SolarWinds (SWI) acquired N-able for $120 million, or 5X annual revenues. A few years ago, CA Technologies acquired Nimsoft for 10X annual revenues. Are MSP software company valuations falling?
When SolarWinds acquired N-able Technologies (SWI) yesterday, the $120 million deal was valued at 5 times N-able's 2012 revenues ($24 million). SolarWinds stock fell 14 percent on the news. In a somewhat similar deal from 2010, CA Technologies acquired Nimsoft at a 10X revenue valuation. The obvious question: Are MSP software company valuations (acquisition price divided by annual revenues) falling rather than rising?
Of course, it's not completely fair to weigh this question based on only two M&A deals, especially since the companies involved (N-able and Nimsoft) had different growth rates and different target MSP markets. Plus, I don't know the bottom-line EBITDA (earnings before interest, taxes, depreciation and amortization) or EBITDA growth rates for N-able and Nimsoft at the time of acquisition. Those EBITDA figures can greatly impact valuation.
Worth A Look
Still, here are a few reality checks as Wall Street weighs potential valuations for MSP software companies:
- RMM (remote monitoring and management) software is incredibly difficult to sell to MSPs, because MSPs often have a difficult time charging SMB customers for related technology and monitoring services. Wall Street seems to be realizing this, as SolarWinds' shares (SWI) are down about 10 percent in response to the N-able acquisition.
- N-able has done a rather incredible job over the past few years. Revenues grew 47 percent in 2012 vs. 2011 -- jumping to around $24 million from around $16 million the previous year.
- But N-able is a decade-old company, so it's difficult to generate a huge multiple valuation based on a decade-long journey from $0 to $24 million in annual revenues.
Regardless, the valuation bar is set. As rival MSP software companies consider potential acquisitions, exit strategies, private equity deals or IPOs the valuation multiple is 5X revenue -- at least based on the SolarWinds' buyout of N-able.