Cloud Insights. Q Investment Banking. 1Q Valuation Pullback Sparks Unprecedented M&A Surge in 2Q and 3Q

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1 Q Investment Banking 1Q Valuation Pullback Sparks Unprecedented M&A Surge in 2Q and 3Q Cloud Insights In This Issue: LinkedIn and NetSuite among nine public SaaS companies acquired since April Talend and Twilio mark reopening of IPO markets Private placement activity remains healthy despite pullback from 2015 highs

2 EXECUTIVE SUMMARY 1Q Valuation Pullback Sparks Unprecedented M&A Surge in 2Q and 3Q Attractive valuations spurred record-setting activity from large strategic buyers and increasingly aggressive financial sponsors. SaaS stocks were hit especially hard by the decrease in investor risk appetites and increased volatility that rattled equity markets in the first six weeks of From January 1 to February 9, the Nasdaq fell 16% and the all cap SaaS index fell 32%, punctuated by a massive five-day selloff starting on February 5. While SaaS stocks have steadily recovered from their early-february lows, strategic acquirers and financial sponsors have used the valuation pullback as an opportunity to aggressively acquire leading companies throughout the sector. Since the beginning of the second quarter, there has been a flurry of blockbuster SaaS acquisitions, putting 2016 on pace to shatter the previous record for deal values. We examine the trends behind this unprecedented surge in M&A activity and look at capital raising across public and private placement markets. LinkedIn and NetSuite Among Nine Public SaaS Companies Acquired Since April Despite the pullback in public valuations for SaaS stocks in the first quarter, the business outlook for these companies remained promising. This disconnect between public valuations and performance expectations created a compelling opportunity for strategic and financial buyers alike, setting the stage for the surge in M&A activity seen in the spring and summer. Since the beginning of the second quarter, nine publicly traded SaaS companies have been acquired, a group headlined by the two largest M&A transactions in the history of the sector. On June 13 Microsoft announced that it was acquiring LinkedIn for $26.2 billion, and then on July 28 Oracle announced that it was acquiring NetSuite for $9.3 billion. These blockbuster deals pushed the sector s year-to-date M&A deal values to $50.3 billion through August 1. This EV / LTM Revenue total already easily surpasses 2014 s previous record-setting full-year total of $30.0 billion. Of these nine acquisitions, two Oracle s acquisition of NetSuite and Salesforce s acquisition of Demandware generated multiples of greater than 10.0x LTM revenue. These outsized multiples were a function of the targets robust growth rates and the high degree of synergies anticipated by the buyers. While strategic buyers, as a general rule, continue to pay higher multiples than financial sponsors because of these synergies, the gap is certainly closing. Vista Equity Partners acquisitions of Cvent in April and Marketo in May both were at LTM revenue multiples

3 of greater than 7.0x, levels historically paid only by strategic buyers. Financial sponsors aggressive pursuit of SaaS companies is a function of improving conditions in debt markets and the attractiveness of companies with strong metrics related to cashflow generation, customer acquisition, and customer lifetime value. Talend and Twilio Mark Reopening of IPO Markets Since reaching its low on February 9, the SaaS index has increased 57.5%, outgaining the Nasdaq by 2.5x over that span. The recovery in public SaaS multiples means that the sector is no longer on sale, and thus acquisitions of publicly traded companies in the space should slow in the second half of The recovery in public multiples, along with the successful summer IPOs of Talend and Twilio, also point to increased public market activity over the next several quarters. There were no SaaS IPOs or follow-on offerings during the first quarter of 2016 and the first 12 weeks of the second quarter. But Twilio s $172.5 million June 23 IPO and Talend s $108.7 million July 29 IPO should lead to a continued reawakening of public market activity. Both offerings priced above the range and have enjoyed strong aftermarket performance. As of August 17, Talend was up 62% and Twilio was up 292%. William Blair served as an underwriter on both IPOs. follow-on activity over the next several quarters. The backlog of tech companies either on-file or preparing to file remains robust. Since a brief spike in volatility surrounding the Brexit vote, the VIX has remained well below 20.0, the threshold commonly seen as being conducive to IPOs. In this environment, companies with strong metrics and a clearly defined path to profitability should have attractive opportunities to go public. Private Placement Activity Remains Healthy Despite Pullback From 2015 Highs On a year-over-year basis, private placement activity has slowed from 2015 s heady levels. Through August 1, SaaS companies have raised $2.5 billion in private capital in While this figure represents a 45% decrease from 2015 year-to-date fundraising, which included several unicorn transactions during the second quarter of 2015, the fundraising environment remains very healthy for SaaS companies, particularly those seeking sub-$1 billion valuations. To learn more about these and other trends shaping the deal-making and capital-raising landscape in the SaaS sector, please do not hesitate to contact us. Several other factors should drive continued momentum in SaaS IPO and

