and we certainly expected the vendor to keep
buying as it built out its online marketing suite. Instead, it went to Adobe, which
still mostly does high-volume sales of design and development tools. The tie Adobe
drew between content creation and content analytics as the rationale for the deal
makes some sense, but it seems that Adobe still lacks some of the content manage-
ment components to really connect the two. This makes it seem at least possible
that Adobe will buy further in this sector and in particular, might consider SaaS
options. Web content management (WCM) and online marketing have been fairly
slow in coming together (despite our predictions), and WCM’s movement to the
cloud has also taken longer than expected. Could Adobe be the vendor to change
all that?

• Aleri-Coral8 – We had expected consolidation in the CEP space, although in all
honesty we expected one of the larger data management firms to snap up one of
the CEP specialists, rather than a merger of two of those specialists. The assets
and customer bases of Aleri and Coral8 are highly complementary and, although
somewhat surprising, the deal makes a lot of sense in terms of expanding the
addressable market for the new integrated Aleri. Our suspicions about interest from
larger data management firms were also somewhat vindicated as Sybase acquired
a license for the Coral8 CEP engine prior to the merger. CEP still seems like a
component of a larger data management strategy to us and the likes of Aleri and
StreamBase Systems remain acquisition targets in our eyes.
• Autonomy-Interwoven – Autonomy Corp’s pickup of longtime WCM leader

Interwoven brought new life to the WCM market, particularly as Vignette was also
taken out by Open Text in 2009. Many remaining independents (both commer-
cial and open source) are looking to gain an advantage in a much-changed market.
Acquisitions often shake up sectors but it was pronounced in this case because
Autonomy’s main driver in the deal was information governance and questions
remain as to its commitment to WCM. Autonomy is putting Interwoven’s legal
document management and e-discovery offerings into a portfolio with previously
acquired Zantaz and Meridio archiving and records management software. Informa-
tion governance is likely to drive more M&A activity generally in 2010 and many
will be watching Autonomy specifically to see how effectively it brings together its
acquired assets.
• IBM-SPSS – IBM bought its way into predictive analytics by acquiring a veteran
of the sector and longtime rival to SAS Institute and in so doing became a more
potent threat to SAS, the acknowledged market leader in predictive analysis. The
SPSS deal also enabled Big Blue to become a purveyor of text analysis applications,
rather than tools, making it a more bona fide player in the text analytics market.
Buying an installed base to upsell and cross-sell existing offerings, particularly in
the complementary arenas of BI and consulting services, was also a key aspect of
this deal.
• Oracle-GoldenGate Software – Oracle’s long-rumored move to snag Golden-

Gate Software increased its data management credentials, particularly against IBM,
which acquired GoldenGate rival DataMirror for $162m in July 2007, while also
making it more competitive against others in the data management fray, including
Informatica. With GoldenGate in the fold, Oracle’s Fusion middleware portfolio
gained a boost in the area of real-time data integration, high availability and equally
importantly heterogeneity, enabling it to better handle data housed in non-Oracle
databases and applications. The acquired GoldenGate wares have also become the
strategic data replication offering for Oracle; disaster recovery for a diverse array of
environments beyond Oracle’s own are the other capabilities the acquisition brought
to the table, aside from a new infusion of customers.

• Oracle-Sun – This deal appeared tracking to close in early 2010, following a
lengthy investigation by the European Commission’s competition commission into
the potential impact on competition in the database market. Although the EC finally
approved the deal in mid-January, it was particularly concerned about Oracle’s
impending ownership of open source database MySQL, and the potential for Oracle
to disrupt the development of the open source database as well as the commer-
cial licensing arrangements that enable it to be used with other proprietary data
management technologies. Oracle has committed to keeping MySQL open source
and investing in its ongoing development, but a recent 451 Group survey indi-
cated that open source users have concerns about the deal. The impact of Oracle
acquiring Sun Microsystems will be felt well beyond the database market since
Oracle will become the owner of the Java language and associated middleware
technologies; the OpenOffice.org productivity software; and Sun’s server, processor
and storage assets. Oracle has vowed to use the portfolio of products to compete
directly with IBM in delivering full systems and in 2009 delivered a preview with
the launch of the Sun Oracle Database Machine and Exadata Storage Server.
Infrastructure Management
• Compuware-Gomez – After selling its testing business and planning to spin off its
B2B marketplace technology, Compuware has recommitted to application perfor-
mance management. Its existing technology manages the back-end infrastructure
(servers, databases, etc.), and Gomez will give it more tools to manage users’ front-
end experiences of application performance. This notion of real-user monitoring
(RUM) was huge in 2009 and figures to grow as cloud computing takes hold.
• Sun-Q-Layer – Sun got its Open Cloud IaaS offering to market last spring, less
than a year after forming the business unit to develop it. It acquired Q-Layer to
enable the creation of virtual datacenters, allowing users to group and manage
multiple machine images and storage, create sub-networks, isolate resources and
support different teams where required – all within a single logical resource.
Q-Layer is as much a private cloud component as a public cloud application,
though where Open Cloud will go now under Oracle remains to be seen. Oracle
certainly didn’t buy Sun for Open Cloud, but it could become an interesting asset
for it despite CEO Larry Ellison’s lack of appetite for all things cloudy.
• VMware-SpringSource – Faced by stagnating revenue for virtualization infra-

structure, VMware made a strategic move to expand its footprint, acquiring
SpringSource at a significant multiple with an eye toward becoming a PaaS
vendor. VMware will be able to provide not just the virtualization infrastructure
for building private clouds but also the application development frameworks to
build applications that run in those cloud environments. Users who have started
IaaS projects are invariably drawn toward PaaS as a possible path of progression as
an internal and external function. Microsoft, Oracle and VMware are shaping up
for a battle over what for the sake of argument we’ll call ‘internal PaaS’ – control

of the virtualization and management layers, application development frameworks
and even the data and storage tiers. Red Hat is a dark horse in this race, while IBM
should be but isn’t. VMware owns virtualization in the enterprise and its second
act is cloud, with SpringSource an integral piece. SpringSource brings an applica-
tion development framework to VMware with Groovy, Grails and Java expertise. We
certainly don’t argue with VMware’s strategy here, though we think it will face some
challenges in bringing an open source development organization in-house.
FIGURE 2.3: LESS, MORE OR THE SAME?

VERDICT DEAL VOLUME DEAL VALUE
SUBSTANTIALLY MORE THAN IN 2009
SOMEWHAT MORE THAN IN 2009 X X
ABOUT THE SAME AS IN 2009
SOMEWHAT LESS THAN IN 2009
SUBSTANTIALLY LESS THAN IN 2009
Source: The 451 Group analysts
While the above table is an attempt to aggregate the opinions of more than a dozen soft-
ware analysts covering a broad swath of the software business (and thus smoothes the
edges somewhat), we should point out that in certain areas we expect the results to differ
considerably from the average. So, for example, in application software we expect deal
value and volume in 2010 to be substantially higher than in 2009.
2.1 MACRO-LEVEL DRIVERS

We expect a hunger for additional vertical expertise to be one of the prime drivers for
M&A by midmarket and enterprise apps players in 2010. We said this would happen
in 2009 and it did, as SAP made purchases in telecom billing and retail forecasting
(Highdeal and SAF Simulation, Analysis and Forecasting), while Oracle picked up
more health and life sciences know-how (Relsys and the intellectual property assets of
Conformia Software) and made a foray into communications (most of Sophoi). We also
saw Microsoft obtain additional manufacturing, professional service and retail capabili-
ties with technology purchases from four of its Dynamics AX ERP partners. For 2010, we
expect that SAP in particular will continue to make industry-specific purchases and we
predict that it will look to buy itself some health and life sciences capabilities.
While most vertical purchases will take place in the ERP arena, we are hearing more
from a variety of apps players about heightened user interest in industry specificity for
their CRM apps, so there may well be some buys in that sphere in 2010. We also antic-
ipate further purchases of apps firms both to gain vertical expertise and to get more
SaaSy by serial acquirers CDC Software, Consona and Infor Global Solutions, all
of which returned to the M&A arena in 2009. CDC, in particular, has already kicked off
what it plans to be a series of SaaS-focused purchases. Another key driver for deals will

be vendors looking to enter or move further into a complementary technology area. For
example, we believe that in 2010 we’ll see a number of apps players like Microsoft and
Oracle follow SAP’s lead in buying a green IT company. SAP acquired SaaS startup Clear
Standards in May 2009.
We anticipate a continuing penchant for asset sales in 2010, partly due to some compa-
nies failing but also because application vendors will want to limit themselves to tech-
nology purchases to avoid intruding too deeply into their partners’ niche areas. Cloud
computing will drive some deals that will largely be either about premium acquisitions
of proven companies or asset pickups of startups ahead of the market. We expect to see
these in areas such as PaaS, which will expand from application development to other
areas of management infrastructure.
In the datacenter sector, there is a blurring of the lines between what it means to be a
hardware, software and services company. (Who would have thought, for instance, that
Oracle would become a software and hardware company in 2009?) As such, vendors
now need a portfolio of blended offerings to meet needs, which is driving convergence
strategies. Various types of service providers are chasing the same opportunities as the
large software and hardware players, so who will buy whom and who will win? Service
providers, hosters and telcos are arguably in the strongest position since they own
commercial relationships that garner monthly recurring revenue and they can perhaps
most easily integrate additional high-margin services. We expect to see a lot of activity
here in 2010 and beyond.
Information management saw the three largest software deals in 2009, with Adobe’s
purchase of Omniture, IBM’s pickup of SPSS and Autonomy’s Interwoven buy. We doubt
that the subsector will be as active in 2010, but we do expect more deals. We’re fairly
certain that Autonomy will make another move. Data management will get cloud fever
beyond mere databases in the cloud, which could drive some deals in areas such as data
integration as companies move to embrace Amazon EC2 for complex data integration
scenarios. In addition, BI, performance management and any area where data manage-
ment is moving to a hosted model could be sectors that will see M&A activity.
2.2 MICRO-LEVEL DRIVERS
Application Software: Customer Relationship Management

CRM vendors continue to display a greater interest in building up the service automa-
tion side of their offerings as more companies are placing greater emphasis on customer
satisfaction and retention as well as cross-selling opportunities. We believe there are
further opportunities for consolidation in the service automation arena, with CRM players
Microsoft, Oracle and SAP all in the frame as potential acquirers of companies such as
InQuira, Kaidara Software, Numara Software and Parature. We also wonder about
Kana Software, now that it’s set to become a private entity under new owner Accel-

KKR, as well as still-public and struggling rival eGain Communications. We also would
expect to see some more M&A activity to further meld the worlds of customer service and
collaboration and community a la RightNow’s acquisition of HiveLive with SaaS players
like Awareness Inc, Lithium Technologies and Mzinga of interest to CRM vendors.
At the same time, the leading CRM players have yet to make M&A moves on the devel-
oping marketing automation (MA) space, but we anticipate that will come next, given the
resilience that sector has shown despite the recession. As they look to their bottom line,
companies are growing more eager for insight on which of their marketing campaigns are
generating leads and contributing to closing deals, and how to further automate many
functions within their marketing departments. Perhaps salesforce.com will lead the way
with a technology purchase in email marketing rather than an all-out company buy, given
that so many of its leading AppExchange partners are marketing automators like Eloqua,
Genius.com, Manticore Technology, Marketo, Pardot and Silverpop.
Information Management: Business Intelligence

BI vendors will also continue to eye non-tech-savvy folk as a target market and craft
requisite functionality with this audience in mind. However, the business user is not a new
target for most in the BI fray, many of which have been crafting requisite functionality
with this group of users in mind for several years now. It is also still a pretty new territory
– and therefore arguably a more lucrative opportunity – for data management players.
Midmarket BI firms will continue to expand into the enterprise as they seek to grow their
addressable market by developing products with new or deeper functionality. This move
is driven by a ‘land and expand’ strategy in which expansion in existing accounts is seen
as a rich vein to tap for further revenue growth. BI vendors are not alone; purveyors
of corporate performance management (CPM) to the midmarket are also adopting this
strategy, although not in as great a number as their BI counterparts.
Information Management: Content Management

Microsoft SharePoint 2010 is scheduled to debut in 2010 and its advances, particularly in
the areas of records management and governance, may well drive more M&A as enter-
prise content management (ECM) vendors look for differentiators. Open Text, Hewlett-
Packard, CA Inc and EMC are possible acquirers of additional governance or e-discovery
technologies that can handle distributed data and myriad data types. Information gover-
nance generally is likely to drive additional deals; Microsoft itself could be an acquirer
in the archiving realm since it lacks an archive technology that could be applied across
email, SharePoint and file system content. HP, Oracle and Iron Mountain are other
potential buyers that are interested in archiving as a governance technology.
With Interwoven and Vignette both gone to larger players, there isn’t much large-scale
ECM-related M&A left to occur. Unless, of course, SAP finally steps in for Open Text. The
two continue to tighten their relationship, making it seem that an acquisition is inev-
itable; however, SAP is obviously in no hurry. In the meantime, Open Text itself will

likely continue to buy in areas of governance, as noted, but also potentially to bolster
its vertical expertise and transactional capabilities. EMC, Oracle and Hyland Software
could also be shoppers in these areas, since Microsoft is likely to steer clear of areas like
document capture and presentment, for example.
On the WCM front, it’s hard to see M&A of any scale in 2010. There is no shortage of
newcomers and smaller players continue to grow in this sector, although none are large
enough to do deals of any size. There could be small-scale consolidation, however, partic-
ularly as WCM players continue to advance in online marketing and social software.
Information Management: Data Integration

Purveyors of data management software for data integration, data quality and MDM will
escalate efforts to attract business users in a bid to expand their presence beyond their
traditional purview in IT departments. Easier-to-use products with collaborative capabil-
ities and a business context will be served up with this aim in mind. Many data manage-
ment vendors’ third-party software development strategies are also being conceived with
increased business user adoption as a core goal.
Information Management: Data Management

Upon the completion of Oracle’s acquisition of Sun and MySQL, Oracle will have a new
database asset to target Web environments and the low end of the market – and we
expect it to use this to target Microsoft’s SQL Server in both. There are few natural alter-
natives to MySQL so we do not expect Microsoft (or IBM, for that matter) to make coun-
teracting acquisitions of its own in the core database space. The data-warehousing sector
might be a different matter. A number of players have sprung up to target the low end
of this market, which is ripe for expansion given the focus of incumbent players on the
traditional low-volume, high-value data-warehouse adopters. The likes of Infobright,
Calpont and Kickfire are building on MySQL to target the low end of the space and
could be considered potential acquisition targets for Oracle – if it decides to explore the
potential for MySQL-based data warehousing – or one of its rivals if they want to target
the MySQL user base to exploit concerns over the future of the open source database.
Information Management: Enterprise Search and Text Analysis

In enterprise search and text analysis, we expect search-based applications to continue
to rise in prominence as vendors move away from enterprise search messaging in a quest
for something with a clearer value proposition. In text analysis, we think voice of the
customer will be the catalyst for finally seeing mainstream adoption of text analysis and
one of the larger players here could well get snapped up by a major application vendor to
speed its time to market.
Information Management: E-discovery

We believe e-discovery will be an interesting M&A market in 2010. There’s still some
shakeout to happen among software purveyors, since too many are chasing the dwindling

number of unaddressed gaps in the market. Meanwhile, the service providers that once
dominated this space are under a lot of pricing pressure and some are clearly hurting.
Those for which e-discovery is only a minor part of what they do may choose to exit the
market and focus on their core business, so we expect some new independent compa-
nies to be spun off from service providers (if they’re not just shut down by their owners).
We feel the trend of moving e-discovery in-house will continue, but the need to perform
e-discovery in the cloud will blur the lines of what it means to be in-house. As in many
other areas, cloud will create confusion and opportunities.
Infrastructure Management: IT Performance Management

As cloud computing gains in adoption, the need to manage these new environments –
both public and private clouds – will grow in importance. Expect the Big Four to make
consolidating deals, particularly of vendors they’re losing to in private cloud manage-
ment, or of firms that fill gaps in public cloud management, which current Big Four tools
are neither suitable nor affordable for. Cloud infrastructure providers such as VMware and
Amazon may also buy management companies to upgrade their in-house offerings.
Infrastructure Management: Application Integration

IBM and Oracle are doing a good job of consolidating this space out of existence. Expect
to see the next tier of vendors – Software AG, TIBCO Software, Progress Software
and Red Hat-JBoss – continue to make differentiating moves to strengthening their posi-
tioning beyond the application server or explore new product directions. Data integration
startups, especially those tackling SaaS and cloud integration, provide plenty of targets.
Infrastructure Management: Application Development

We saw SpringSource, TIBCO and Intalio make moves in 2009 to become PaaS players in
2010. Existing PaaS vendors such as hosted Ruby players Engine Yard and Heroku could
become targets. MuleSoft’s new name and Tomcat offering have it begging for acquirer
attention.
Infrastructure Management: Desktop Virtualization

VMware’s PC-over-IP, Red Hat’s open source SPICE and the incorporation of the Calista
Technologies assets into Microsoft’s RDP will spark a revival of interest in graphics-
remoting protocols as rivals race to match Citrix’s HDX portfolios. The owners of desktop
connection brokers – Citrix, VMware, Quest Software and Symantec – will expand
these frameworks into full-fledged desktop-as-a-service offerings. Look for acquisitions
around user virtualization and application virtualization.
Infrastructure Management: Server Virtualization

EMC-Configuresoft points the way. Hypervisor and enterprise systems management

vendors, as well as those hoping to join their ranks, need to layer performance
management and datacenter automation on top of VM managers.
Infrastructure Management: Converged Fabric

Cisco’s Unified Computing System (UCS) has already brought it closer to longtime
partners EMC and VMware, at the expense of their partners HP and Dell. HP and
Dell in turn are leaning on partners to develop their offerings, as with the newly
invigorated relationship between Dell and Scalent Systems. Converged fabric
may drive giant acquisitions of networking and storage vendors as well as smaller
buyouts of I/O virtualization firms.
Infrastructure Management: Unified Computing

