Cloud Insights. Q Investment Banking. Recalibration of Valuation Expectations Sparks 2Q Increase in SaaS M&A Activity

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1 Q Investment Banking Recalibration of Valuation Expectations Sparks 2Q Increase in SaaS M&A Activity Cloud Insights In This Issue: Reset valuation expectations lure major acquirers back to SaaS Public SaaS offerings grind to a halt Private placement activity continues pullback from 2015 levels

2 EXECUTIVE SUMMARY Recalibration of Valuation Expectations Sparks 2Q Increase in SaaS M&A Activity April and May acquisitions by Oracle and Vista Equity Partners signal renewed interest in SaaS acquisitions. The challenging conditions that dampened the capital raising environment for SaaS companies in the second half of 2015 have continued throughout the first five months of Public SaaS valuations dropped sharply in January and February as investors retreated from higher growth, higher risk sectors. While valuations have steadily rebounded from their mid February lows, IPO and follow on markets have shut down completely for SaaS companies. Private placement activity while still relatively healthy continues to pullback from the heady levels seen in mid Reset Valuation Expectations Lure Major Acquirers Back to SaaS Concerns about the global growth outlook and oil prices rattled equity markets over the first six weeks of While all sectors were affected by the pullback in investors risk appetites, SaaS stocks were hit especially hard. From January 1 to February 9, the Nasdaq fell 16%; meanwhile the all cap SaaS index fell 32%, punctuated by a massive fiveday selloff starting on February 5. While SaaS stock prices have recovered steadily since then, valuations in the sector remain well below the peak levels seen in the summer of The lower valuations have begun drawing strategic and financial buyers back into the SaaS market over the past several weeks. In late April and early May, one of the software sector s leading private equity firms and preeminent strategic buyers announced three acquisitions of publicly traded companies. On April 18, Vista Equity Partners announced that it was acquiring Cvent for $1.6 billion. On April 28, Oracle announced that it was acquiring Textura for $663 million, and the following Monday Oracle announced that it was acquiring Opower for $532 million. With each transaction, the target s share price jumped considerably on the news of the announcement but remained below the company s 52 week high. We believe that this is a signal that corporate boards have adjusted their expectations regarding what valuation levels are achievable Against this backdrop, however, there have been distinct signs in April and May that SaaS M&A activity is springing back to life. The mid February collapse in public SaaS valuations recalibrated seller valuation expectations, and the sector s most important strategic and financial buyers have begun activity pursuing opportunities again. In this issue of Cloud Insights, we examine these and other trends that are shaping the M&A and capital raising landscape in SaaS. SaaS Index Diverges from Nasdaq The performance of SaaS stocks diverged sharply from the Nasdaq in early February. While SaaS stocks have recovered steadily since then, valuations remain well below the levels seen in 2015 and 2014, creating a buying opportunity for strategic and financial buyers /1/15 11/9/15 12/18/15 1/27/16 3/6/16 4/14/16 5/24/16 Source: Capital IQ as of May 24, NASDAQ All SaaS 1

3 following the pullback that began in the fall of We also interpret the recent flurry of activity as a sign that the SaaS sector s biggest buyers see an attractive buying opportunity and are looking to put their considerable cash positions to work. After remaining largely on the sidelines from an M&A perspective in 2015, the 25 largest software companies have seen their cash and short term investment positions swell to a collective $251.8 billion. Against a backdrop of slowing macroeconomic growth, IBM, Microsoft, Oracle, Salesforce, SAP, and other consolidators view marketdisrupting and market creating SaaS companies as scarce opportunities to invest in growth. This increased acquisition appetite is not limited to strategic buyers. Large technology focused private equity funds are seeing attractive buying opportunities with both private and publicly traded companies. Capital Markets Remain Challenging While M&A activity appears to be springing to life, capital markets remain largely dormant for SaaS companies. The declines across IPO, follow on, and private placement markets that started in the fall of 2015 have continued well into There were no IPOs or follow on offerings involving SaaS companies during the first four months of 2016, and there has been only one SaaS IPO SaaS M&A Springs to Life in April and May After staying relatively steady over the previous three quarters, there was a flurry of SaaS M&A activity in the first five weeks of 2Q The three acquisitions by Oracle and Vista Equity Partners in April and May signal that large buyers are actively pursuing opportunities in the space. ($ in millions) $1,765 $10, Note: YTD is through May 6, Source: Capital IQ as of May 6, $2,769 since the second quarter of SaaS companies that may have considered going public in 2016 are being dissuaded by the inconsistent performance of the sector s most recent IPOs. Of the six SaaS companies that went public in 2015, only two, Alarm.com and Shopify, have seen significant post IPO increases in their stock prices. While the private placement market for SaaS companies remains open, the large rounds that were common in mid 2015 have become scarcer. In the second and third quarters of 2015, there were a combined 23 private capital raises of at least $50 million. Since then, there have been only 10 such transactions, with only three coming in the first quarter of After reaching a peak of $2.4 billion in the second quarter of 2015, the $2,799 $2, $5,729 15Q1 15Q2 15Q3 15Q4 16Q YTD Deal Value No. of Transactions 41 amount of private capital raised by SaaS companies has declined steadily each quarter, totaling only $1.0 billion in the first quarter of The slowdown in capital raising activity should be another factor that spurs increased SaaS M&A. As long as the IPO window remains shut and valuations remain well below their 52 week highs, being acquired will remain an increasingly attractive option for companies that did large private rounds in 2015 and 2014 and would otherwise be forced to take a down round. To learn more about these and other trends that are shaping the M&A and capital raising landscape in the SaaS sector, please do not hesitate to contact us. William Blair 2

