Database application software maker Embarcadero Technologies
Founded in 1993, Embarcadero develops software for so-called Strategic Data Management (SDM), which helps customers get better value from their databases. The software handles such things as developing effective database architectures, improving security, and allowing for integration with the database platforms from Oracle
Actually, for large companies, data management can be a huge source of pain. A multinational, for example, may have thousands of databases scattered across the globe in different business units. What's more, with the surge in data -- because of new Internet applications and regulatory requirements, such as Sarbanes-Oxley -- it is becoming difficult to effectively get high performance from databases.
Embarcadero has more than 12,000 customers, including 97 of the Fortune 100. But, interestingly enough, this is actually a negative because its target market is saturated, something that obviously impacts future growth. Its competition is also formidable, including the likes of CA, Quest Software
For example, in the second quarter, sales increased only 7% to $15 million and cash flow from operations was $3.6 million. With $67.9 million in the bank, Embarcadero has an enterprise value of $143 million. Thus, the buyout value is about 2.3 times revenues - which is reasonable in light of recent transactions.
Now, keep in mind that private equity firms look for discounted values. Their goal is to buy a company at a relatively inexpensive valuation, streamline operations, perhaps buy more companies, and eventually sell the company to a bigger player or take it public. It's really that simple.
So, with private equity coming into software -- another recent deal was the $1.3 billion transaction for Intergraph -- the smart money certainly is finding good values in the sector.
The problem for individual investors is that trying to pick the next buyout opportunity is almost impossible. Then again, if the software space looks attractive, then so should the bigger players. After all, these firms are buying up smaller players, too.
This is certainly the case with Oracle, which has spent nearly $19 billion on software companies over the past three years. Or there is IBM, which according to my Fool colleague Brendan Mathews appears to be selling at a discounted value. And, of course, there is the world's biggest software company, Microsoft, a Motley Fool Inside Value selection, whose stock price has been picking up over the past couple months.
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Fool contributor Tom Taulli does not own shares of any company mentioned in this article. The smart money is always on the Fool's disclosure policy.