HP reacted more firmly than either IBM or Dell to Cisco’s move into the server
market with the UCS back in May. It countered Cisco’s move on two fronts: by
pushing hard on converged infrastructure packages of its own and with direct retal-
iation on Cisco’s home turf by building up its own networking business. (Of course,
some might claim that HP started the war by growing ProCurve in the first place.)
HP also bought 3Com to provide it with a go-faster route to converged infrastruc-
ture. It seems inevitable that IBM and Dell will follow suit.
If any of these companies were to acquire Juniper Networks or, more interest-
ingly, F5 Networks, the takeover premium, certainly in the latter case, would be
no more than a declaration of war on Cisco. Meanwhile, how long will it be before
Cisco finally picks up EMC? ACADIA and the VCE (VMware, Cisco, EMC) alliance is
another vignette in this intriguing picture. EMC would bring at least storage, virtu-
alization, document management and security – exactly what Cisco will require in a
battle with HP, IBM, etc.
Cloud Computing
Cloud suppliers will continue to invest in ecosystem companies, especially those
driving business into clouds. On-ramp companies such as Elastra have money from
Amazon. VMware’s vCloud could be the biggest driver of all. Cloud is VMware’s
second act and it’s seeking to capitalize on the trust and base of customers that it
has established in the enterprise and take this into a cloud play. VMware has made
an investment in Terremark and we expect it will make others to help ‘buy’ a future
for vCloud.
We may see commoditized cloud services (IaaS, PaaS) marketed and sold by sector
brand names such as tier one banks and insurers to smaller financial services shops
and hedge funds where additional sector expertise (market access/proximity, algo-
rithm processing, etc.) is needed. This will create new kinds of alliance opportunities.
The Big Four system software management companies are not full service yet in
terms of cloud. Service governance is an obvious hole – providers are writing their

own code or gluing point products. BMC, Oracle and VMware could probably use more
automation, too; less so HP, IBM and Microsoft. ISVs are opportunistically targeting the
holes in these portfolios.
Cloud enablement companies started out targeting enterprises but there isn’t yet a
private cloud market. In 2009 they turned their attention to the service providers –
hosters, colocation players and other players seeking to get into the cloud. 3Tera is
the leader here, with companies such as Enomaly, Hexagrid Computing and Abiquo
present. Eucalyptus Systems, Elastra, Arjuna Technologies and others are targeted at
private cloud enablement. FlexiScale, ElasticHosts and Symetriq are IaaS providers
looking to wholesale their expertise to service providers, or more ideally, sell them the
entire shop. The likes of Platform Computing and Univa UD will continue to benefit
from the convergence of datacenter automation and HPC markets where the techniques
of the latter are underpinning the former.
VMware’s acquisition of SpringSource makes many assumptions about the future,

both in terms of premium valuations such as this deal, as well as integration require-
ments and customer appetite. But one thing is for sure – the move represents VMware’s
springboard into the PaaS world. With Microsoft Azure already playing and Oracle
surely brewing a head of cloud, it will be interesting to see how M&A will play a part in
2010, especially as other vendors such as Red Hat and IBM seek to get game.

2.3 IPO CANDIDATES
The IPO market may be firmly shut, but should it open in 2010, these are some of the
software companies that we feel are best placed to exploit it.
FIGURE 2.4: IPO CANDIDATES IN ENTERPRISE SOFTWARE

COMPANY COMMENT
APRIMO Might the enterprise marketing resource management vendor move to
reignite its IPO hopes, which it quashed back in 2008 citing adverse
economic conditions? And, would going public help the company evangelize
its SaaS B2B marketing apps suite?
CORADIANT Coradiant swallowed rival (Symphoniq) in 2009 and might buy a partner
(dynaTrace Software) in 2010, becoming a dominant vendor in a hot niche
(RUM). Could it go where Gomez never did?
ELOQUA We continue to expect the SaaS MA player to go public, both as a way to
raise its profile among enterprises as well as to try to differentiate itself from
the large pack of other MA startups.
HUBSPOT Raising a total of $33m in a trio of funding rounds, the three-year-old
inbound marketing platform player models itself on other SaaS firms that
previously trod the IPO path, including Constant Contact Inc, LogMeIn and,
of course, salesforce.com.
INGRES The open source database purveyor has been preparing itself for an IPO for
some time and likely is in a position to do so quickly if and when conditions
improve.
JIGSAW DATA The business directory firm's IPO hopes are set more for 2011, but could
potentially come sooner. The startup has been cash-flow positive for around
a year and is expecting revenue of $18-20m.
JIVE SOFTWARE As the largest independent social software player, Jive continues to sign big
customers and grow quickly. In a sector where there are lots of options, it
may be too pricey for acquirers, leaving IPO as an exit for Sequoia Capital,
which has put $27m into the company.
LINKEDIN Will the business-focused player be the first of the large social network
providers to go public? Recent chatter both within and outside the firm
suggests that to be the case.
NIMSOFT Nimsoft, which has seen steady growth and is not close to any companies
that might acquire it, remains focused on beating The Big Four, not
partnering. It would listen if an EMC or Cisco came calling, though.
QLIKTECH QlikTech is believed to be the largest independent BI vendor and would gain
better scale and visibility against its archrivals in BI (SAP, IBM, etc.) by
going public.

SECTION 3
Security and Networks
Analysts: Josh Corman, Paul Roberts, Steve Coplan, Steve Steinke
For some, 2009 was a pretty brutal year. Although the sector actually saw a slight
uptick in M&A spending, that was primarily due to a few landmark networking trans-
actions. Meanwhile, acquisition activity for security companies remained muted. What
deals did get done were largely driven by compliance mandates – an understand-
able but disturbing trend. Many vendors encountered an environment of frozen capex
budgets and downsized IT staffs. While it was a good year for startups offering PCI-
mandated services in an opex consumption model (such as MSSP or SaaS), several firms
with very strong technologies had to tough it out, scrutinize their strategic options and
make adjustments. Most buyers in 2009 were the large infrastructure incumbents. These
same giants may find more willing and realistic expectations from weary acquisition
targets in 2010.
For enterprise networks, the overall number of M&A transactions in 2009 was greater
than in any of the boom years of 2004-2008. Cisco’s shareholder obligations led it
into the server market, provoking former partners Hewlett-Packard and IBM, which
considered servers to be reserved for them. The coming server war will likely color and
cloud datacenter-purchasing decisions for the next year or two.
Meanwhile, purchasing decisions regarding wireless LANs were simplified by the actual
approval of industry standards. Ethernet switches and edge routers from Cisco, Juniper
Networks and Brocade (Foundry) came out with interesting new technology, and the
Turin Networks-Force10 Networks merger undermined the notion that simply being
the first to build products for a new generation of Ethernet is a great strategy.
WAN traffic optimization (WTO) faced the first phase of perturbations resulting from
building and selling appliances rather than licensing software. Expand Networks,
Certeon and Replify jumped onto the issue of virtualization and its requirement of a
complete software implementation.
Finally, there was consolidation in the often-quiet network management subsector. If

there was any doubt about the efficacy of the SolarWinds model that creates loyal
internal supporters by giving them free software, PacketTrap Networks’ sale to Quest
Software redoubled the point.

FIGURE 3.1: THE TOP FIVE SECURITY DEALS OF 2009
HEWLETT- 3Com $3.1bn HP has been vendor-agnostic toward security. With 3Com, HP also
PACKARD gets into security with TippingPoint. Combined with its ProCurve
line, this may better equip HP to compete with Cisco. This may
also bring complications in both its ProCurve ONE partner
ecosystems and its install base.
CISCO ScanSafe $183m Cisco wasn't the first company to grasp the potential of hosted
Web gateways, and we thought tiny Zscaler might be a better fit.
But ScanSafe's roster of ISP customers was too hard to resist.
QINETIQ Cyveillance $40m This deal didn't get much attention, but we think it's a harbinger
of things to come in 2010 as large, diversified security players and
infrastructure providers look for an edge in threat detection and
cyber intelligence.
CA INC Orchestria $30m* While this transaction has not prompted a string of copycat
IAM-DLP deals (and integration is still forthcoming), CA was
the first to act on the need to deliver policy definition and
enforcement based on who and what criteria.
IBM Ounce Labs $25m* Static code analysis tools, which started out as a niche in the
otherwise humdrum application development tools space, look like
an increasingly integral part of the future of enterprise security as
ISVs and their customers bump up against the limits of post-hoc
'layered' security.
Source: 451 Group analysts *451 Group estimate
Cisco-ScanSafe
We saw a wave of M&A in 2009 focused on hosted security services, including
McAfee’s takeout of MX Logic, Barracuda Networks’ purchase of hosted Web
gateway vendor Purewire and WatchGuard Technologies’ BorderWare Technolo-
gies buy (kind of). Still, Cisco’s pickup of Web security-as-a-service pioneer ScanSafe
strikes us as the most portentous. For one thing, Cisco’s size and reach into enter-
prises is a force multiplier for all of its security wares, even though many of them –
from intrusion-detection systems (IDS) and firewalls to security information and event
management (SEIM) – aren’t category leaders. And, while Cisco made a big invest-
ment in SaaS through its acquisition of WebEx Communications in 2007, ScanSafe’s
hosted Web gateway is a major shift in its approach to security, which has focused on
bladed security functionality for its switches and routers or dedicated security appli-
ances for the DMZ.
We think this move presages a broader expansion into managed services that could
truly be transformational for the for the San Jose, California-based networking equip-
ment vendor. The immediate drivers that got Cisco and ScanSafe to the altar are
easy enough to understand. Sales of security products are down – revenue decreased
by approximately $40 million in the company’s most recent quarter amid declining
demand for security blades for its routers and LAN switches, as well as lower sales of
security appliance products.

Sales of email and Web security products have been the one bright spot, but Cisco recog-
nized that hosted Web and messaging offerings threaten to chip away at the appeal of
mail and Web gateways like Cisco’s IronPort, even among the enterprise and large enter-
prise customers that are IronPort’s sweet spot. Previous attempts to ‘SaaS-ify’ IronPort
yielded inferior results: a smattering of managed IronPort and ASP-like hybrid offer-
ings with Cisco managing single-tenanted IronPort appliances on its own infrastructure.
As we noted, Cisco said it plans to port IronPort technology to a hosted offering based
on ScanSafe’s platform, while also building up ScanSafe’s already healthy ISP business,
where a white-labeled hosted Web gateway will be part of a package of products and
services that also includes firewall, VPN, intrusion-protection systems (IPS), and so on.
ScanSafe’s Anywhere client will also be wrapped into Cisco’s AnyConnect endpoint
agent, providing Web filtering outside of the firewall. But the line between ‘enabling’
managed services for ISPs and other customers and becoming an MSSP is a blurry one.
Cisco executives noted that equipment orders declined 20-30% in 2009, while demand
for services increased. Barring a sharp reversal in that trend, we think it’s only a matter
of time before Cisco decides that appeasing the fears of its ISP and MSSP partners isn’t
worth the opportunity cost of not carrying its portfolio of security products and sterling
brand forward as a managed offering. Stay tuned.
QinetiQ-Cyveillance
As the sophistication of computer threats has increased, we’ve noted the increasing value
of certain categories of cyber intelligence and reputation monitoring to verticals like
finance, banking and defense. RSA’s Cyota buy in 2005 was a data point in this trend
line, as were deals like NICE Systems’ acquisition of Actimize in 2007 (and then anti-
money-laundering vendor Fortent in August 2009, Verafin’s funding earlier that year,
and so on). And, as the amount of the federal pie getting directed to cyber security has
grown in recent years, we’ve also seen big government and defense contractors make
direct investments in promising security startups. Note Raytheon’s purchases of Oakley
Networks in 2007 for data loss prevention (DLP) and, in 2009, BBN Technologies. The
pool of security vendors that tell us their direct and indirect government business has
stepped up considerably, especially with the advent of the Obama administration, is even
larger and comprises players in penetration testing, digital forensics, vulnerability scan-
ning, IDS/IPS and SEIM.
One area of interest appears to be around cyber intelligence – infiltrating and moni-
toring hotbeds of illegal activity, and then translating that into forward intelligence that
can be used to anticipate and thwart attacks. Government agencies do lots of this for
themselves on the public’s dime. But that type of information isn’t for sharing, and the
few hooks that law enforcement and federal agencies do provide to the private sector are
not optimized, to say the least. That leaves room for smaller firms like Cyveillance and
Team Cymru that make money by being smart and keeping their ear to the ground.

That’s what drove QinetiQ, a publicly traded, London-based defense contractor, to
pick up Cyveillance. The move brought QinetiQ marketable anti-phishing and brand-
monitoring services for its high-end customers. It also brought a raft of online intel-
ligence gathering, cyber security and threat research expertise that will infuse the
company’s other offerings. In dollar terms, this deal wasn’t a blockbuster; the $40m
QinetiQ paid was a nice premium over Cyveillance’s revenue, but less than the $60m
that Cyveillance’s investors poured into the firm since 2001. (A rumored $40m
earnout could make the final transaction more lucrative.)
However, fraud prevention and threat intelligence already loom large on the roadmaps
of vendors like Cisco, EMC and IBM. The next year will show that there’s real money
to be made in cyber intelligence for security firms that contract with government
agencies and large enterprise. At the end of the day, if you can tell your customer
about a credible threat to their organization that they didn’t know about, you’re hired.
We expect to see cyber intelligence and threat research operations absorbed into the
portfolios of larger companies this year as players of all stripes look for an edge.
CA-Orchestria
After an extended hiatus, CA Inc has been one of the more prolific shoppers in the
past 18 months or so, albeit at depressed valuations that reflect that it’s a buyer’s
market. We believe Orchestria was not on a strong financial footing and had been
falling behind the market, but it did give CA a launching point in the DLP market and
the foundation to start talking about ‘content-aware identity management,’ which is
the corollary to Orchestria’s ‘identity-centric’ DLP pitch. Integration work has focused
on reinforcing Orchestria’s native functionality and strengthening endpoint capa-
bilities. Still ahead is melding identity and access management (IAM) and DLP in a
unified policy workflow. With that in place, we believe the driving rationale for the
acquisition of defining who with policies defining what to establish the how in access
control will start to pay off – and prompt deals in both the IAM and DLP segments.
HP-3Com
HP buying 3Com is an interesting and noteworthy deal for many reasons. HP clearly
gains technology and market share in both network infrastructure and security.
However, we have seen HP as taking a vendor-agnostic position when it comes to
security. Acquiring 3Com and its TippingPoint business should shake things up a bit.
Here are a few examples of the gains and possible challenges that come with 3Com’s
security Trojan horse– namely TippingPoint.
What does HP gain on the security front? For starters, TippingPoint has been one of
the market-leading network IPS (NIPS) appliances. This squarely puts HP into the
field for stand-alone IPS. Cisco currently dominates that space, leveraging its network
buying center incumbency and relationships to edge out IBM’s ISS and McAfee’s
NIPS stand-alone offerings. Given HP’s switching business, this could similarly help
TippingPoint. To that end, a clear future opportunity would be to leverage the deep-

packet inspection capabilities and integrate into HP’s ProCurve platform for switch-based
IPS. Lastly, HP also inherits the threat research capabilities of DVLabs (and its ‘hired
gun’ ‘money-for-vulnerabilities’ initiative known as the Zero Day Initiative). If paired
with talent from the SPI Dynamics buy, this could establish HP’s presence in the security
research community.
What challenges could HP face on the security front? Aside from the SPI Dynamics acqui-
sition to address application layer security risks, HP has largely been vendor-agnostic
– even exiting the identity space in 2008. Instead of competing in the network secu-
rity sector, HP invested in its ProCurve Open Network Ecosystem (ONE) partner program.
By bringing on Tipping Point, it will be interesting to see what effect this may have on
the ProCurve ONE initiative. More specifically, concerning RSA last year, HP and McAfee
made news by announcing full portfolio partnerships. McAfee’s IntruShield considers
TippingPoint a mortal enemy. Short of highly compelling commercial joint opportunities
elsewhere, we expect this once-blossoming relationship to be over.
Finally, there is the ‘x’ factor of 3Com’s business in China. It isn’t far-fetched to expect
that it will impact HP’s business in US federal and financial services. Concerns over China
and cyber security are now well covered in the mainstream media and are garnering
increased attention. Real or perceived, this area of concern will need to be well managed.
IBM-Ounce Labs
IBM and its chief rival HP plunged into the application-testing space with their respec-
tive acquisitions of Watchfire and SPI Dynamics two years ago. We see the purchase of
Ounce Labs as the next logical step in that development: providing Big Blue with the
tools to write code and then analyze that code for security vulnerabilities, all in an inte-
grated suite. Ounce Labs may not have been the category leader in the static code analysis
space (that title likely goes to HP partner Fortify Software), but it had a strong presence
and development hub in Massachusetts, where IBM already has a significant R&D pres-
ence, and a healthy patent portfolio. While no deal value was disclosed, we hear rumors
that Ounce Labs went for a low multiple – which may also have contributed to IBM’s
choice of the firm over near competitors like Fortify or Coverity.
However, securing enterprises by improving the quality of application code sounds like a
‘boil the ocean’ approach. We’ll be interested to see how Big Blue goes forward with its
combined Watchfire and Ounce Labs product suites and the degree to which it’s able to
build bridges from the kinds of code-level analysis and application testing that Watchfire
and Ounce Labs offer, along with other parts of their security portfolio. The bigger ques-
tion is what this means for other static analysis shops – Fortify, Klocwork and Coverity,
plus newer players like Veracode. If Ounce Labs puts static code analysis on the map, one
or more of those firms may find themselves in the crosshairs of a larger player.