4 MARKET UPDATE AND ANALYSIS Cvent, Opower, and Textura Share Prices Cvent, Opower, and Textura all saw significant share-price jumps when their acquisitions were announced, but the share prices remained below the 2015 highs. As corporate boards continue to recalibrate valuation expectations, this should continue to lead to increased M&A activity targeting publicly traded SaaS companies. $40.00 $30.00 $20.00 $10.00 $0.00 May-15 Jun-15 Aug-15 Sep-15 Nov-15 Jan-16 Feb-16 Apr-16 May-16 Note: Cyan circles approximate acquisition date. Source: Capital IQ as of May 24, Cvent Opower Textura Cloud Insights Market Analysis We look behind the numbers to examine the market dynamics that are driving trends in the dealmaking and capital-raising landscape in the SaaS sector. Annual M&A of Top Buyers After being extremely active in 2014, the major SaaS strategic and financial buyers remained largely on the sidelines in Oracle s acquisitions of Textura and Opower and Vista Equity Partner s acquisition of Cvent in 2Q-2016 are a sign that buyers have renewed interest in putting capital to work via acquisition. $14,399 $984 $2,844 Select M&A Buyers YTD Note: YTD is through May 6, Source: Capital IQ as of May 6, Public Equity SaaS Activity Only one SaaS company, Instructure, has gone public since the end of 2Q As long as the IPO window remains closed, later-stage private companies may view being acquired as an increasingly attractive option Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q YTD IPO Follow-on Source: Capital IQ as of May 6,

5 LTM Revenue Multiples -- Publicly Traded SaaS Companies After reaching their nadir in mid-february, SaaS multiples have steadily increased into the second quarter. These valuations, however, remain well below the peaks seen in Select 2016 M&A Transactions 9.4x 9.1x 9.7x 7.6x 2.4x 2.7x Source: Capital IQ as of May 24, Lowpoint 9.0x 9.4x (Non quarter End) 8.6x 7.0x 7.5x 6.4x 5.8x 5.3x 5.8x 4.0x 1.8x 2.2x 1.8x 2.2x 2.2x 15Q1 15Q2 15Q3 15Q4 2/12/ Q1 5/24/2016 Large-Cap Mid-Cap Small-Cap Cvent = 7.1x Brightree = 7.1x Textura = 6.5x Opower = 3.2x Performance of 2015 SaaS IPOs The relatively inconsistent performance of 2015 s SaaS IPOs may be dissuading some late-stage companies that were considering going public in $17.00 $27.06 $14.00 $21.72 $9.46 $8.00 $13.60 $12.00 $17.18 $16.00 $14.00 $13.49 Shopify Alarm.com Xactly Appfolio Instructure Mindbody Source: Capital IQ as of May 24, Closing 1st Day Price Price as of May 24, 2016 ($ in millions) $1,555 $1, $1, $1, $1, $2, $1, $1, $996 Private Placement SaaS Activity The private placement market remains open for SaaS companies, but large transactions have become more scarce. This raises the potential of down rounds for companies that raised large sums in Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 Total Capital Raised Private Placements Private Placements Over $50M Source: Capital IQ as of May 6, William Blair 4

6 WILLIAM BLAIR SAAS AND CLOUD INVESTMENT BANKING William Blair By the Numbers Drawing on our deep sector expertise and the strength of our relationships with buyers around the world, 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: 250+ William Blair technology team completed transactions since SaaS transactions since SaaS companies under coverage 5

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 CVENT, Inc. CVT Justin Furby Demandware, Inc. DWRE Justin Furby The Descartes Systems Group DSGX Bhavan Suri 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 Opower, Inc. OPWR Matthew Pfau 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 SciQuest, Inc. SQI Matthew Pfau ServiceNow, Inc. NOW Justin Furby SPS Commerce, Inc. SPSC Matthew Pfau Textura Corporation TXTR 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 William Blair 6

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.