European Software Companies: SHOW ME THE MONEY!

1. European Software Companies: SHOW ME THE MONEY! October 15, 2004

2. A crowded universe Where are the exits? A. IPO / Secondary B. M&A Who / where are the potential acquirers? Conclusion 1 2 3 Table of Contents

3. 1 A CROWDED UNIVERSE

4. A CROWDED UNIVERSE Crowded and Characterized by Fragmentation and Lack of Critical Mass • 178 publicly traded software and IT service companies in the UK • 100+ of which are software • Conservatively estimate that 10X more private software companies with €5+ million in revenues • > 5000 software companies across Europe? • Plus the services companies • … and each one offers the best and most unique solution • … if you ask the CTO • These companies have a complex positioning and are not visible to their potential acquirers (or customers) • THERE HAS NEVER BEEN AS MANY POTENTIAL PARTNERS BUT THECOMPETITION FOR VISIBILITY IS FIERCE

5. A CROWDED UNIVERSE And growing… Recent headline VC Fundings in European IT (round size E7.5 million or larger)

6. A CROWDED UNIVERSE And growing… • DISPARITY OF DYNAMICS BETWEEN THE EUROPEAN AND US MARKETS FOR FUND RAISING • European VC fund raisings totaled just E860m in the first nine months compared with E1.4bn in the same period of 2003. • Much of the capital raised has been raised by Israeli groups or a US group planning to invest in Europe (Benchmark) • US VC closes in the first nine months totaled $14.1bn, compared with just $2.2bn in the same period of 2003. • The US fundraising cycle typically leads Europe by six to 12 months • Increasingly conspicuous structural differences that might make that historical relationship less useful: the growing share of buy-out funds chiefly at the expense of the venture sector.

7. A. IPOs / Secondary Direct B. M&A 2 WHERE ARE THE EXITS?

8. WHERE ARE THE EXITS? IPOs / Secondary Direct VC • The US as an indicator of trends for Europe • In the third quarter of 2004, 14 venture-backed US companies completed IPOs raising a total of $1.72bn (VentureOne) • It is a decrease from 29 in Q2 but still tied as the second highest quarter on record since Q4 2000 • The Google IPO garnered a great deal of attention, but has not led to a dramatic flood of public offerings • In fact, seven venture-backed companies withdrew from registration in the Q3, while 13 filed to go public • 41 companies currently in registration • IPO OPPORTUNITIES IN EUROPE EXIST BUT ARE LIMITED – beware – IPO  Exit

9. WHERE ARE THE EXITS? IPOs / Secondary Direct VC • The secondary market is an established exit route for the buyout industry – can the model migrate to VC stage PE? • The secondary market for LP interests in VC funds or for portfolios of companies has developed efficiently over last 5 years • However there are no established secondary direct investors focusing on acquiring interests in individual companies • There are signs of interest in technology buyout from US players however they will only focus on very late stage companies • THE DIRECT SECONDARY EXIT ROUTE IS NOT AVAILABLE YET BUT COULD DEVELOP OVER THE MEDIUM TERM

10. WHERE ARE THE EXITS? So M&A continues to be the more likely exit • In the US the number of acquisitions of venture-backed companies are at healthy levels: • In Q2, 86 venture-backed US companies were merged or acquired • In Q3, 90 venture-backed US companies were merged or acquired for a total of $5.89bn. • Information technology companies represented a majority of these transactions • This US appetite has flowed over to Europe with notable deals in 2004 such as: • UK Vault acquired by Veritas $225 million • Kelkoo acquired by Yahoo $575 million • Suze acquired by Novell $210 million • There have also been numerous smaller US acquisitions in Europe • Trigenic acquired by Qualcomm $23 million Q4, 2004 • Cisco acquired a networking co in the UK

11. WHERE ARE THE EXITS? So M&A continues to be the more likely exit • As well as many domestic European deals • GIVE YOUR COMPANIES (and M&A bankers) A CHANCE TO INTEREST THE BUYERS: • Map your space on an ongoing basis • Meet your competitors • Have good company presentations • Issue news letters to keep main players informed of your progress in the enterprise application space

12. 3 WHO / WHERE ARE THE POTENTIAL ACQUIRERS

13. WHO ARE THE POTENTIAL ACQUIRERS? The Mammoths • The mammoth industry leaders • They usually communicate clearly their technology paths and welcome small peripheral players • They have institutionalized partnership programs to identify complementary technologies • They are best positioned to leverage technologies over large customer bases • Therefore can justify paying higher valuations • Challenge is that they are large and bureaucratic • Most are US based and decision making is in the US • Relationships must be built long ahead of time using the partnership scheme • Need to demonstrate that the solution has been implemented on their platforms • EUROPEAN SMALL SOFTWARE COMPANIES FAIL TO CULTIVATE THESE RELATIONSHIPS!

14. WHO ARE THE POTENTIAL ACQUIRERS? Middle Market Private And Public Companies • Private and public middle market companies • Middle market companies with revenues >E100 million • Most are publicly traded • Valuations of the public companies are highly dispersed • Entrepreneurial enough to identify the right technology opportunity • Less accretion / size sensitive than the smaller buyers • Tend to reach faster the decision makers • Challenges • They will be sensitive to equity dilution and rarely cash rich • Even a small mistake can adversely affect the stock price substantially • THESE ARE THE SWEET SPOT. EUROPEAN SMALL SOFTWARE COMPANIES OFTEN HAVE NOT SYSTEMATICALLY IDENTIFIED THEIR SPACE

15. WHO ARE THE POTENTIAL ACQUIRERS? The Micro Combinations • The micro partners • Some still private, some are publicly traded: the “fallen angels” • Building critical mass is their priority • Will value a target for existing revenues rather than potential • Maybe interested only in cash balance • These are the tier 3 potential acquirers • Usually contacted when it is too late • Will not provide liquidity but potential long term upside • US companies are very efficient at completing rollups to build size, breadth and economies of scale • Egos tend to override realism • POTENTIAL FOR LONG TERM VALUE CREATION BETTER THAN THE WRITE OFF ALTERNATIVE

16. WHO ARE THE POTENTIAL ACQUIRERS? Also Think Of The IT Services Companies and Japan for Internet • Valuations of Software and Services companies have converged • IT services companies are seeking to add value beyond body shopping Value Added

17. WHO ARE THE POTENTIAL ACQUIRERS? Also Think Of The IT Services Companies and Japan for Internet • IT Services companies are potential software company buyers • SAGE is a good example of the quest to add value beyond by offering high value added solutions for wireless telecom • Business Process Outsourcing generates similar needs • Ordina acquires Innovity to add functionality to its BPO offering for Benelux financial institution back office needs in the • Remember that software companies rarely have less than 30% of revenues from services • usually closer to 60% for the earlier stage ones • As they seek to offer higher value added services their business models converge with software companies • Do not forget Japanese potential buyers • Japanese internet valuations still at height of internet bubble • They are willing to pay premiums for a foothold into European telcos • 123 Multimedia (Fr) acquired by Index Corp. (Japn) in Q2, 2004 E120 million for 60%

18. CONCLUSION

19. CONCLUSION SHOW ME THE MONEY • Opportunities for exits and consolidation are greater than ever before in a huge but crowded market • Software companies need to map their space and build visibility on an ongoing basis. This will be beneficial from strategic, commercial and exit perspectives • Consider a broad range of alternatives both from sector and geographic angles, it is a long term process, do not wait for a fire sale situation

20. European Software Companies: SHOW ME THE MONEY! October 15, 2004