More broadly, The 451 Group likes this type of deal. First, application security is
becoming increasingly important as threats climb up the stack to the application layer
(as will be detailed in our upcoming 451 ESP report on e-crime). Second, as enterprises
migrate to the cloud, application security becomes more center stage. Third, this deal
is an excellent example of pulling together the right mix and complement of capabili-
ties and baking security into common infrastructure. Doing so helps to drive down cost
and complexity and yields inherently more secure systems – in contrast to the dominant
after-the-fact Band-Aid approach.
FIGURE 3.2: THE TOP FIVE NETWORKING DEALS OF 2009

CISCO Tandberg $3.4bn Cisco is admitting that proprietary
telepresence can't provide for the needs
of the market by buying the most
interoperable competitor.
HEWLETT- 3Com $3.1bn HP is shoring up its switching, routing and
PACKARD telephony lines as Gotterdammerung with
Cisco looms.
LOGITECH LifeSize $405m Perhaps the hottest echelon of telepresence
Communications and videoconferencing gear is a step below
'immersion.' Logitech has had much success
in consumer electronics products, but lacks
experience in enterprise markets.
CA INC NetQoS $200m NetQoS did well enough on its own to
wait until the right deal came along. It's
not out of the question that CA could be
rejuvenated by its new Austin, Texas-based
contingent.
QUEST PacketTrap Not disclosed PacketTrap followed much the same
SOFTWARE Networks business plan as SolarWinds and gets
acquired rather than going public.
Source: 451 Group analysts
CA-NetQoS
NetQoS has been one of the market leaders in the application performance manage-
ment subsection that employs network data for analysis. CA can cover the network device
management and WAN management territories with its existing products, but NetQoS pretty
much finishes the job. NetScout, OPNET, Apparent Networks, InfoVista and Fluke
Networks will face a tougher competitive environment. However, none of these firms
appears as ripe for acquiring or for being bought in 2010. Public rivals NetScout, Fluke,
OPNET and InfoVista appear healthy but not terribly aggressive.
Quest Software-PacketTrap
The PacketTrap story is a classic, worth the attention of business schools and case study
literature. PacketTrap took the SolarWinds model and enhanced it to make it appealing
to MSPs and similar customers. The SolarWinds business plan is to give away download-
able network management tools to administrators and IT staff, creating a community of

users who contribute tricks and techniques via a website, and who will look to SolarWinds
when the time comes to buy more costly network management tools. Quest Software has
steered clear of network management and has stuck to systems management, but Pack-
etTrap provides a strong entry to network customers.
FIGURE 3.3: SECURITY AND NETWORKING: LESS, MORE OR THE SAME?

Security

SOMEWHAT MORE THAN IN 2009 X
ABOUT THE SAME AS IN 2009 X
Networking
SUBSTANTIALLY MORE THAN IN 2009 X
3.1 MACRO-LEVEL DRIVERS FOR SECURITY AND NETWORKING

According to The 451 M&A KnowledgeBase, the security and networking sectors
accounted for 150 deals with a total deal value of $13.55bn in 2009. While that number
seems impressive, excluding HP’s acquisition of 3Com ($3.1bn) and Cisco’s offer for Tand-
berg ($3.4bn), the total drops to $6.7bn, compared with $9.8bn in 2008 (which was less
than a stellar year for volume and deal values). Also, the individual deal values drop quite
precipitously, especially in security, when we move down the list from those two block-
buster acquisitions. So, do the anemic valuations and deal flow reflect broader trends, or
is there something specific happening in the security and networking sectors that explains
the decline?
While it would be foolish to attribute the falloff to any one factor, the overall economic
climate certainly has had a tangible impact. However, security has fared better than
most other tech sectors, and in some areas, we’ve even seen decent growth – in partic-
ular those where compliance was driving spending. Certainly, security has served as one
prime example of the valuation gap phenomenon, where buyers and sellers struggle
to come to mutually acceptable terms. Buoyed by compliance revenue, several smaller
vendors with healthy growth have simply walked away from offers. Although valuations
have clearly come under pressure, IBM’s pickup of Guardium at a healthy multiple under

normal circumstances illustrates that the right technology fit, strong momentum and
a material threshold in revenue (about $45m in Guardium’s case) puts the ball in the
seller’s court. With Fortinet now cracking open the IPO window, targets with some
momentum will defer an acquisition in favor of going public (with our IPO prospects
listed below as possible candidates, along with vendors like Crossbeam Systems,
Trustwave and Meru Networks).
For buyers, on the other hand, another dynamic holds. Even in a relatively robust
segment of the technology space, the risk associated with an acquisition predicated on
future revenue streams has increased. With spending under pressure and procurement
tightly controlled, it’s unclear to what extent pipeline projections at targets can be
trusted to justify multiples. While the market loosened up considerably in the second
half of 2009, there is no guarantee that conditions will hold. In addition, buyers are
looking to reduce cost and complexity at this point, rather than pile on more. With the
economic outlook still uncertain, the prudent course of action for shoppers is to keep
an eye on operating margins and ensure that costs are kept in check. In other words,
why buy growth when no one else is, especially when buying patterns have fundamen-
tally shifted?
Nonetheless, several trends have emerged, even in the midst of what might be
described as a sloppy market. One trend that has surfaced is infrastructure compa-
nies snaring security firms – which in fact may reflect the impetus from acquirers who
want to reduce cost and complexity and break down the security silo. This is exempli-
fied by HP indirectly obtaining TippingPoint via the 3Com deal (and explicitly calling
it out as an attractive facet of the transaction), but several other examples can be cited:
IBM’s Information Governance unit snagging Guardium, IBM Rational picking up
Ounce Labs and CA acquiring Orchestria. Admittedly, CA has a security management
division, but it is better known as an IT management player, and the unit has histori-
cally focused on identity management and host access control. We see this reflecting a
broader trend in terms of embedding security in the business process. The adoption of
virtualization, SaaS and cloud-based services conspires to make the browser the new
OS – which likely has the denizens of the e-crimes economy especially ebullient. The
change in architecture doesn’t necessarily affect the underlying security functionality,
but does mean that it has to adapt to a new security model, and we believe this will
push the industry toward more comprehensive orchestration.
This change also has implications in the delivery and/or consumption model, which
speaks to another visible trend: the rise of security as a service. The impetus for this
has several converging sources. Buyers are clearly looking to move from a capital
expenditure to an operating expenditure model, as well as to outsource both manage-
ment and security of their infrastructure. We have seen the first wave of acquisitions
this year, both in terms of managed security service providers bulking up in the form
of Trustwave buying Vericept and Mirage Networks; SecureWorks scooping up
VeriSign’s managed security business and dns Limited; plus the convergence of Web

security and messaging that prompted McAfee’s pickup of MX Logic, Cisco’s purchase of
ScanSafe and Barracuda’s Purewire buy.
What does the future hold? We anticipate that buyers will scrutinize technology acquisitions
even more intensely and demand a demonstrable reduction in cost and complexity before
signing on the dotted line. Of course, that does not preclude that compliance requirements
will continue to free up budgets, but we anticipate that buyers will start to look askance at
‘uni-taskers’ that don’t solve a broader set of security challenges. In turn, this will spur the
momentum toward a services-based model.
To opine that a large proportion of future activity (although not necessarily of total deal
value) will be opportunistic is hardly prescient. However, perceptions and premiums are only
likely to shift if vendors make targeted, strategic acquisitions, as opposed to waiting for
deals to fall into their lap. What we do believe will characterize the next phase of M&A is a
focus on business process modeling and risk management. This does not necessarily entail
fundamentally new technology, but does involve assuming a different perspective on the
optimal security model. Rather than focus on a specific structural or operational vulnera-
bility, we anticipate that a greater degree of orchestration will emerge to engineer a balance
between process and enforcement, which suggests that the trend of infrastructure companies
buying security vendors will continue. In fact, we may even see some deals where security
providers look to acquire infrastructure players – Symantec or Juniper, perhaps?
In enterprise networking, consolidation of thriving but shaky network management firms

continues to be one of the major themes, with deals for NetQoS, PacketTrap, AirMagnet and
Mazu Networks tightening competition in the sector. We were surprised to see the down-
fall and asset strip of monitoring vendor Cittio. Several players have attempted to approach
SMBs with specialized management tools, but they haven’t survived. Our prediction is that
the complication is too much to handle in organizations that can’t support fulltime IT staffs.
Open source network management systems and tools continue to put downward pricing
pressure on the products in this space, but the communities that have been established by
vendors such as SolarWinds, PacketTrap, F5 Networks and Citrix Systems seem to have
preempted some of the energy around open source software. Cisco returned to its good-
times acquisition practices in 2009 with two multibillion dollar deals – Tandberg and
Starent Networks – as well as five others, for a grand total of $7.2bn. Juniper, in contrast,
continued to stay on the sidelines, with no acquisitions in 2009. While Cisco’s dramatic
entry into the server market dominated the datacenter environment, Juniper licensed its
Junos OS software to BLADE Network Technologies, providing another alternative to
Cisco’s Unified Communications System along with HP, IBM and Dell. Virtualization is
becoming a factor in network management where visibility of intra-server network traffic is
not provided by legacy-monitoring tools. The subject also arises with WTO and datacenter
communications acceleration. Some firms have gotten a step ahead of the competition in
these areas.

3.2 MICRO-LEVEL DRIVERS FOR SECURITY AND NETWORKING
Security
Thirst for managed services drives hosted security vendors along, as well. Cisco’s acqui-
sition of ScanSafe was a signal by one of the largest infrastructure vendors around that
hosted security offerings are key to future growth. Cisco couched the deal in terms of its
appeal as a sweetener for existing relationships with ISPs and MSSPs, and we don’t think
that was just spin. As constrained capex budgets have pushed more enterprises to take a
hard look at how they might benefit from managed offerings, MSSPs are looking at ways
to offer more low-touch services to a broader range of enterprise and SMB customers.
MSSPs and ISPs were a key target market for ScanSafe, as well as smaller rivals like
Purewire (now part of Barracuda) and Zscaler. We’ve also seen Panda Security license its
SaaS-based anti-malware product to MSSPs as part of a partnership with N-able Tech-
nologies. While there are fewer security SaaS vendors out there to acquire in 2010, we
expect continued interest from MSSPs and ISPs to drive investment and M&A, especially
around services that speak to immediate compliance-related demands such as Web secu-
rity, data loss and data privacy.
Compliance and complexity drive security and endpoint management closer

The trend toward consolidated endpoint management has been going strong since 2006-
2007, when security behemoths like McAfee and Symantec snapped up IT management
firms like Citadel Security Software and Altiris, respectively. Those moves may have
not yet yielded the ideal of a single pane of glass, but that doesn’t make the need for
consolidated endpoint management any less urgent in the enterprise. Indeed, compli-
ance demands, an increasingly heterogeneous population of endpoints (including mobile
devices) and the growing use of both server and client virtualization all augers for tighter
integration of threat prevention and endpoint management.
Despite one wave of consolidation, there is still plenty of room left for further deals. We
note Sophos’ pending IPO and its singular focus on the enterprise. Upstart Russian anti-
malware firm Kaspersky Lab also tells us that it has designs on a bigger enterprise busi-
ness, but is sorely lacking a management platform that enterprise deployments demand.
Plenty of players on either side are partnering up, as well
Trend Micro and BigFix are both enjoying the fruits of their partnership, we hear, but
the acquisition of either firm (especially BigFix) could leave the other exposed. Shavlik
Technologies has teamed up with Sunbelt Software, while Lumension Security
recently penned a deal with Norman Data Defense Systems for white-labeled anti-
malware (while struggling to find the right message and mix of features for its configura-
tion management and security wares).
While partnerships work for now, we think the future will require tighter collabora-
tion between threat research and endpoint management, with an eye toward both threat
blocking and compliance. We’ll be anticipating opportunistic M&A between second-tier

endpoint management and security players in 2010, as the checklist for playing in the
enterprise calls for pieces of what the other side has.
Will Web application testing find a home in 2010?

Compliance mandates such as PCI 6.6 have been driving demand for Web applica-
tion vulnerability scans and Web application testing for some time now. Recent years
have also seen some consolidation in this space, with development tools vendors like
IBM and HP picking up Web application-testing firms Watchfire and SPI Dynamics,
respectively. Still, as of the end of 2009, some of the more innovative players in the
Web application-scanning and testing space such as WhiteHat Security and Cenzic,
as well as vendors like Acunetix and Mayflower Gmbh, were freestanding. We think
it’s clear that intelligence on Web application vulnerabilities and exploits is a central
component of more than a few enterprise protection schemes. Witness the matchups
between WhiteHat and Web application firewall vendors like Imperva and F5, as well
as Cenzic’s work with Citrix.
We expect the walls to come down around Web application testing and vulnerability
scanning in 2010 and see interest from a number of quarters: existing application-
testing and code-auditing players like Fortify as well as IBM, HP or Microsoft are all
plausible buyers. With the small loop between Web application vulnerability research
and Web application firewalls, we believe those two technologies could fit snugly in
the same product portfolios, as well.
SaaS access management and IAM hybridization

While there were a few close calls, expectations of at least one or two acquisitions
predicated on the need to manage access to a new class of resources – SaaS applica-
tions – did not materialize. As tangible revenue starts to roll in and identity manage-
ment begins to feel the real impact of SaaS adoption and cloud-based delivery models,
deals will ensue. We anticipate that incumbent IAM vendors – including Oracle, CA
and IBM – that sense an opportunity to support the transition to cloud and hybrid-
ization resulting from the gradual move to off-premises services will be one group of
interested parties. Others such as VeriSign or even Microsoft that see the move to a
loosely coupled model as an opportunity to inject trust into the relationship between
service provider and service consumer (what we describe as ‘authenticity’) could also
figure in transactions. TriCipher, Ping Identity, Symplified, Nordic Edge, Confor-
mity Inc, Arcot Systems and identity-as-a-service provider Fischer International
Identity could improve their relative attractiveness by building authentication and
authorization in the cloud, providing governance tools for the IAM install base and
driving user management into the midmarket where provisioning, by and large, has
been too expensive.

Privileged identity management is not just for super users anymore
We were surprised that no privileged identity management (PIM) deals were consum-
mated in 2009, since several players in the space appeared to be in play. However, we
continue to believe that there remain compelling reasons for some transactions, even
if they are largely opportunistic. The demand for PIM technology was initially ignited
by compliance. The realization of the risk posed by insiders with elevated access rights
coupled with a growing set of actors that now constitute privileged users – such as
users with access to network infrastructure or databases where sensitive data resides –
is intensifying the demand. CA has looked to internal development, Oracle to partner-
ships (after acquisition overtures were turned down, we believe) and IBM has roped in
ISS to fill in the functionality for its provisioning customers. At some point, Big Blue
and Oracle will likely look to own the technology in order to provide a complete spec-
trum of identity analytics and governance capabilities. Symark Software (and poten-
tially Cyber-Ark Software) might play a category consolidation role as virtualization
and the cloud stretch user-monitoring requirements.
IAM portfolio round-out and consolidation

Once Oracle’s pending acquisition of Sun Microsystems is finalized, the number of
incumbents will shrink by one, leaving IBM, CA, Oracle and Novell. As this scenario
unfolds, vendors with elements of the stack may be compelled to fill out their port-
folios. EMC’s security division RSA springs to mind, and in particular its relationship
with provisioning and role management vendor Courion. The companies already have
a clear symbiosis, and the choice faced by RSA is to either expand or contract if it has
aspirations of being a credible identity management vendor. RSA may also look to
players like Imprivata for a heterogeneous authentication management layer (caving
in to the inevitable erosion of the SecurID franchise) or consider Centrify and Like-
wise Software as a means of adding a directory play.
Alternatively, we could see a larger vendor pick up Novell’s identity management

business, whose revenue has been heading in the wrong direction. Granted, identity is
part of Novell’s cloud management strategy, but other imperatives may prevail. IBM
may emerge as a suitor for Novell, since it could help its relationship with Microsoft
and managing Windows infrastructure. Or Big Blue could snag Quest Software, which
has a wealth of Microsoft identity management expertise. That capability might even
prove of interest to Microsoft itself, which is showing every indication of undertaking
an extensive identity management product refresh once Forefront Identity Manager is
out the door.
IRM is providing the connective tissue for embedded enforcement

As we’ve noted before, if information wants to be free, information rights manage-
ment (IRM) serves as a reminder that with freedom comes responsibility. We see IRM
as a superset of enterprise rights management incorporating contextual encryption
and a policy management layer for document-level controls. Longstanding players

include Liquid Machines, GigaTrust, DLP refit BitArmor Systems and file manage-
ment player Varonis, while newer entrants include InDorse Technologies and trans-
parent encryption vendor ZafeSoft. By providing the point of integration between
digital rights management (or document-level access rights and permissions), DLP and
classification, encryption and key management, and IAM, IRM is a tool for addressing
the vast spectrum of data in use where legitimate access is a function of multiple
parameters. DLP has focused on locking down sensitive data, and only recently has
started to filter unstructured data. As the cloud, collaboration and fraying perimeter
drive further proliferation in the ways that information and data can flow, we anticipate
that vendors with a strong endpoint presence – Symantec, McAfee and Microsoft – as
well as those with gateway products like PGP Corp, Juniper and Cisco (or perhaps even
storage players) may look to acquire the technology.
Are ESIM and log management finally converging with IT management?

Is 2010 the year that convergence with IT and systems management will play out for
security management: enterprise security information management (ESIM), log manage-
ment and the hybridized outcome of the two? We think so, since the practice of IT
security looks to be changing, with log management and search vendors like Splunk
leading the way. The perennial challenge for security is to stop the attack you don’t
know is coming. Log management and query by way of forensics and incident response
has become the tool to model attacks, both externally launched and perpetuated by
insiders. This modeling in turn allows for the generation of a baseline, with diver-
gence representing either legitimate system, user or process change or some emerging
attack or exploit. This model can be transposed onto IT management to make the
process of management more efficient. And, once there is a consolidated event ware-
house, the divergence can be better understood, more effectively resolved and normal-
ized within the baseline. We think the end result is that systems management vendors
(including McAfee, Symantec and potentially Juniper or Cisco) will look to cherry-pick
the remaining independent players, possibly reaching for ESIM granddaddy ArcSight.
DLP consolidation: the emergence of a horizontal and vertical stack

Tapped-out buyers are likely to compel companies in the DLP market to concatenate
network-based, resource-specific and endpoint approaches with ‘intelligent encryption’
into a single platform, rather than buy protection in a piecemeal fashion. We antici-
pate that economic concerns will drive consolidation as a matter of necessity, with the
remaining stand-alone players finding comfort in the arms of network infrastructure
providers, antivirus purveyors and datacenter incumbents. For example, we see Fidelis
Security Systems with its strong network-based technology becoming increasingly
attractive to network infrastructure vendors Juniper and Cisco. Also, now that IBM has
opted for Guardium, AppSec Consulting could court another database player or even a
datacenter incumbent, which could include CA. We also see some potential for players
with strong endpoint capabilities – Verdasys and now Safend with its new discovery
and classification capabilities – finding a home at an antivirus vendor or, alterna-

tively, merging with Kaspersky in the run-up to the IPO that the Russian firm is shooting
for. Rumors that Check Point could move into the DLP market via the acquisition of
Verdasys, GuardianEdge or Safend may yet transpire, as well.
Networking WAN traffic optimization

Software has always been the point for WTOs, despite their almost universal deployment
in metal boxes. With the need to move virtual servers in response to spikes in demand or
security events, the appliance form factor won’t always constitute the best approach. This
subsector has seen a great many acquisitions over its short life, but there weren’t any
major ones in 2009, which likely indicates pent-up demand for deals in 2010.
Wireless LANs
With the ratification of the IEEE 802.11n standard, competition will be based on product
features and effective marketing. Things like reliable performance of VoIP over WLAN,
easy-to-deploy access points and dynamically tunable antennas will be the foundation
for competition going forward. Cisco will doubtless continue to control more than half of
the market, though a smaller share is possible or even likely.
Telepresence and video conferencing

Cisco’s Tandberg buy is a sign that a market exists for interoperable, standards-based
telepresence. This may even constitute a larger space than the original proprietary
systems that Cisco had been marketing. LifeSize Communications is a maker of video-
conferencing systems that applied some downward pressure on the market. Its acquisi-
tion by Logitech could signal a more broad-based interest in two-way video with better
production values than a Webcam but a much lower cost than full-scale telepresence.