4 MARKET UPDATE AND ANALYSIS Cloud Insights Market Analysis We look behind the numbers to examine the market dynamics that are driving trends in the deal-making and capital-raising landscape in the SaaS sector.

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6 WILLIAM BLAIR SAAS AND CLOUD INVESTMENT BANKING William Blair By the Numbers WB Franchise Information Drawing on our deep sector expertise and the strength of our relationships, William Blair has built a leading SaaS and cloud investment banking franchise. Business owners turn to us for outstanding execution for their M&A and capital raising objectives. Recent transactions include: 280+ William Blair technology team completed transactions 50+ SaaS transactions since SaaS companies under coverage

7 SaaS Equity Research Coverage: Company Ticker Analyst Alarm.com Holdings, Inc. ALRM Bhavan Suri AppFolio, Inc. APPF Bhavan Suri athenahealth ATHN Ryan Daniels Benefitfocus BNFT Adam Klauber Carbonite, Inc. CARB Bhavan Suri ChannelAdvisor Corporation ECOM Justin Furby Connecture CNXR Adam Klauber Cornerstone OnDemand, Inc. CSOD Justin Furby The Descartes Systems Group DSGX Matthew Pfau Ellie Mae ELLI Brandon Dobell Fleetmatics Group PLC FLTX Bhavan Suri HealthStream HSTM Ryan Daniels MiX Telematics Limited MIXT Bhavan Suri NetSuite Inc. N Justin Furby Ooma, Inc. OOMA Bhavan Suri Paylocity Holding Corporation PCTY Justin Furby QAD Inc. QADA Bhavan Suri RealPage RP Brandon Dobell RingCentral, Inc. RNG Bhavan Suri salesforce.com, Inc. CRM Bhavan Suri ServiceNow, Inc. NOW Justin Furby SPS Commerce, Inc. SPSC Matthew Pfau Talend SA TLND Bhavan Suri Twilio, Inc. TWLO Bhavan Suri The Ultimate Software Group, Inc. ULTI Justin Furby Upland Software, Inc. UPLD Bhavan Suri Veeva Systems Inc. VEEV Amanda Murphy WageWorks WAGE Robert Napoli Workday, Inc. WDAY Justin Furby Zendesk, Inc. ZEN Bhavan Suri With more than 150 senior bankers around the world, William Blair has completed more than 2,000 advisory and financing transactions totaling more than $200 billion in value for our clients*. Cloud Insights Dan Connolly Managing Director dconnolly@williamblair.com Chris Lane Managing Director clane@williamblair.com Scott Mattson Managing Director smattson@williamblair.com Andrew Arno Director aarno@williamblair.com Peter Dalrymple Director pdalrymple@williamblair.com *In the past five years as of December 31, 2015

8 Disclosure William Blair is a trade name for William Blair & Company, L.L.C., William Blair Investment Management, LLC and William Blair International, Ltd. William Blair & Company, L.L.C. and William Blair Investment Management, LLC are each a Delaware company and regulated by the Securities and Exchange Commission. William Blair & Company, L.L.C. is also regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair International, Ltd is authorized and regulated by the Financial Conduct Authority ( FCA ) in the United Kingdom. William Blair only offers products and services where it is permitted to do so. Some of these products and services are only offered to persons or institutions situated in the United States and are not offered to persons or institutions outside the United States. This material has been approved for distribution in the United Kingdom by William Blair International, Ltd. Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only made available to, persons falling within COB 3.5 and 3.6 of the FCA Handbook (being Eligible Counterparties and Professional Clients). This Document is not to be distributed or passed on at any Retail Clients. No persons other than persons to whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision. About William Blair Investment Banking William Blair s investment banking group combines significant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and financing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth financing, financial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From 2011 to 2015, the investment banking group completed more than 350 merger-andacquisition transactions worth $95 billion in value, involving parties in 26 countries and four continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised more than $120 billion in public and private financing.