3.3 IPO CANDIDATES IN SECURITY AND NETWORKING
FIGURE 3.4: SECURITY IPO CANDIDATES
COMPANY RATIONALE
Although 2010 might prove premature for going public, Splunk is growing
SPLUNK fast and as a vendor that is establishing a new category, it will have
plenty of room to expand.
UK-based Sophos has been warming up to an IPO for some time now, but
SOPHOS (smartly) pulled back in the face of a deteriorating economy and unstable
markets. Now the company looks to be ready to go out.
When IBM purchased Ounce Labs, all eyes turned to HP and its
FORTIFY relationship with Ounce Labs' chief rival, Fortify. If HP doesn't buy the
company, Fortify (a profitable firm with $60m in sales) could go public.
BigFix is looking to broaden its endpoint management wares to
BIGFIX encompass endpoint protection, virtualization management, and more. It
may well do that as a public company.
We expect Tripwire's sales to come in above the $62m that it said it
TRIPWIRE booked in 2008. A public offering would also boost its profile as it
increasingly squares off against VMware.
Barracuda flatly denies that it's thinking about an IPO, while
BARRACUDA acknowledging that it's plenty large enough to do one. We think Fortinet's
NETWORKS good fortune on the public markets may accelerate planning within the
vendor for an IPO.
Trustwave has grown its original vulnerability-scanning operation into a
TRUSTWAVE diversified PCI auditing and compliance practice serving more than 300
customers in retail, healthcare, financial services, and more.
Crossbeam sells a multi-tenant, highly reliable blade chassis for third-
CROSSBEAM party security applications, making them attractive to service providers.
SYSTEMS The company has been generating cash for more than a year, running at
more than $50m in revenue, and currently has some $11m in the bank.
With 5,000 customers and sales of around $60m in 2009, Lumension
LUMENSION also has all of the right technology offerings to go it alone: patch and
SECURITY configuration management, endpoint control and application whitelisting
all managed from a single pane of glass.
FIGURE 3.5: NETWORKING IPO CANDIDATES

COMPANY RATIONALE
NETWORK It may not have the same relationship with partner NetQoS after the
INSTRUMENTS latter's sale to CA.
VIDYO With the example of LifeSize's acquisition by Logitech, there may be a
window for a 'personal telepresence' IPO.
AEROHIVE
The latest Wi-Fi entry avoids controllers and offers simple deployment.
NETWORKS
MERU NETWORKS Meru's virtual ports partition the wireless network among clients,
providing the equivalent of a switched Ethernet VLAN.
ARICENT Majority owned by Kohlberg Kravis Roberts, Aricent will likely hit the
market when (and if) KKR needs an exit.

SECTION 4
Storage and Systems
Analysts: Simon Robinson, John Abbott, John Barr
As expected, and as in other sectors of the market generally, M&A in the storage and
systems sector fell sequentially in 2009, marking the lowest level in terms of deal
volume since 2004 and down significantly from the heady days of 2005-2007. Although
there was a smattering of big deals during the year, spending also dropped in 2009. For
the year, there were a total of 336 deals with an aggregate deal value of $32.97bn.
Drilling down into the systems sector, after two years on our watch list, 2009 was the
year that it finally happened, or almost happened: Sun Microsystems, one of the top five
system vendors, is on the way to being acquired by Oracle, and we expect the transac-
tion to go ahead early in 2010. (It’s not the systems side of the business that’s holding
things up but software assets, including MySQL and Java). Other than that, the systems
landscape is much the same as it was in 2008 – except that Dell and Hewlett-Packard
are both substantially larger through acquisitions of services specialist Perot Systems
and networking firm 3Com, respectively.
In 2009, Fujitsu-Siemens turned itself into Fujitsu Technology Solutions and, with
annual revenue of $47.9bn and 186,000 employees, it now ranks itself as number four
in the global IT space, behind HP, IBM and Dell. In the lower tiers, Silicon Graphics
was purchased by Rackable Systems, which promptly changed its name to SGI – a
move very reminiscent of Tera Computer’s acquisition of Cray (then owned by Silicon
Graphics) in 2000. Casualties throughout the year included supercomputing startup
SiCortex (Cray acquired its PathScale parallel compiler business), long-established inter-
connect company Quadrics (Vega bought its support contracts) and 10-Gigabit Ethernet
fabric vendor Woven Systems (certain assets were acquired by Fortinet).
In the storage sector, 2009 was another fairly quiet year on the M&A front. The year did
feature one major transaction, however, as EMC took out Data Domain for $2.3bn. That
was the only truly strategic acquisition of 2009, though larger tuck-in deals included
LSI buying struggling NAS gateway specialist OnStor and the 3Ware RAID business
from AMCC; HP acquiring clustered file system software firm Ibrix; and Informatica
picking up database-archiving specialist Applimation. The other big storage transactions
of the year were at the components level, as Western Digital snagged SiliconSystems for
$65m and Toshiba bought Fujitsu’s hard-drive business for $380m.

FIGURE 4.1: THE TOP FIVE STORAGE AND SYSTEMS DEALS OF 2009
EMC Data Domain $2.3bn EMC emerged the victor following an intense
bidding war with NetApp for the data
de-duplication specialist.
RACKABLE Silicon Graphics $42.5m The amount paid is almost ridiculous, but
SYSTEMS (plus Rackable (now renamed SGI) must fight its way
liabilities) out of debt, albeit with an expanded user base.
A brave move.
INTEL Wind River $884m Intel took its software interests up another
notch by buying the leader in embedded
systems software in order to boost its Atom chip
and its future Linux activities.
HEWLETT- 3Com $3.1bn 3Com, which is on the rise again after years
PACKARD in the wilderness, helps expand HP's ProCurve
networking business from edge to datacenter,
providing a serious challenge to Cisco.
DELL Perot Systems $3.9bn This marks Dell's move into services. Perot's
outsourcing and hosting focus fits to a certain
extent with Dell's recent emphasis on remote
infrastructure management.
EMC-Data Domain – If NetApp’s proposed $1.5bn pickup of data de-duplication super-

star Data Domain in late May caused a stir (especially considering that the acquirer
had previously dubbed de-dupe a ‘feature’), then the storage industry almost went into
meltdown when archrival EMC countered with its own offer two weeks later. Over the
next six weeks, the trio found themselves at the center of the IT and business press as a
bidding war unfolded. EMC eventually won the day in early July with an insurmount-
able $2.3bn cash offer, despite NetApp crying foul with the SEC.
The tussle over the undisputed pick of the recent de-dupe startups served to further
highlight not only the strategic nature of this technology, but also of Data Domain’s
own position within the market; remember, EMC had already inked a de-dupe acqui-
sition in 2006 with Avamar Technologies. By tapping into EMC’s formidable world-
wide presence, Data Domain undoubtedly has a chance to accelerate its growth, espe-
cially since EMC had the good sense to install its CEO Frank Slootman as the head of a
new division focused exclusively on selling backup and recovery systems. Meanwhile,
though much was made of NetApp’s failure to land Data Domain (another black mark
on its already poor M&A record), the company has apparently gone from strength to
strength with a stellar performance in the back half of the year. Although we believe
that NetApp will ultimately return to the backup and de-dupe M&A fold at some point,
losing out on Data Domain wasn’t the negative turning point that many anticipated.

HP-3Com – HP reacted more decisively than either IBM or Dell to Cisco’s move into the
server market early in 2009. The ProCurve business was already growing nicely, but the
majority of HP’s business was in edge, rather than core switches. 3Com is seen by many
as a faded brand, but in fact its long-term decline started to reverse in 2007, largely
through its buyout of the Huawei-3Com joint venture in China, where a strong new
product portfolio has been designed and sold successfully in the Chinese market. HP
becomes the worldwide number two networking vendor and has designs to be number
one. In addition, its new 3Com wares give it a readymade base on which to distribute
its emerging Converged Infrastructure Architecture software portfolio, including Virtu-
alConnect and associated products. This is another indication that the convergence of
servers, storage and networking is gaining momentum.

Systems

SOMEWHAT MORE THAN IN 2009
SOMEWHAT LESS THAN IN 2009 X X
Storage
SOMEWHAT MORE THAN IN 2009
SOMEWHAT LESS THAN IN 2009 X X
4.1 MACRO–LEVEL DRIVERS

Server sales suffered in 2009 from budget pressures due to the recession, from the
continued squeezing of margins from standard x86 servers, and from consolidation
through virtualization. However, new four- and six-core x86 servers were a bright spot
in sales. VMs need to be more powerful and more robust if they are to be effective. We
expect increased activity in this area in 2010, especially in blades and other new form
factors. Mainframes and high-end RISC systems sales also dropped, but there is still
some valuable, high-margin business to be had here. And of course, virtualization and
consolidation generates some valuable services business, and opens the door to internal
cloud and dynamic datacenter projects. Now that Sun is on its way to Oracle, we don’t

expect to see any major M&A deals in the core server sector. However, we do expect
server firms to expand further into storage and networking infrastructure (and perhaps
some networkers to pick up the smaller server vendors) in an attempt to transform them-
selves into more rounded ‘systems’ companies.
Meanwhile, the macro-level drivers in the storage industry for 2010 are essentially
unchanged from those of a year ago. The large players are undoubtedly getting bigger,
which would appear to be serving a growing appetite among enterprises for working
with fewer, more strategic technology suppliers.
As we discuss in detail below, we continue to believe that the storage landscape is

currently too fragmented, supporting an excess of individual players – meaning there’s
still plenty of room for consolidation. At the same time – and somewhat exacerbating
this dynamic – 2009 saw a healthy influx of new startups in storage. This proves that
there is money out there for truly innovative startups – which is possibly motivated by
the healthy storage IPO window of 2007, not to mention some very rich M&A valua-
tions along the way. This glut of startups could pave the way for a robust amount of
tuck-in-type M&A in 2010 should any of them begin to demonstrate signs of traction in
the coming months. Indeed, many of these firms took in minimal amounts of funding
in 2009 in the belief that better term sheets would be available in 2010; in other words,
there could be a lot of cash-strapped startups in 2010 that could prove to be potential
bargains for acquirers astute enough to spot diamonds in the rough.
Storage
With a paucity of really big deals involving storage targets (aside from Data Domain/
EMC, you have to go back to Dell’s EqualLogic purchase to find the last billion-dollar-
plus deal), we have to wonder whether 2010 will see the return of big-ticket deals. One
seemingly perennial question here is whether – or rather, when – Cisco will take out
EMC. The two undeniably moved closer in 2009, especially through the formation of the
vBlocks initiative and the joint venture. With enterprise customers seemingly favoring
large IT players that can offer true soup-to-nuts services (and with all other big-ticket
IT vendors now preaching the virtues of ‘convergence’ from their respective pulpits), is
such a combination the optimal way for these two giants of their own domains to prog-
ress? A combination perhaps makes more sense now that Cisco is at out-and-out war
with former partners HP and IBM. On paper, an EMC-Cisco marriage continues to look
good, with almost no product overlap (which helps to skip the antitrust hurdle) and
common enemies at every turn.
The other hardy perennial here is the NetApp takeout story. Will 2010 see IBM or
another suitor make a move for a company that is undeniably very good at what it
does? Certainly the vendor’s solid performance in 2009 – and the effect of that on revi-

talizing its stock price – seems to suggest that the window of opportunity may have passed
for the time being.
Another supposed big question of 2009 regarded Brocade and the possibility of whether it
also was for sale. After the initial frenzy of speculation subsided, including the somewhat
implausible scenario (at least, it was improbable a year ago, though it seems like anything
is possible these days) of Larry Ellison having to deny any interest in acquiring a fiber-
channel switch specialist, it looked increasingly like it was all for naught. Nonetheless,
Brocade remains a fairly strategic player; as a strong and independent firm, it constitutes a
good stick with which partners and customers could beat Cisco with.
Finally, on the ‘big deal’ front there’s the case of Sun and Oracle. When the transaction
finally gets the green light, we struggle to comprehend how the software giant can make
use of Sun’s storage assets, especially in tape. The question here seems to be: Is there going
to be enough of a tape business left in a few months to attract any would-be buyer?
While such ‘elephant hunting’ deals are not out of the question in 2010, we wonder if the
coming year will see more consolidation involving the large number of tier two storage
vendors that have emerged recently, especially those that have gone public; we saw
evidence of this in 2009 as EMC took out Data Domain. There’s no shortage of indepen-
dent, smaller public storage specialists providers, including 3PAR, CommVault, Compellent,
Isilon Systems and Double-Take Software. In addition, there’s a good stock of privately
held storage specialists that are posting healthy growth and are either profitable or close
to it. With the IPO window remaining shut for the time being (despite most of the players
having it as their preferred exit), acquisition remains a possible alternative for the likes of
Acronis, BlueArc, DataDirect Networks, Exagrid and Glasshouse Technologies.
As we noted above, in 2009 a number of new storage startups entered the prospective target
pool, which was already well populated by privately held firms. Focus areas include the
impact of virtualization on storage (EvoStor, Virsto Software), cloud storage (B-Virtual,
Cirtas Systems, CTERA Networks, MaxiScale, Mezeo Software, Symform, Zetta), storage
acceleration/tiering (Avere Systems, Storspeed) and clustered NAS (GridStore). With such a
broad sector, there’s no shortage of potential targets for larger vendors looking to accelerate
their time to market in emerging segments, especially around cloud storage.
Meanwhile, we wonder if the economic pressures of the past year will trigger a clear-out
of some of the vendors that have struggled to deliver consistent growth or profitability in
recent years. Of the public companies, Adaptec and Overland Storage are definitely strug-
gling but have relatively little to offer prospective buyers. In contrast, Quantum Corp,
which has some strategic de-dupe technology, did a good job of stabilizing itself financially
in 2009, and could be priming itself for a takeout in 2010. In addition, a number of long-
standing privately held, VC-backed specialists seem to have come to the end of the road,
with an asset sale the best they can hope for; clustered NAS specialist Exanet and MAID
storage pioneer Copan Systems are two players in this category.

The fact that Dell was reportedly negotiating to finance a rescue deal for Exanet opens the
possibility that it could be looking elsewhere in 2010 to build a more comprehensive NAS
portfolio. Indeed, with Dell’s reseller deal with EMC now dead (though the OEM pact is still in
place), we wonder if Dell will mount a more aggressive storage campaign in 2010 to comple-
ment the iSCSI business that it obtained with EqualLogic. Meanwhile, Symantec has been
quiet on the storage realm for a couple of years, though it undoubtedly has a shopping list.
Finally, one growing trend from an M&A perspective is the role of services in storage. The
enterprise IT generalists – IBM, HP (with EDS) and now Dell (with Perot) – now have substan-
tial services operations, which again would appear to gel with the notion of big customers
consolidating their suppliers. How will this impact the larger storage specialists – most
notably EMC but also Hitachi Data Systems and NetApp – and could it tempt them to delve
deeper into the services realm? So far they have resisted such moves, preferring to focus on
their core product competencies and then work with select partners, many of whom now
have a greater motivation to team up with independent vendors.
Systems
In 2008, we pointed out that the server business has been largely captured by the top five
vendors, and for that reason we didn’t expect to see many consolidation deals – with the
exception of Sun. At the end of 2008 it looked as if IBM or Fujitsu might step up to buy
all or parts of Sun. We didn’t foresee Oracle, and even now, months after the deal was first
announced, we are unsure what the ultimate fate of Sun’s hardware business under Oracle
will be. However often Larry Ellison insists that Oracle will be a systems company and will
keep everything, we can’t imagine that Oracle will persist long-term with the Sparc architec-
ture when it’s asserted for years that x86 is the future. Of course, Oracle can’t actually say
this without triggering a mass exodus of the Sparc user base. That’s already happening to a
certain extent as regulatory hurdles hold up completion of the deal.
The only core server-consolidation move of any significance in 2009 was Rackable’s acqui-
sition of Silicon Graphics for just $42.5m. Under its new name of SGI, Rackable went ahead
later in the year with the introduction of the long-awaited high-end shared memory systems
that have been under development at SGI for years. It’s a risky move, but is something that
could pay off if the new SGI can sell its Rackable portfolio into the much larger legacy SGI
user base. So what of Rackable rival Verari Systems, which has been very quiet of late?
Either realigned partnerships or an acquisition are likely. Aside from that, we’re seeing
increased market presence and activity from SuperMicro, which has made a virtue out of
its white-box manufacturing expertise and could also benefit from the renewed interest in
unified computing appliances.
As we mentioned, server, storage and networking companies are likely to start looking
more closely at each other in 2010. HP’s Ibrix acquisition is an example from 2009. BLADE
Network Technologies, which is already a hybrid firm in its own right, would be a good
catch for one of the big five. (Or should that now be four?) And Dell’s move into services,
already prompted by HP’s acquisition of EDS in 2008, is likely to spur further deals in that

direction, not the least from Dell itself, which still needs to scale up the size of its
services operations substantially. Smaller startups with components of the unified
picture such as 3Leaf Systems, NextIO, One Stop Systems, PLX Technology, RNA
Networks, ScaleMP, Virtensys and Xsigo Systems are potential targets, as are those
few startups that have worked on their own converged platforms but ultimately will
struggle to fund such expensive developments themselves, including Liquid Computing
and IntelliCloud.
Technology in financial markets

In 2008, we predicted that the London Stock Exchange (LSE) would buy one of the
new European Multilateral Trading Facilities (MTFs). In fact, in December 2009 the
LSE acquired a 60% stake in Turquoise. Competition between the remaining MTFs has
led to a proliferation of new business models and pricing strategies, with some of the
new players in this space using their strength elsewhere to buy market share. So as the
number of MTFs has increased, the competitive price pressure has meant that there is a
smaller pie to be shared. The undeniable consequence of this is that others will share the
pain that Turquoise has felt. We anticipate failure, consolidation or a significant change
in business model for some of the remaining MTFs, with Chi-X perhaps the only one
that is currently profitable.
Interparty latency monitoring is of growing interest to low-latency traders and vendors.

If sufficient progress is made, could 2010 be the year that Corvil’s investors look to
get a return on their investment? Or will smaller rivals such as TS-Associates – which
has been staunchly self-funded to date – raise capital to build the resources required to
pursue growing business opportunities?
TIBCO Software surprised us last year by buying grid computing pioneer Data Synapse
to support its ambitions in the cloud. Might TIBCO (or IBM, Microsoft or Oracle, for that
matter) look to supplement its complex-event-processing capabilities by snapping up
the new Aleri/Coral8 team or StreamBase Systems, both of which are focusing their
offerings on the changing needs of financial markets?
FIGURE 4.3: IPO CANDIDATES

COMPANY RATIONALE
Appearing for the second year in a row on this list, BNT's
BLADE NETWORK recent series B funding round valued it at $230m – a 10
TECHNOLOGIES times growth in valuation since it was spun off from Nortel
Networks three years ago.
The storage services specialist withdrew its S-1 paperwork in
GLASSHOUSE TECHNOLOGIES March 2009 but continued on its acquisitive trail and will be
ready to go public as soon as conditions permit.
The storage systems specialist was on the verge of filing its
DATADIRECT NETWORKS S-1 before the downturn; should conditions improve, it could
be ready to make a move.

SECTION 5
Mobility
Analysts: Chris Hazelton, Brenon Daly
As we discuss in detail in this report, mobility is at a turning point as advances in hard-

ware and new openness in software are increasing the power of the smartphone. Mobile
devices are more closely tied to users than any other enterprise IT tool, so it is impor-
tant to focus on consumers as well as the enterprise. Last year, we predicted that in
2009 there would be a few more deals than in 2008, with a somewhat lower total value
in deals. The activity was in line with our expectations as there were 148 deals in 2009,
compared with 110 in 2008. However, disclosed deal values were actually higher in
2009 at $4bn, compared with $3.4bn in 2008. Here are our predictions for 2010.
The economic recovery will see a change in acquisition strategies. Deals in 2009 were
driven by consolidation of weaker competition. The theme in 2010 will be strategic
entrance into the mobile space by players from the traditional computing space. Aspi-
rations to join the mobile sector are not to be taken lightly, since mobile vendors have
fought long and hard to get were they are. The best way to enter this club is to buy a
healthy member.
FIGURE 5.1: SIGNATURE MOBILITY DEALS OF 2009

GOOGLE AdMob $750m Use of mobile browsing and applications
is growing at the expense of traditional
computing. Google needs to protect its digital
advertising business by moving into mobile.
This deal will spur competitors to ink their
own acquisitions in 2010.
TELECOMMUNICATION Networks In $170m GPS navigation will soon be dominated by
SYSTEMS Motion mobile ISVs targeting smartphones, disrupting
a market led by hardware-focused players.
TANGOE InterNoded Not Telecom expense management (TEM) vendors
disclosed need to add enterprise mobility expertise as
mobile becomes a larger portion of enterprise
communication costs. Expect additional TEM
providers to acquire mobile players.
VISTO Good Not Motorola missed the boat on Good
Technology disclosed Technology. Going forward as Good, the
company will try to reignite competition
with RIM. Increasing interest in multi-device
environments is good for Good.
ANTENNA SOFTWARE Dexterra Not The recession was not kind to all mobile
disclosed players, and Antenna picked up assets of two
of its rivals. The consolidation is not over, and
strong competition still exists. Antenna now
needs to demonstrate a return for its spree.

Google-AdMob – This was a huge deal both in valuation and market push. Google
has long had its eye on the mobile space, taking a shotgun approach with it own
mobile apps, mobile OS and several carrier search engine deals. AdMob adds another
arrow to Google’s mobile quiver, but is much more in line with traditional paid search
advertising, which accounts for the lion’s share of its profits. There are several mobile
advertising companies, most of which are small startups aiming to be acquired by
Google’s competitors. The driver for continued consolidation will be the need to create
dominant and cross-platform (both mobile OS and medium) ad networks.
Visto-Good Technology – Motorola, which bought Good Technology for $500m in

late 2006, sold it to Visto primarily to avoid further litigation over messaging patent
disputes. Motorola and Good were supposed to be a match for RIM’s BlackBerry, but
poor execution of hardware in the devices division got in the way of success. The
timing may not have been the best, but now Visto has a chance to turn things around
for Good by focusing on managing multiple devices in the enterprise – particularly the
iPhone. The company faces the challenge of shoehorning the iPhone into the enter-
prise with little to no help from Apple.

ABOUT THE SAME AS IN 2009 X
5.1 MACRO–LEVEL DRIVERS

There will be a major shift in computing over the next few years, as more tradi-
tional computing (on both PCs and Macs) migrates to mobile computing. Smart-
phones are increasingly taking on the features and capabilities of their desktop and
laptop brethren. Netbooks are relevant here, but will be eaten up by more powerful
laptops. Up to this point, the two markets have lived as separate entities, with distinct
hardware and software vendors. A dominant IT player in the PC space could be the
underdog in the mobile sector.
As the two markets converge (a promise that is not new) over the next few years, there
will be a lot of overlap in capabilities as well as land grabs driving M&A. Convergence
is an overused term, but we feel that the hype of a few years ago will begin to take
shape as users find more of their computing needs ably met by smartphones.

For the most part, it will be a one-way street as large, traditional computing firms look
to extend their reach into the mobile space by picking up startups and some stable,
medium-sized vendors. A key impetus for this trend is how well mobile weathered the
recession in 2009, when demand remained steady for smartphones and the technologies
supporting them, while many other technology markets suffered.

Hardware is harder than you think – The smartphone market is where a lot of hard-
ware purveyors want to be, and a few entered the space in 2009, including Acer and
Dell (joining Garmin, which entered in late 2008). While it is early days for these
players, they haven’t hit a grand slam like Apple did with its first smartphone. As other
companies look to jump on the bandwagon, they should learn from their predecessors
that this is a very difficult and expensive market to enter on your own. A cheaper route
would be to acquire vendors that are already in the sector. We have mentioned Palm
Inc as a potential acquisition target, and still consider it a viable alternative to entering
the market. Dell is on the Android bandwagon, but we believe it would have done much
better if it joined the fray by acquiring Palm – leveraging its strengths to prop up a
strong but poorly positioned device vendor.
Mobility management moves upstream – Enterprises will continue to heavily leverage

IT to remain relevant and responsive to customers, but at the same time push devel-
opment and management of IT into the cloud. Large companies like BMC, CA Inc,
Hewlett-Packard and IBM can manage many aspects of enterprise IT. Outsourcing the
management of servers, PCs and even helpdesks, these companies have yet to touch
mobility. There are several small players in the mobile arena that manage devices and
services for the enterprise that would provide ready targets for large managed service
providers. A few of these companies include BoxTone, Conceivium, Mobile Iron and
Zenprise. These vendors are focused entirely on managing aspects of mobile enterprise
deployments. As enterprises move from reacting to mobile to controlling it, BMC and
others will see value in mobile and buy incumbents to speed their entrance.
Mobile applications rise, but are still grounded – Mobile applications have become
popular, with a renewed focus on mobile application storefronts providing success for
Apple and Google; however, very few application developers shared in that success. One
of the reasons for this is reach, since many of these applications are just on one plat-
form. For those that have moved to multiple platforms, their success is challenged by
the need to support several development environments at once. The answer to both of
these problems lies in mobile application development platforms. These platforms allow
developers to write an application once and then port it quickly to several mobile oper-
ating systems at once. We have seen consolidation of the traditional players, but there
are a couple of firms that have looked to the cloud to further reduce costs. Vendors

like Rhomobile and Appcelerator, which both focus on multiple platforms with cloud
development tools, will drive the next round of consolidation in the mobile application
development space.
Mobile security reaching a tipping point – We will see tougher regulations for
customer data outside of the enterprise in 2010. This oversight paired with strong
growth in the number of enterprise users leveraging smartphones will bring new value
to mobile security players. Enterprise mobile has avoided major security breaches due
to the low value that it currently holds compared to the data on servers, desktops and
laptops. With more data running over the air and being stored on smartphones, it will
be even more critical that enterprises lock these devices down. Mobile-focused players
for VPNs and data encryption could become key targets for larger security providers
looking to enter the mobile space.
Mobile device encryption has been one area of investment as well as some M&A in
recent years, with Check Point Software Technologies’ acquisition of Pointsec in
November 2006, anti-malware vendor McAfee’s purchase of SafeBoot in October 2007
and Sophos’ pickup of Utimaco Safeware in July 2008. Security for mobile phones
is still a small part of that business (laptops being the main segment), but in recent
months there have been indications that vendors are starting to refine their strategies.
Remaining players in this market that we think are worth keeping an eye on include
Credant Technologies, GuardianEdge, encryption mainstay PGP Corp and Safend.
Mobile VPN vendors include BirdStep Technology, Columbitech and Netmotion Wire-
less.
FIGURE 5.3: MOBILE IPO CANDIDATES

COMPANY RATIONALE
RED BEND The mobile software management company has had recent success expanding its
SOFTWARE portfolio of products in a down market. As over-the-air updates become a strategic
tool for wireless carriers in 2010, the opportunity to raise additional cash in 2011 to
expand its technology and marketing reach might be too good to pass up.
TANGOE The TEM provider's acquisition of InterNoded this year puts it ahead of the pack in
providing management of mobile devices, not just cost.
GOOD The vendor has made some acquisitions to bolster its portfolio of products; it may
TECHNOLOGY turn to Wall Street again to raise cash as it takes on large rivals RIM and Sybase.

SECTION 6
IT Services
Analysts: Aleetalynn Schenesky-Stronge, Brenon Daly
6.1 OVERVIEW
As expected, 2009 proved a challenging year for M&A activity in the IT services industry.
The frozen credit market knocked private equity (PE) firms out of the game, particularly
in the first half of the year. The disappearance of buyout shops hit this sector harder than
most. PE firms, attracted by the long contracts and predictable cash flow thrown off by
most IT outsourcing and service providers, had been heavy buyers in the space, accounting
for three of the five largest deals in the segment. (To get a sense of just how dramatic the
falloff has been, consider the fact that Kohlberg Kravis Roberts’ $29bn buyout of payment
service vendor First Data Corp in April 2007 exceeded the aggregate amount spent by all
PE players across all sectors in 2009.)
FIGURE 6.1: IT SERVICES M&A

$100 1,200
1,115
1,087
$88
$80 1,000
Total Volume
Total Value ($B)
$60 761 800

775 772
$45
$42
$40
$39 600
$22 468 $26
$20
$19 $18 400
432
307
$0 200
2002 2003 2004 2005 2006 2007 2008 2009
While the buyout shops were not buying much last year, the strategic acquirers were typi-
cally making smaller deals overall. Look at it this way: while the number of transactions
in 2009 stayed roughly the same as the previous year, spending dropped to $26bn from
$39bn. And even the level in 2008 was just half the level hit in the record year of 2007,
when spending on IT services reached $88bn, nearly one-quarter of all tech and telco
M&A spending that year.

6.2 OUTLOOK
We highly doubt that dealmaking in the IT services market in 2010 will get anywhere
close to 2007 levels, but we could see spending tick up a bit from last year. One reason
for that view is the thaw we saw in the credit markets in the second half of 2009. That
allowed datacenter, colocation and hosting companies to raise approximately $1.8bn
through debt offerings. And, as we noted earlier in this report, there are some signs that
buyout shops will be back in action in 2010.
Another reason why we see additional acquisition activity is that filling gaps in service
offerings has become the primary driver of revenue expansion, rather than organic
growth. This is especially true in the managed hosting segment, where hosting compa-
nies – looking to move up the value chain or round out their service offerings – are
acquiring companies with complementary ancillary hosting services. We would point
to Terremark’s acquisition of DS3 Datavaulting and Carpathia Hosting’s purchase of
ServerVault as examples of this trend.
Further, the technology that many service providers want to purchase has been deeply
discounted for much of the past year, and the reduced pricing on some companies is
likely to continue in 2010. In the shared hosting world, razor-thin margins have resulted
in survival via rollup and consolidation, with companies acquiring customer bases inex-
pensively from players looking to exit the market or to focus on more profitable busi-
ness lines. Examples of these types of low-multiple deals include Hostopia’s pickups
of CI Host and Aplus.net’s shared hosting assets as well as IBM’s takeout of Outblaze’s
email assets.
The content delivery network (CDN) market is one that we expect will be particularly
active, although valuations will remain under pressure. Given that there are roughly 35
CDN vendors competing solely on price in a rapidly commoditizing industry, we project
that the number of deals in that market in 2010 should handily exceed the five or so
CDN transactions we saw last year. The big buyers in this space could well turn out to
be telcos, given the deepening partnerships between the two sectors and the large cash
holdings at telcos.
6.3 DATACENTER ACTIVITY

In the datacenter segment, a number of small deals were inked earlier in 2009 for the
strategic purposes of quickly adding much-needed capacity as utilization of datacenter
facilities approaches 90% in key markets worldwide, as well as solidifying a market
position within a geographic area. Unlike acquisitions that occurred immediately after
the dot-com bust when datacenters on the market were both cheap and plentiful and
forward-looking individuals and companies were able to acquire some top-quality facil-
ities for pennies on the dollar, the current situation differs sharply since there are less
than a handful of prime datacenter properties to pick up at this point.

In addition, those prime datacenter facilities are now likely to attract multiple bidders at
only a modest discount to construction costs, considering the continued supply/demand
imbalance. Although unanticipated, the largest datacenter deal last year was valued at
$689m when Equinix took out North American competitor Switch and Data. While we
believe that this deal may serve as an impetus for additional colocation providers to begin
considering larger-scale acquisitions in 2010, there are only a few candidates worldwide
with the cash or ability to obtain the cash to make such purchases.
Some M&A deals that appear to have potential include Interxion or TeleCity purchasing
Telx as a means of entrance into the North American market and largely following
their current strategy of providing colocation in top cities with a strong interconnection
product; Global Switch buying Coresite to expand into North America with similar whole-
sale and collocation product offerings; or, likewise, Digital Realty Trust picking up Global
Switch in order to expand its reach into the European and Asian wholesale markets.
6.4 KEY DEALS IN 2009

Equinix-Switch and Data – In October, Equinix announced the acquisition of rival coloca-
tion provider Switch and Data in a $689m deal in cash and stock scheduled to close in the
first part of 2010. Why make this acquisition? The answer, as with many things, revolves
around time and money. Equinix was able to obtain a significantly expanded North Amer-
ican colocation footprint for a fraction of the cash that it would have cost to build it and
in a fraction of the time. This is a major strategic plus for Equinix and will accelerate its
growth and enhance its outlook. Equinix has been turning in 6-7% quarterly growth rates
over the last two quarters and to maintain that level of growth, it must ‘feed the machine’
– providing new cabinets to sell and existing cabinets to re-price.
This move is key to keeping that machine well fed and Equinix on a strong upward trajec-
tory in 2010 as demand continues to rise. In addition, Equinix not only consolidates its
dominant position in the third-party, pure-play colocation market in North America, but
also prevents a potential competitor – perhaps from Europe or Asia – from establishing a
strong foothold in the North American market by purchasing Switch and Data.
Deutsche Telekom-Strato – In November, Deutsche Telekom (DT) agreed to acquire

the second-largest mass-market German hoster, Strato, from freenet, a publicly traded
company looking to pay down a large debt load. The deal value was approximately
$410m. Why does DT, which had previously ignored the hosting space entirely, want to
acquire a mass-market hoster? There are a number of reasons including customer acquisi-
tion, SMB market penetration and becoming a one-stop shop or single-serve provider. DT
wants to sell its DSL, telephony and mobility services to a base of more than 1.35 million
consumer and small-business customers.
And going the other way, DT also wants to sell hosting, email and other online services
into its existing base of communication services customers. As people move more of their

personal and business lives online, there is going to be increased demand for hosting
and hosted services. For DT, this represents a logical addition to its communications
portfolio, with the benefit of incurring very low subscriber acquisition costs. In addi-
tion, the company could also leverage Strato to take a bigger step into the SMB segment
– an area it has neglected. Its DSL base is, of course, heavy in residential users, and its
IT outsourcing services focus on the mid-tier to enterprise space. A mass-market hosting
operation is rich with SMB types and DT might view Strato as a way to penetrate that
market more effectively.
Compuware-Gomez – IT services firm Compuware acquired Internet measurement

and monitoring provider Gomez for $295m in cash in November. Gomez will continue
largely unchanged from the hosting/CDN point of view – its pricing and products will
remain the same. The three primary areas where we may see some change (albeit not
immediately) look like positives. First, Gomez will likely have greater international
availability, which is a plus for hard-to-reach spots like Japan. Second, Gomez will be
more financially stable, since the publicly traded Compuware is a profitable, $1bn-plus-
revenue firm. Finally, Gomez is likely to introduce a significantly more useful profes-
sional services offering, capable of assisting customers of CDNs and hosting providers
with optimizing their code for Internet applications. That’s always a tough set of skills
to find and we’re aware of more than one SaaS provider that has been on the lookout –
it’s a handy arrow in the hosting/CDN quiver.
Carpathia Hosting-ServerVault – Managed colocation and hosting provider Carpathia

Hosting, which has been pushing the expansion of its cloud products in the second half
of 2009, acquired managed services provider ServerVault in September for an undis-
closed sum. The deal will slip nicely into Carpathia’s current operating model. Like
Ashburn, Virginia-based Carpathia, ServerVault, based in Dulles, Virginia, is a hosting
provider specializing in secure and compliant hosting offerings to both the commercial
and federal government sector. Also much like Carpathia, ServerVault generates 40% of
its revenue from the federal government sector and 60% from the commercial sector,
although we estimate that with its single datacenter, it brings to the table about half the
revenue that Carpathia does.
This acquisition has a number of positives for Carpathia, and demonstrates that the
company has aggressive management determined to grow the firm far more rapidly
than it has in the past through organic and inorganic means. It also means that its
hybrid solution of colocation, managed hosting and cloud services targeted at the
federal government space just got a little more serious. Carpathia has indicated that it
is now ready to compete head-on with the other managed hoster in the Washington DC
region that has been successful with the federal sector, Terremark. We even feel that
Carpathia may be generating similar amounts of capital on a free cash-flow basis. With
the uptake from the federal government sector picking up steam, we expect results for
both companies to come in at higher levels over the next couple of quarters.

6.5 MACRO-LEVEL M&A DRIVERS
While we certainly don’t expect 2010 to a banner year for M&A activity, we do project
that it will certainly see higher deal volumes and values than in 2009 as the economy
continues to stabilize and cash becomes more readily available. In addition, we believe
that there is a fair amount of deals currently in backlog that could well get closed in the
early part of 2010.
FIGURE 6.2: LESS, MORE OR THE SAME

SOMEWHAT MORE THAN IN 2009 X X
Tighter IT budgets driving capex to opex, creating new demand – With the economic
downturn, the subsequent lack of access to capital, reduced spending by consumers and
companies looking to maintain profitability measures in the face of declining revenue in
2009, the pressure to reduce capital spending by both SMBs and enterprises was signif-
icant. These factors combined to create two new trends in the business world. The first
was converting capital spending to operational spending as much as possible in order to
preserve cash (since there was effectively no lending in the first half of last year). In the IT
services arena, this had the effect of prompting companies and industries that had never
considered outsourcing to begin to take down outsourced colocation and hosting products
as internal capacity constraints kicked in, thus creating trend two: a new demand driver
for Internet infrastructure services and a primary reason for the continued revenue growth
in the IT services sector despite the ailing economy.
Access to capital loosening – With the capital markets completely closed during the first
half of 2009, there was serious concern in the IT services space that capacity and tech-
nological constraints would effectively put an end to industry growth and potentially
innovation. However, during the back half of the year, debt financing in the datacenter
segment in particular has begun to loosen, with more availability and terms that providers
can justify in terms of their ROI requirements. We’re relieved to see the return to more
normalized levels of borrowing for investment, but more important, lenders are being
conservative and only providing debt to proven executors in the industry, allowing those
providers to meet demand by building just-in-time capacity. This strategy will allow high-
quality providers to continue to meet demand requirements and as a result grow revenue,
keep pricing stable and, most important, not allow speculative builders to glut the market
– thereby destroying the industry by competing on price alone.

Service providers positioning themselves for economic recovery – Going into 2009, we
all knew that the economy was in bad shape and were preparing ourselves for far worse.
These apocalyptic predictions created a panicked IT spending environment as all enter-
prises sought to drastically reduce costs wherever possible. This prompted consumers to
call for price reductions and threaten to leave service providers if their demands went
unmet. In years past, this type of behavior could have led to opportunistic cannibalization
by some providers in order to drive competition out of the marketplace.
Instead, much to our approval, the IT services industry reacted in a mature, refined
manner. Vendors carefully balanced customer-retention strategies with deployment initia-
tives aimed at managing costs for customers in the near term, while garnering guaran-
tees of future growth commitments with those customers. They also worked in tandem on
technological innovations necessary for the long-term health of their customer bases. As
such, the IT services industry, while taking a hit on near-term growth (i.e., not growing
its top line as quickly as it had in the previous decade), positioned itself well for the
economic recovery. Owing to these factors, we fully expect increased levels of revenue
growth to resume as the panic subsides and the macro-level economy stabilizes over the
course of 2010.
6.6 MICRO-LEVEL M&A DRIVERS

Similar to 2008, 2009 micro-level drivers included deals completed for the purposes of
acquisition of complementary services and technology, market consolidation and rollup,
and geographic expansion.
Acquisition of complementary services and technology – By far the most dominant

trend for M&A in IT services during 2009 was the acquisition of complementary services
and technology that allowed providers to either round out existing service offerings (e.g.,
Onyx Group’s pickup of Disaster Recovery Solutions Ltd), provide new complementary
services (e.g., DT’s purchase of Strato) or offer technology needed to build new services
(e.g., VMware’s acquisition of SpringSource). The list is long for deals utilized as a way to
obtain complementary services and technology in 2009.
Market consolidation and rollup – Market consolidation also continued, predominantly

by mass-market hosting providers. Deals included Endurance International’s acquisi-
tion of Globat, UK2 Group’s purchase of Virtual Internet and Namesco’s Poundhost buy.
Meanwhile, intersecting both the mass-market and managed hosting sector, HostMy-
Site took out Hosting.com and iomart Group bought RapidSwitch in moves that could be
precursors to further market consolidation. There were also some datacenter transactions
for the purpose of market consolidation. C7 Data Centers acquired Tier Four to become
the dominant third-party datacenter provider in Utah and, of course, Equinix announced
that it is in the process of buying Switch and Data, consolidating its position in the North
American market.

Geographic expansion – Geographic expansion was less of an impetus for M&A in
2009 given the state of the global economy and IT services companies’ low tolerance
for risk. However, several deals were completed for the purpose of expansion into new
markets, including CDNetworks’ pickup of Panther Express, in which the South Korean
acquirer added heft to its North American operations by snagging the New York City-
based target. In addition, we would note that the value of the dollar has sunk against
most major currencies, giving a discount to European and Asian companies that want
to purchase US vendors.

APPENDIX 1
Tech Banking Is Back
The recession is over. At least that’s the view from technology bankers, who consider
the IPO market once again receptive and expect M&A activity to pick up in the coming
year. When we asked bankers in our annual 451 Tech Banking Outlook Survey to gauge
their current pipeline compared to where it was at this time last year, the recovery was
striking. Two-thirds of the bankers said the dollar value of mandates on the deals they
are currently working on is higher than it was in late 2008. In the 2008 survey, half of
the bankers said their pipeline was actually drier.
FIGURE A1.1: CHANGE IN DOLLAR VALUE OF TECH MANDATES
68%
INCREASE
26%
2010
20%
2009
DECREASE
52%
0% 20% 40% 60% 80% 100%

Source: The 451 Tech Banking Outlook Survey
Indeed, it was a dramatic turnaround from the results of last year’s survey, which took
place during the historic upheaval and bloodletting on Wall Street caused by the credit
crisis. In late 2008, the crisis appeared to some to be the death knell for capitalism, with
once-venerable financial institutions literally disappearing overnight. However, one
year later, a very different legacy from the credit crisis is emerging. More than half of
the bankers responded that those unprecedented changes actually boosted their firm’s
opportunities – and they expect to be hiring in order to handle the additional work they
anticipate in 2010.
A1.1 OUTPACING THE MARKET

The improving M&A outlook is due in no small part to the recovery in the equity
markets (the two are closely correlated, after all). When we surveyed bankers in
November 2008, the Nasdaq was hovering around 1,550. On this go-round, the index
stood at about 2,200, or 40% higher. However, we would add that the bullishness in
the M&A market has actually outpaced the equity markets. Consider this: 25% of the
respondents said their pipeline is 25-50% fuller than last year, with another 20% saying
it is at least 50% fuller. That compares to just 5% and 1%, respectively, who had the
same view in the 2008 survey.

Granted, looking at the ‘pipeline’ is hardly empirical, and only a fraction of transactions in
the works will actually get printed. But it is nonetheless a leading indicator – and a particu-
larly bullish one as we exit a year that saw overall tech and telecom M&A spending drop to
its lowest level in six years. With spending in 2009 totaling just $152bn, the level last year
was just half the level of 2008 and one-third the level of both 2006 and 2007.
FIGURE A1.2: OVERALL TECH M&A ACTIVITY

YEAR TOTAL VOLUME TOTAL VALUE DEALS WORTH $1BN+
2004 2,081 $226bn 28
2005 3,040 $373bn 70
2006 4,029 $457bn 74
2007 3,640 $432bn 79
2008 3,014 $301bn 33
2009 3,010 $152bn 33
Note: These results come from a survey emailed to senior-level bankers, nearly all of whom are clients of The
451 Group. The 15-question survey was open in early December, and drew responses from 142 bankers. More
than half of the respondents were either managing directors or head/co-head of banking at their firms, which
ranged from bulge-bracket giants to advisory shops with just a handful of principals.
A1.2 THE ROAD TO RECOVERY

One recent development that has already bumped up technology M&A spending is the
fact that valuations have rebounded. The overall median price-to-sales multiple inched up
nearly every quarter this year, hitting 1.4x trailing sales in the fourth quarter. That’s up
50% since the first quarter, when the Nasdaq bottomed out after a five-month slide at its
lowest level since early 2003.

FIGURE A1.3: RECENT TECH VALUATIONS
2.0
1.7
Median Price/Ttm Sales Valuation 1.6
1.5 1.4
1.3
1.2 1.2
1.0
0.9
0.5
0
Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008 2008 2008 2009 2009 2009 2009
Perhaps more important, valuations are expected to continue to get richer in the coming
year. In our survey, nearly two-thirds of senior investment bankers told us that valuations
of targets are ‘somewhat likely’ to increase, with another 23% saying an increase is ‘very
likely.’ This sentiment has been reinforced by a number of recent high-multiple transac-
tions, including Cisco’s reach for Starent Networks, Adobe’s purchase of Omniture and
Google’s acquisition of AdMob.
A1.3 REPLENISHING THE RANKS

Of course, there’s still a fair amount of recovery needed to even get back to where the
business once was, if that’s even possible. We have argued for a half-year that tech M&A
may be heading toward a ‘new normal,’ with fewer deals overall and smaller ones at that.
Along with fewer transactions in 2009, the paydays on the deals that did get closed were
smaller than what they have been. Most bankers (40%) said fee rates ‘decreased somewhat’
in 2009 from the previous year. That’s up from the 32% who said the same thing in 2008,
when the most common response was that there was ‘no change’ in fees.
Despite the pressure on the business, bankers don’t expect their firms to continue to cut
headcount. In fact, they plan to be hiring in the coming months. That’s a reversal from a
year ago, when the credit crisis appeared to be threatening the very foundations of capi-
talism. Last year, our survey went out at a time when whole banks were disappearing,
either through hasty mergers or outright bankruptcy. More broadly, financial institutions
that were once considered invulnerable also collapsed or were reduced to living on bailout
money from the federal government.

FIGURE A1.4: EXPECTED HEADCOUNT CHANGE
64%
INCREASE 22%
57%
2009
4%20% 2008
DECREASE 35% 2007
8%
0% 20% 40% 60% 80% 100%

Against the backdrop of crumbling capitalism, it’s easy to understand why one out of
three bankers told us last year that they expected their firm’s headcount to be lower
in mid-2009 than it was at the start of the year. This year, that sentiment has dramat-
ically improved, with two-thirds of the respondents saying their firms will likely add
employees between now and mid-2010. We should add, however, that the pace of hiring
will be measured. The most common level of expected hiring (cited by 37% of the
bankers) was that their banks would increase headcount by just 5-10%.
A1.4 STAYING BUSY

When we asked investment bankers what they anticipated to be keeping them – and the
new hires – busy in 2010, the responses indicated that business should be picking up
across the board. Starting with sell-side advisory mandates, which serve as the mainstay
work for nearly all of the bankers we surveyed, the outlook is positively bullish.
FIGURE A1.5: PROJECTED YEAR-OVER-YEAR CHANGE IN SELL-SIDE MANDATES
86%
INCREASE
41%
11%
NO CHANGE
30%
2009
3%
DECREASE 2008
29%
0% 20% 40% 60% 80% 100%


Some 85% of bankers told us that they expected to do more sell-side work in 2010 than in
2009. That was more than twice the level (40%) that said they projected a pickup in our
survey last year. On the other side, some 28% of respondents in our 2008 survey predicted
that their sell-side work would decrease in the coming year, compared to just 3% who
indicated that this year.
A1.5 IPO WINDOW OPENS A CRACK

The respondents also told us that business will be picking up next year in two areas that
saw relatively little action in 2009: leveraged buyouts (LBOs) and IPOs. The IPO market
should keep bankers busy, with 70% of respondents who offer IPO-underwriting services
saying they expect to have ‘substantially more’ business with new offerings in 2010, with
another 23% forecasting ‘somewhat more’ work there in their pipelines for the coming
year. That’s a substantial increase from last year, when just 7% of the bankers offering
IPO-underwriting services expected to be busier.
FIGURE A1.6: PROJECTED NUMBER OF TECH IPOS

YEAR NUMBER OF DEBUTANTS
2007 (FOR 2008) 25
2008 (FOR 2009) 7
2009 (FOR 2010) 22
As to how that work will translate into actual offerings, the median response for projected
number of technology IPOs in 2010 stood at 22. That’s roughly three times the median
projection of seven IPOS from last year’s survey, which pretty much matches the actual
number in 2009. (Obviously, there are different definitions of ‘technology’ at various
banks, with some banks including offerings that others would leave out.)
The IPOs that are coming should be helped by the fact that, overall, technology has been
among the strongest sectors during the recession, as well as the fact that the new tech-
nology offerings in 2009 have all performed reasonably well on the public market. For
instance, both SolarWinds and Fortinet – which went public in May and November,
respectively – have traded up solidly from their offering price and currently sport market
capitalizations of about $1.3bn. (At the end of our recently published 2010 M&A Outlook
– Security and Networks report, we listed a number of candidates that we think could go
public in the coming year. One company on that list, Meru Networks, put in its IPO paper-
work in mid-December.)

A1.6 BUYOUTS ARE BACK
Just as the IPO market appears to be coming back, the LBO space also seems to
be recovering. When we asked investment bankers to look at their pipelines and
project LBO activity (on a dollar basis) for the coming year, the difference between
2008 and 2009 was striking. Last year, basically half of the respondents said they
expected their business with private equity (PE) firms to fall by at least 10%. It’s
a complete switch this year, with half of the bankers saying their PE activity will
increase at least 10%.
FIGURE A1.7: PROJECTED YEAR-OVER-YEAR CHANGE IN DOLLAR VALUE OF PE

MANDATES
76%
INCREASE
23%
18%
NO CHANGE
20%
2009
6%
DECREASE 2008
57%
0% 20% 40% 60% 80% 100%

The bullishness also carries over if we look at just the number of PE mandates
(rather than their dollar value) that the banks project in the coming year. The
percentage of bankers who said they expect to have more PE mandates this year
than last year was twice as high as the percentage who said the same thing in our
2008 survey (75% vs. 34%).
It’s interesting to note that the forecasts for both the number and value of PE
mandates in 2010 tally fairly closely to one another. That wasn’t the case in last
year’s survey, where expectations for PE activity on a dollar basis lagged behind
the overall number of mandates. That turned out to be a fairly accurate assessment,
as 2009 saw a notably large number of PE deals valued in the tens of millions of
dollars. That’s a huge drop-off from the LBOs valued in the billions of dollars that
the buyout barons were inking a few years ago, when debt was cheap and easy.

APPENDIX 2
Companies Are Back In Business For M&A
Having survived the worst economic downturn since the Great Depression, companies
are ready to do deals again. Two-thirds of the respondents to our annual 451 Group Tech
Corporate Development Outlook Survey said they expected their firms to pick up the pace
of M&A in 2010. That represents a substantial change in sentiment among the corporate
buyers from last year’s survey. At that time, when the entire financial services industry
appeared to be collapsing, some 23% of the respondents said they expected to actually
slow their acquisition activity amid all the uncertainty that loomed in the coming year. In
our most recent survey, just 5% said they planned to slow their pace of dealmaking.
FIGURE A2.1: PROJECTED CHANGE IN M&A ACTIVITY IN THE COMING YEAR
68%
INCREASE
44%
27%
NO CHANGE
33%
2009
5%
DECREASE 2008
23%
0% 20% 40% 60% 80% 100%

Source: The 451 Group Tech Corporate Development Outlook Survey
We would also note that the bullishness for M&A in the coming year extends far beyond
just the projected activity. In both types of transactions and even the structure of them,
corporate buyers indicate that they have thrown off much of the conservatism and caution
that characterized their outlook in late 2008. They appear ready to take on more risk in
their acquisitions. For instance, nearly half of the respondents said they were likely to pick
up an early-stage company in the coming year – twice the level who answered that way in
our previous survey. And a final indicator of the improved health of the overall tech M&A
market: corporate development executives said they expected the process to be much more
competitive this year, as participants that had been sidelined by the credit crisis in 2009
return to the market.

A2.1 REBOUND, IF NOT RECOVERY
When the results from our survey of corporate development executives are paired
with the views from the investment bankers that we also surveyed in early December,
the coming year appears set for a solid rebound – if not recovery – for tech M&A.
Just as two-thirds of the corporate development executives said they expected to be
busier in 2010, two-thirds of high-level tech investment bankers said their pipeline is
currently fuller than it was a year earlier. (See Appendix 1 for full report on our 451
Tech Banking Outlook Survey.)
If deal activity tracks at all closely to the consensus view from both surveys, the
coming year should bring significantly more activity than 2009, when spending on
tech M&A sank to its lowest level in six years. Spending on deals last year slumped
to $155bn, half the level that it was in 2008 and just a quarter of the annual totals
during the boom years of 2006 and 2007. A number of factors contributed to the
falloff in overall tech M&A spending, including the unprecedented number of low-
value asset sales, the utter disappearance of private equity (PE) buyers and the overall
erosion of valuations, particularly in the first few months of 2009.
FIGURE A2.2: QUARTER-BY-QUARTER M&A TOTALS, 2008-09
$200 1,000
839 $173
Total Volume
Total Value ($B)
770
$150 800
724
784
757
719 733
$100 659 600
$57 $55
$50 $48 400
$32 $38 $38
$10
$0 200
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008 2008 2008 2008 2009 2009 2009 2009
When we sent out our surveys in early December, the M&A environment had
substantially improved from the beginning of 2009. Fourth-quarter spending on tech
deals surged 45% from the year-earlier quarter, hitting its highest level in six quar-
ters. (Our survey ran in the first week of December and attracted 42 responses from
corporate development officials. About two-thirds of the respondents worked at
publicly traded companies, with the remaining one-third split among VC-backed,
PE-owned and otherwise privately held companies. A full 60% worked for software
companies, with the rest employed at all manner of tech companies. Some nine out

of 10 were based in the US, evenly split between those headquartered in the San Fran-
cisco Bay Area and those in other parts of the country.)
A2.2 VALUATION INFLATION

Perhaps the most striking change in the projected M&A activity in the coming year isn’t
simply that activity is going to pick up from the lethargic rate that we saw in 2009.
Instead, it’s the fact that companies expect to be busier with shopping even though they
know it almost certainly is going to cost them more. More than half (58%) said valu-
ations for private tech companies would increase over the next 12 months. That’s 10
times the percentage that projected any decline in valuations (6%).
FIGURE A2.3: PROJECTED CHANGE IN PRIVATE COMPANY VALUATIONS IN THE

COMING YEAR
58%
INCREASE 4%
39% 2009
36% 2008
NO CHANGE 9% 2007
28%
6%
DECREASE 87%
33%
0% 20% 40% 60% 80% 100%

Source: The 451 Group Tech Corporate Development Outlook Survey
Granted, this is a relative measure and, for the most part, private company valuations
right now are coming off rather depressed levels due to the global recession. But it’s
still a remarkable turnaround. In our survey last year, nearly nine out of 10 respondents
said they expected valuations of private companies to sink. Of that number, roughly
half indicated that they expected valuations to ‘decline substantially,’ with the other half
saying they would ‘decline somewhat.’
The projected valuation inflation has made striking a price in deals much more difficult,
corporate development executives told us. By far, the biggest ‘pain point’ they identi-
fied was bridging the gap between what they were willing to pay and what the target
company wanted for its business. More than half (53%) said it is ‘very much a pain
point,’ which was twice the level of any other difficulty we asked about (obtaining deal
financing, dealing with convoluted equity structures, and so on). Another 28% said the
bid/ask spread was ‘somewhat a pain point,’ with just one respondent (representing 3%
of the total) saying it posed no problem. Incidentally, corporate development executives

were slightly more likely to say that the valuation gap stemmed from the target compa-
ny’s backers, rather than the company’s management.
The responses about potential M&A snags appear to indicate that the immediate impact
of the credit crisis has passed. We phrased the question slightly differently this year,
so the results aren’t directly comparable. Nonetheless, they are revealing. In 2008, the
top reason for the slowing deal flow stemmed from the ‘uncertain financial outlook for
acquirers.’ The next-most-popular response was ‘frozen credit market’ while the ‘valua-
tion gap’ ranked only as the third-most-difficult obstacle last year.
A2.3 COMPETITIVE FIELD

One of the primary reasons that companies expect to pay more for deals in 2010 is that
they see more competition, which wasn’t the case for much of 2009. As we wrote in the
introduction to our report last year, companies were fully aware that they were likely
to be the only potential buyer at the table and could dictate terms to cash-strapped
startups. Indeed, that’s exactly how transactions played out all too often in 2009. In this
year’s survey, corporate development executives said they expected to bump into an
increasing number of corporate and financial bidders. In addition, they anticipated that
more potential targets would head for the other exit, an IPO.
FIGURE A2.4: EXPECTED CHANGE IN COMPETIVENESS FROM OTHER MARKET

PARTICIPANTS IN 2010
71%
INCREASE 41%
47% Other Strategic Acquirers
26% Private Equity

NO CHANGE 35% IPOS
38%
3%
DECREASE 24%
15%
0% 20% 40% 60% 80% 100%

Source: The 451 Group Tech Corporate Development Outlook Survey, December 2009
Some 70% of respondents – twice the level from the previous survey – said they
expected to see more fellow strategic buyers in potential transactions in the coming
year. But an even more dramatic turnaround is expected in competition from finan-
cial buyers. PE firms, which were largely sidelined in 2009 because of the frozen credit
market, are expected to be active again this year. Four out of 10 respondents told us
that buyout shops were likely to pose more competition in 2010, almost twice the

number who said PE firms would pose less competition. In comparison, nearly nine
out of 10 corporate development executives said last year that they expected to see less
competition from buyout shops. That turned out to be pretty accurate, as the share of
PE spending in overall tech M&A in 2009 slid to about 15%, roughly half the level of
boon times for tech LBOs.
Corporate buyers also said they expected more competition from the public market,
as companies ready for an exit begin to head toward an IPO rather than a trade sale.
Nearly half of the respondents said IPOs would offer more competition for their deals in
2010. In contrast, last year nine out of 10 respondents said they expected less compe-
tition from the public markets in their deals. When asked how many IPOs they antici-
pated from IT vendors in 2010, the median response was 15 offerings. That’s less bullish
than the median projection from investment bankers, who estimated 22 IPOs this year.
A2.4 RISKY BUSINESS

As they looked ahead to the kind of deals they planned to ink in the coming year,
corporate development executives appeared to indicate that they have regained their
appetite for risk. They also appeared to have shed the conservative attitude toward
paying for their deals. Last year, when much of the economy was suffering through a
period of tight liquidity, one out of five respondents said they planned to use less cash
to cover their M&A spending in the coming year. (That’s fiscally prudent in a time when
‘cash is king,’ as we heard over and over in early 2009.) In our more recent survey, just
6% said they’ll be using less cash to pay for deals in 2010.
In terms of types of deals, almost half of those surveyed said they expected to pick
up early-stage companies in 2010 – twice the level that said that in last year’s survey.
To us, that suggests that the uncertainty of the previous year has eased to the point
where companies are once again willing to take a gamble on an unproven player. The
sentiment toward ‘transformative acquisitions’ also underscores the fact that compa-
nies don’t expect to be as conservative in their deals in the coming year. Just 18% said
they’re likely to do fewer of the large, bet-the-company kind of deals in 2010, half the
level that said that in the previous survey.

APPENDIX 3
The Vanishing Public Software Company
Analyst: Yulitza Peraza
In the past few years, we have seen a remarkable amount of consolidation among
publicly traded technology companies. To illustrate the consolidation that has already
taken place, we ran an analysis of the acquisitions of publicly traded US enterprise soft-
ware vendors (see our definitions below) since 2002. The results, as shown graphically
on the following four pages, demonstrate a wave of consolidation that has seen nearly
six out of 10 players acquired in those eight years. (Note: The first two pages of the
‘waterfall’ chart show purchases of companies of greater than $250m in market capi-
talization. The following two pages show takeouts of companies of less than $250m in
market cap.)
We started with a base of 203 enterprise software vendors that fit our criteria. As the
following table demonstrates, buyers spent $82bn on 118 of those firms from 2002-
2009. Acquired companies in this sample had a combined average market value
premium of 34% over the closing price on the last trading date prior to their acquisition
announcement. The median deal value/market cap ratio rose from 21% in 2003 to an
all-time high of 44% in 2009.
FIGURE A3.1: ACQUISITIONS OF PUBLICLY TRADED ENTERPRISE SOFTWARE

COMPANIES, 2002-2009
YEAR TOTAL NUMBER ACQUIRED DEAL VALUE (BILLIONS) MEDIAN PREMIUM
2002 16 $3.8 33%
2003 17 $4.7 21%
2004 10 $11.8 32%
2005 24 $18.9 31%
2006 18 $12.2 26%
2007 15 $14.6 34%
2008 8 $10.1 32%
2009 10 $5.4 44%
NOT ACQUIRED 85 $731.6 N/A
TOTALS 203 $813.0 N/A
Source: 451 M&A KnowledgeBase

A3.1 THE BIG GET BIGGER
Our data further shows that the giants are getting larger, thanks in no small part to
that very consolidation. In fact, the total dollars spent to acquire the above companies
(including a not-insubstantial acquisition premium) is just one-tenth the current valuation
for the remaining software vendors. The numbers: aggregate spending on the 118 pickups
of software providers over the past eight years totaled $82bn, while the market cap of the
85 remaining companies in mid-December totaled about $732bn.
To further reinforce the fact that the software industry – like many other mature indus-
tries – is now rather top-heavy, consider the fact that the single-largest software transac-
tion since 2002 (Oracle’s $10.5bn purchase of PeopleSoft) is equal to less than 2% of the
combined valuation of the eight largest independent software vendors, which collectively
garnered a market cap of $636bn in mid-December.
As seen in the following table, the market cap of the remaining independents is heavily
weighted in the top few players. For example, just three of those behemoths – Micro-
soft, IBM and Oracle – account for just about 75% of that remaining market cap, or about
$545bn. It’s no coincidence that these three giants are among the most active shoppers in
our sector, with the 12 deals inked by IBM and Oracle alone accounting for nearly half
of the total consolidation spending in the eight-year period. Subtracting those three large
players leaves 82 remaining companies with a combined market cap of $192bn. And the
waterfall continues to drop off steeply. Of those companies, the 12 with market caps greater
than $5bn make up 75% of that remaining market value ($144bn). That leaves 70 software
vendors with a combined market cap of just $48bn.
To sum up, even the so-called 80/20 rule understates the case of the remaining independent
companies in our data set. Just 15 companies, or 18% of the total, account for 93% of the
market capitalization of still-independent public companies with 70 firms accounting for
the remaining 7% of market value.
FIGURE A3.2: AND THEN THERE WERE… 85: INDEPENDENT PUBLIC ENTERPRISE
SOFTWARE COMPANIES BY SHARE OF TOTAL MARKET CAPITALIZATION
NUMBER OF COMBINED % OF
COMPANIES MARKET CAP TOTAL*
3 $540bn 74%
12 $144bn 20%
70 $48bn 7%
Source: 451 Group Research
*Exceeds 100% due to rounding
In our analysis of the enterprise software market, we included US public companies that primarily sell applica-
tion software, infrastructure software and information software. We excluded security, storage and single-industry
vertical software with the exception of several very large vendors such as IBM that have been major consolidators
within the enterprise software industry. The market cap figures are as of December 18, 2009.

FIGURE A3.3: PUBLIC ENTERPRISE SOFTWARE ACQUISITIONS
INDEPENDENT AND ACQUIRED COMPANIES WITH MARKET CAP OR EXIT VALUE >$250M
INDEPENDENT PUBLIC COMPANY ACQUIRED PUBLIC COMPANY DATE (EG. 2005): YEAR ACQUIRED
0 $2.5BN $5BN $7.5BN $10BN
MICROSOFT $263BN
IBM $167BN
ORACLE $110BN
EMC $34BN
ADOBE $19BN
VMWARE $17BN
SYMANTEC $14BN
CA $11BN
PEOPLESOFT $10BN 2004
INTUIT
SALESFORCE.COM
CITRIX SYSTEMS
BMC SOFTWARE
BEA SYSTEMS 2008
AUTODESK
AMDOCS
RED HAT
SIEBEL SYSTEMS 2005
NUANCE COMMUNICATIONS
ANSYS
SYBASE
MERCURY INTERACTIVE 2006
MACROMEDIA 2005
HYPERION SOLUTIONS 2007
WEBEX 2007
RATIONAL SOFTWARE 2002
INFORMATICA
CONCUR TECHNOLOGIES
PARAMETRIC TECHNOLOGY
COMPUWARE
QUEST SOFTWARE
TIBCO SOFTWARE
KRONOS 2007
FILENET 2006
J.D. EDWARDS 2003
NOVELL
CONVERGYS
OMNITURE 2009
DOCUMENTUM 2003
LAWSON SOFTWARE
SUCCESSFACTORS
IDX SYSTEMS 2005
SSA GLOBAL TECHNOLOGIES 2006
OPSWARE 2007
PEGASYSTEMS
MICROSTRATEGY
SAPIENT
PROGRESS SOFTWARE
SKILLSOFT
ARIBA
0 $2.5BN $5BN $7.5BN $10BN

INDEPENDENT AND ACQUIRED COMPANIES WITH MARKET CAP OR EXIT VALUE >$250M
0 $2.5BN $5BN $7.5BN $10BN

SERENA SOFTWARE 2005
ACXIOM
NETSUITE
FAIR ISAAC
ASCENTIAL SOFTWARE 2005
JDA SOFTWARE
HNC SOFTWARE 2002
TALEO
OPEN SOLUTIONS 2006
WITNESS SYSTEMS 2007
PAREXEL
ASPECT COMMUNICATIONS 2005
ULTIMATE SOFTWARE
TYLER TECHNOLOGIES
SPSS 2009
BLADELOGIC 2008
EBIX
MICROMUSE 2005
MRO SOFTWARE 2006
DENDRITE 2007
INTERWOVEN 2009
ART TECHNOLOGY
MANHATTAN ASSOCIATES
DELTEK
RETEK 2005
AUTHORIZE.NET 2007
RIGHTNOW TECHNOLOGIES
PREMIERE GLOBAL SERVICES
EPICOR SOFTWARE
I2 TECHNOLOGIES 2009
BOTTOMLINE TECHNOLOGIES
NETIQ 2006
AGILE SOFTWARE 2007
WEBMETHODS 2007
FREEMARKETS 2004
VOCUS
STELLENT 2006
VISUAL SCIENCES 2007
EPIPHANY 2005
RENAISSANCE LEARNING
MSC SOFTWARE 2009
MATRIXONE 2006
LIVEPERSON
MAPICS 2005
SEEBEYOND TECHNOLOGY
2005
DEMANDTEC
KENEXA
INTERVOICE 2008
NIKU 2005
GROUP 1 SOFTWARE 2004
0 $2.5BN $5BN $7.5BN $10BN

INDEPENDENT AND ACQUIRED COMPANIES WITH MARKET CAP OR EXIT VALUE <$250M
0 $62.5M $125M $187.5M $250M

CAPTIVA SOFTWARE 2005
OPNET TECHNOLOGIES
CLICK COMMERCE 2006
PROS HOLDINGS
APPLIX 2007
INKTOMI 2002
VIGNETTE 2009
VERITY 2005
MANUGISTICS GROUP 2006
QAD
ACTUATE
CONCORD COMMUNICATIONS 2005
NEOFORMA 2005
DATASTREAM 2006
EMBARCADERO TECHNOLOGIES 2007
AMERICAN SOFTWARE
PLUMTREE SOFTWARE 2005
KEYNOTE SYSTEMS
INDUS INTERNATIONAL 2006
SILVERSTREAM SOFTWARE 2002
MOBIUS MANAGEMENT SYSTEMS 2007
UNICA CORPORATION
IMANAGE 2003
EPLUS
MARIMBA 2004
HIRERIGHT 2008
SUMTOTAL SYSTEMS 2009
GUIDANCE SOFTWARE
SUPPORTSOFT
SABA SOFTWARE
BRIO SOFTWARE 2003
TALARIAN 2002
TIGERLOGIC
NUANCE COMMUNICATIONS 2005
CONCERTO SOFTWARE 2003
PHOENIX TECHNOLOGIES
CAPTARIS 2008
VITRIA TECHNOLOGY 2006
INFINIUM SOFTWARE 2002
NOVADIGM 2004
CHORDIANT SOFTWARE
PERVASIVE SOFTWARE
DOCUCORP 2006
MERCATOR SOFTWARE 2003
CALLIDUS SOFTWARE
VASTERA 2005
SEGUE SOFTWARE 2006
ON TECHNOLOGY 2003
SPEECHWORKS INTERNATIONAL 2003
DIGITAL IMPACT 2005
ONYX SOFTWARE 2006
LATITUDE COMMUNICATIONS 2003
0 $62.5M $125M $187.5M $250M

INDEPENDENT AND ACQUIRED COMPANIES WITH MARKET CAP OR EXIT VALUE <$250M
0 $62.5M $125M $187.5M $250M

VERTICALNET 2007
BROADVISION
ROGUE WAVE SOFTWARE 2003
BORLAND SOFTWARE 2009
ROSS SYSTEMS 2003
CENTRA SOFTWARE 2005
MARKET LEADER
VERSANT
A.D.A.M.
FAIRMARKET 2003
SALARY.COM
MANATRON 2008
ALPHASMART 2005
NEON SYSTEMS 2005
EXE TECHNOLOGIES 2003
OPTIKA 2004
AVANTGO 2002
COMSHARE 2003
MULTI-CHANNEL HOLDINGS 2002
DOCUMENT SCIENCES 2007
AUTHENTIDATE HOLDING
BLUE MARTINI SOFTWARE 2005
UNIFY
MADE2MANAGE SYSTEMS
2003
RAINMAKER SYSTEMS
CATALYST INTERNATIONAL
2004
XATA CORPORATION
PRINTCAFE
2003
INSIGHTFUL CORPORATION
2008
PRIMUS KNOWLEDGE
SOLUTIONS 2004
EXCELON 2002
SOFTBRANDS 2009
SONIC FOUNDRY
EXTENSITY 2002
INTRAWARE 2008
I-MANY 2009
SCIQUEST 2004
PERSISTENCE SOFTWARE 2004
T/R SYSTEMS 2003
FRONTSTEP 2002
DATAWATCH
SELECTICA
ONSTREAM MEDIA
BRIDGELINE SOFTWARE
ACTIONPOINT 2002
AVIDYN 2002
STARBASE 2002
CLICKACTION 2002
NETGURU 2006
PLANETCAD 2002
PROSOFT LEARNING 2006
0 $62.5M $125M $187.5M $250M
Includes US-based enterprise software companies traded on NASDAQ, NYSE or AMEX. This view of enterprise software includes applica-
tion software, information management and infrastructure management but excludes security, storage and single-industry vertical software.
Values shown are market capitalization for independent companies and market capitalization or deal value for acquired companies.

INDEX OF COMPANIES
3Com 8, 12, 25, 29, 31, 32, 33, 34, 35, 43, Agent Logic 16
44, 45
Agile Software 75
3Leaf Systems 49
AirMagnet 36
3PAR 47
Aleri 15, 18, 49
3Tera 26
AlphaSmart 77
3Ware 43
Altiris 37
Abiquo 26
Amalto Technologies 16
Accel-KKR 21
Amazon 8, 12, 21, 24, 25
Acer 52
AMCC 43
Acronis 47
Amdocs 74
Actimize 30
American Software 76
ActionPoint 77
Ansys 74
Actuate 76
Antenna Software 50
Acunetix 38
Aplus.net 55
Acxiom 75
Apparent Networks 33
A.D.A.M. 77
Appcelerator 53
Adaptec 47
Apple 51, 52
AdMob 12, 50, 51, 63
Applimation 43
Adobe 7, 8, 14, 15, 17, 21, 63, 74
Applix 76
Aerohive Networks 42
AppSec Consulting 40
Affiliated Computer Services 8, 12

Aprimo 27 BearingPoint 6
Arcot Systems 38 BigFix 37, 42
ArcSight 40 BirdStep Technology 53
Ariba 74 BitArmor Systems 40
Arjuna Technologies 26 BLADE Network Technologies 36, 48,

49
Art Technology 75
BladeLogic 75
Ascential Software 75
BlueArc 47
Aspect Communications 75
Blue Martini Software 77
AuthentiDate Holding 77
BlueRoads 15
Authorize.Net 75
BMC Software 26, 52, 74
Autodesk 74
BorderWare Technologies 29
Autonomy Corp 13, 15, 18
Borland Software 6, 13, 77
Avamar Technologies 44
Bottomline Technologies 75
Avantgo 77
BoxTone 52
Avere Systems 47
Bridgeline Software 77
Avidyn 77
Brio Software 76
Awareness Inc 22
BroadVision 77
Barracuda Networks 29, 36, 37, 42
Brocade (Foundry Networks) 28, 47
BBN Technologies 30
B-Virtual 47
BEA Systems 14, 74
C7 Data Centers 59

CA 8, 15, 22, 29, 31, 33, 35, 38, 39, 40, CI Host 55
42, 52, 74
Cirtas Systems 47
Calista Technologies 24
Cisco Systems 8, 12, 15, 25, 27, 28, 29,
Callidus Software 17, 76 30, 31, 33, 34, 36, 37, 40, 41, 44, 45,
46, 47, 63
Calpont 23
Citadel Security Software 37
Captaris 76
Citrix Systems 24, 36, 38, 74
Captiva Software 76
Cittio 36
Carpathia Hosting 55, 57
Clear Standards 21
Cassatt 15
ClickAction 77
Catalyst International 77
Click Commerce 76
CDC Software 20
Coghead 16
CDNetworks 60
Columbitech 53
Centive 16, 17
CommVault 47
Centra Software 77
Compellent 47
Centrify 39
Compuware 4, 13, 15, 19, 57, 74
Cenzic 38
Comshare 77
Certeon 28
Conceivium 52
ChanneLinx 16
Concerto Software 76
Check Point Software Technologies
41, 53 Concord Communications 76
Chi-X 49 Concur Technologies 74
Chordiant Software 76 Configuresoft 15, 24

Conformia Software 20 DataDirect Networks 47, 49
Conformity Inc 38 Data Domain 7, 43, 44, 46, 47
Consona 15, 16, 20 DataMirror 18
Convergys 74 DataStream 76
Copan Systems 47 DataSynapse 16
Coradiant 27 Datawatch 77
Coral8 15, 18, 49 Dell 8, 13, 25, 36, 43, 44, 45, 46, 48, 49,
52
Coresite 56
Deltek 75
Corvil 49
DemandTec 75
Courion 39
Dendrite 75
Coverity 32
Deutsche Telekom 56
Cray 43
Dexterra 50
Credant Technologies 53
Digital Impact 76
Crossbeam Systems 35, 42
Digital Realty Trust 56
CSG Openline 15
Disaster Recovery Solutions Ltd 59
CTERA Networks 47
dns Limited 35
Cyber-Ark Software 39
Docucorp 76
Cyota 30
Document Sciences 77
Cyveillance 29, 30, 31
Documentum 74
Danger Inc 13
Double-Take Software 47

DS3 Datavaulting 55 Eucalyptus Systems 26
DVLabs 32 EvoStor 47
Ebix 75 Exagrid 47
EDS 48 Exanet 47, 48
eGain Communications 22 Excelon 77
ElasticHosts 26 Expand Networks 28
Elastra 25, 26 Extensity 77
Electronic Arts 12 F5 Networks 12, 25, 36, 38
Eloqua 22, 27 Fair Isaac 75
Embarcadero Technologies 76 FairMarket 77
EMC 7, 15, 22, 23, 24, 25, 27, 31, 39, 43, FastScale Technology 15
44, 46, 47, 48, 74
Fidelis Security Systems 40

Endurance International 59
FileNET 74
Engine Yard 24
First Data 10, 54
Enomaly 26
Fischer International Identity 38
Entrust 6
FlexiScale 26
Epicor Software 75
Fluke Networks 33
Epiphany 75
Force10 28
ePlus 76
Fortent 30
EqualLogic 13, 46, 48
Fortify Software 32
Equinix 8, 56, 59
Fortinet 35, 42, 43, 65

FreeMarkets 75 Hexagrid Computing 26
Frontstep 77 Highdeal 20
Fujitsu Technology Solutions 43, 48 HireRight 76
Garmin 52 Hitachi Data Systems 48
Genius.com 22 HiveLive 16, 17, 22
GigaTrust 40 HNC Software 75
Glasshouse Technologies 47, 49 Hosting.com 59
Global Switch 56 HostMySite 59
Globat 59 Hostopia 55
GoldenGate Software 16, 18 Huawei 45
Gomez 13, 15, 19, 27, 57 HubSpot 27
Good Technology 50, 51, 53 Hyland Software 23
Google 12, 50, 51, 52, 63 Hyperion Solutions 74
GridStore 47 i2 Technologies 12, 75
Group 1 Software 75 IBM 3, 8, 15, 18, 19, 20, 21, 23, 24, 25,
26, 27, 28, 29, 31, 32, 34, 35, 36, 38,
39, 40, 42, 43, 45, 46, 48, 49, 52, 55,
GuardianEdge 41, 53
73, 74
Guardium 34, 35, 40

Ibrix 43, 48
Guidance Software 76
IDS Scheer 16, 29, 30
Heroku 24
IDX Systems 74
Hewlett-Packard (HP) 8, 12, 22, 25, 26,

iManage 76
28, 29, 31, 32, 33, 34, 35, 36, 38, 42,
43, 44, 45, 46, 48, 52

I-many 77 Interxion 56
Imperva 38 Intraware 77
Imprivata 39 Intuit 4, 74
InDorse Technologies 40 iomart Group 59
Indus International 76 Iron Mountain 22
Infinium Software 76 IronPort Systems 30
Infobright 23 Isilon Systems 47
InFocus 6 JBoss 24
Infor Global Solutions 20 JDA Software Group 12, 75
Informatica 16, 18, 43, 74 J.D. Edwards & Co. 74
InfoVista 33 Jigsaw Data 27
Ingres 27 Jive Software 27
Inktomi 76 Juniper Networks 25, 28, 36, 40
InQuira 21 Kaidara Software 21
Insightful Corporation 77 Kana Software 21
InStranet 17 Kaspersky Lab 37, 41
Intalio 24 Kazeon 15
IntelliCloud 49 Kenexa 75
InterNoded 50, 53 Keynote Systems 76
Intervoice 75 Kickfire 23
Interwoven 13, 15, 18, 21, 22, 75 Klocwork 32

Kohlberg Kravis Roberts 10, 42, 54 MAPICS 75
Kronos 74 Marimba 76
Latitude Communications 76 Market Leader 59, 73, 77
Lawson Software 74 Marketo 22
LifeSize Communications 12, 33, 41, 42 MatrixOne 75
Likewise Software 39 MaxiScale 47
LinkedIn 27 Mayflower Gmbh 38
Liquid Machines 40 Mazu Networks 36
Lithium Technologies 22 McAfee 29, 31, 32, 36, 37, 40, 53
LivePerson 75 Mercator Software 76
Logitech 12, 33, 41, 42 Mercury Interactive 74
London Stock Exchange 49 Meru Networks 35, 42, 65
LSI 43 Mezeo Software 47
Lumension Security 37, 42 Micro Focus 13
Macromedia 74 Micromuse 75
Made2Manage Systems 77 Microsoft 3, 8, 13, 16, 19, 20, 21, 22, 23,
24, 26, 38, 39, 40, 49, 73, 74
Makana Solutions 17
MicroStrategy 74
Manatron 77
Mirage Networks 35
Manhattan Associates 75
Mobile Iron 52
Manticore Technology 22
Mobius Management Systems 76
Manugistics Group 76

Motorola 50, 51 NICE Systems 30
MRO Software 75 Niku 75
MSC Software 75 Nimsoft 27
MuleSoft 24 Nokia 8
Multi-Channel Holdings 77 Nordic Edge 38
MX 29, 36 Norman Data Defense Systems 37
Mzinga 22 Nortel Networks 6, 49
N-able Technologies 37 Novadigm 76
Namesco 59 Novell 39, 74
Neoforma 76 Nuance Communications 74, 76
NEON Systems 77 Numara Software 21
NetApp 44, 46, 48 Oakley Networks 30
netGuru 77 Omniture 7, 14, 15, 17, 21, 63, 74
NetIQ 75 ON Technology 76
Netmotion Wireless 53 One Stop Systems 49
NetQoS 33, 36, 42 OnStor 43
NetScout 33 Onstream Media 77
NetSuite 75 Onyx Group 59
Network Instruments 42 Onyx Software 76
Networks In Motion 50 Open Solutions 75
NextIO 49 Open Text 18, 22

OPNET Technologies 33, 76 Persistence Software 77
Opsware 74 Pervasive Software 16, 76
Optika 77 PGP Corp 40, 53
Oracle 3, 11, 12, 14, 16, 18, 19, 20, 21, 22, Phoenix Technologies 76
23, 24, 26, 38, 39, 43, 45, 47, 48, 49,
73, 74
Ping Identity 38
Orchestria 29, 31, 35

PlanetCAD 77
Ounce Labs 29, 32, 35, 42

Platform Computing 26
Outblaze 55
Playfish 12
Overland Storage 47
Plumtree Software 76
PacketTrap Networks 28, 33, 34, 36

PLX Technology 49
Palm Inc 52
Pointsec 53
Panda Security 37
Poundhost 59
Panther Express 60
Premiere Global Services 75
Parametric Technology 74
Primus Knowledge Solutions 77
Parature 21
printCAFE 77
Pardot 22
Progress Software 24, 74
Parexel 75
PROS Holdings 76
PathScale 43
Prosoft Learning Corp 77
Pegasystems 74
Pure Digital 12
PeopleSoft 73, 74
Purewire 29, 36, 37
Perot 8, 43, 44, 48

QAD 76

QinetiQ 29, 30, 31 Rogue Wave Software 77
Q-Layer 16, 19 Ross Systems 77
QlikTech 27 RSA 30, 32, 39
Quadrics 43 Saba Software 76
Quantum Corp 47 SafeBoot 53
Quest 24, 28, 33, 34, 39, 74 Safend 40, 41, 53
Rackable Systems 43, 44, 48 Salary.com 17, 77
Rainmaker Systems 77 Salesforce.com 17, 22, 27, 74
RapidSwitch 59 SAP 8, 16, 20, 21, 22, 27
Rational Software 35, 74 Sapient 74
Raytheon 30 SAS Institute 15, 18
Red Bend Software 53 ScaleMP 49
Red Hat 20, 24, 26, 74 Scalent Systems 25
Relsys 20 ScanSafe 29, 30, 36, 37
Renaissance Learning 75 SciQuest 77
Replify 28 SecureWorks 35
Retek 75 SeeBeyond Technology 75
Rhomobile 53 Segue Software 76
RightNow Technologies 16, 17, 22, 75 Selectica 77
RIM 50, 51, 53 Sentillion 16
Riverbed Technology 12 Serena Software 75
RNA Networks 49 ServerVault 55, 57

Shavlik Technologies 37 SPSS 8, 15, 18, 21, 75
SiCortex 43 Starbase 77
Siebel Systems 74 Starent Networks 36, 63
Silicon Storage Technology 6 Stellent 75
SiliconSystems 43 Storspeed 47
Silverpop 22 Strato 56, 57, 59
SilverStream Software 76 StreamBase Systems 18, 49
SAF (Simulation, Analysis and SuccessFactors 74

Forecasting) 20
SumTotal Systems 6, 76
Skillsoft 74
Sun Microsystems 6, 11, 12, 16, 19, 39,
Skype 8, 11 45, 47, 48
SoftBrands 16, 77, 85 Sunbelt Software 37
Software AG 16, 24 SuperMicro 48
SolarWinds 28, 33, 34, 36, 65 SupportSoft 15, 76
Sonic Foundry 77 Switch & Data 8
Sophoi 20 Sybase 18, 53, 74, 86
Sophos 37, 42, 53 Symantec 24, 36, 37, 40, 48, 74
Spansion 6 Symark Software 39
SpeechWorks International 76 Symetriq 26
SPI Dynamics 32, 38 Symform 47
Splunk 40, 42 Symplified 38
SpringSource 7, 12, 16, 19, 20, 24, 26, 59 Talarian 76

Talend 16 Tyler Technologies 75
Taleo 75 UK2 Group 59
Tandberg 33, 34, 36, 41 Ultimate Software 75
Tangoe 50, 53 Unica Corporation 76
Team Cymru 30 Unify Corp. 77
TeleCity 56 Univa UD 26
Telecommunication Systems 50 Utimaco Safeware 53
Telx 56 Varonis 40
Tera Computer 43 Vastera 76
Terremark 25, 55, 57 Vega 43
TIBCO Software 16, 24, 49, 74 Veracode 32
Tidal Software 15 Verafin 30
Tier Four 59 Verari Systems 48
TigerLogic 76 Verdasys 40, 41
TippingPoint 29, 31, 32, 35 Vericept 35
Toshiba 43 Verisign 4
Trend Micro 37 Verity 76
TriCipher 38 Versant 77
Trustwave 35, 42 VerticalNet 77
TS-Associates 49 Vidyo 42
Turin Networks 28 Vignette 18, 22, 76
Turquoise 49 Virsto Software 47

Virtensys 49 Zantaz 18
Virtual Internet 59 Zappos 12
Visto 50, 51 Zenprise 52
Visual Sciences 75 Zetta 47
Vitria Technology 76 Zscaler 29, 37
VMware 7, 8, 12, 16, 19, 20, 24, 25, 26,

42, 59, 74
Vocus 75
Watchfire 32, 38
WatchGuard Technologies 29
WebEx Communications 29, 74
webMethods 75
Western Digital 43
WhiteHat Security 38
Wind River 44
Witness Systems 75
Woven Systems 43
Xactly 16, 17
Xata Corporation 77
Xerox 8, 12
Xsigo Systems 49
ZafeSoft 40


Tech MA Outlook 2010 FINAL

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Tech MA Outlook 2010 FINAL

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Analyzing the Business

TECH M&A OUTLOOK 2010

ABOUT TIER1 RESEARCH

New York London

San Francisco Boston

THE 451 GROUP: M&A KNOWLEDGEBASE i

To request more information or

ii TECH M&A OUTLOOK 2010

SECTION 2: ENTERPRISE SOFTWARE 14

SECTION 3: SECURITY AND NETWORKS 28

SECTION 4: STORAGE AND SYSTEMS 43

THE 451 GROUP: M&A KNOWLEDGEBASE iii

APPENDIX 1: TECH BANKING IS BACK 61

APPENDIX 2: COMPANIES ARE BACK IN BUSINESS FOR M&A 67

APPENDIX 3: THE VANISHING PUBLIC SOFTWARE COMPANY 72

iv TECH M&A OUTLOOK 2010

SECTION 2: ENTERPRISE SOFTWARE 14

SECTION 3: SECURITY AND NETWORKS 28

SECTION 4: STORAGE AND SYSTEMS 43

THE 451 GROUP: M&A KNOWLEDGEBASE v

APPENDIX 1: TECH BANKING IS BACK 61

APPENDIX 2: COMPANIES ARE BACK IN BUSINESS FOR M&A 67

vi TECH M&A OUTLOOK 2010

THE 451 GROUP: M&A KNOWLEDGEBASE vii

FIGURE 1.1: OVERALL TECH M&A

Source: The 451 M&A KnowledgeBase

THE 451 GROUP: M&A KNOWLEDGEBASE 1

FIGURE 1.2: RECENT QUARTERLY TECH M&A ACTIVITY

$300 657 600

Source: The 451 M&A KnowledgeBase

2 TECH M&A OUTLOOK 2010

Source: The 451 M&A KnowledgeBase

THE 451 GROUP: M&A KNOWLEDGEBASE 3

$1,000 985 35%

Source: The 451 M&A KnowledgeBase

4 TECH M&A OUTLOOK 2010

0% 20% 40% 60% 80% 100%

Source: The 451 Corporate Development Outlook Survey

1.2 CASH FOR CLUNKERS

THE 451 GROUP: M&A KNOWLEDGEBASE 5

Source: The 451 M&A KnowledgeBase

6 TECH M&A OUTLOOK 2010

Median Price-To-Sales Multiple

1.3 A REBOUND IN THE BACK HALF

THE 451 GROUP: M&A KNOWLEDGEBASE 7

• Cisco Systems announced a pair of $3bn acquisitions in October, including one

• Hewlett-Packard reached for 3Com in a move designed to bulk up in its fight

8 TECH M&A OUTLOOK 2010

FIGURE 1.8: TECH VALUATIONS DURING THE RECESSION

Source: The 451 M&A KnowledgeBase

THE 451 GROUP: M&A KNOWLEDGEBASE 9

1.5 BUYOUTS BUILDING UP?

10 TECH M&A OUTLOOK 2010

YEAR TOTAL PE DEALS TOTAL PE SPENDING PE VALUE, AS % OF

Source: The 451 M&A KnowledgeBase

1.6 WHAT TO WATCH FOR IN 2010

Continued blurring of hardware and software offerings – Perhaps the highest-profile

THE 451 GROUP: M&A KNOWLEDGEBASE 11

12 TECH M&A OUTLOOK 2010

THE 451 GROUP: M&A KNOWLEDGEBASE 13

FIGURE 2.1: SOFTWARE M&A, 2002-2009

848 $38.89 765