2016 investment banking challenger program_pitch book

M&A: ADOBE AND OMNITURE Pitch Book

20/AUG/2016

Cathay team of The Blackstone Rhyme Zhou Winnie Yang

Nicole Guo Jerry Shan

Erwin Zhang

M&A: Adobe acquire Omniture

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Table of Content 1. Industry Review ......................................................................................................................................................................... 2

2. Company overview .................................................................................................................................................................... 3

2.1 Adobe ..................................................................................................................................................................................... 3

2.1.1 Business Descriptions ............................................................................................................................................ 3

2.2 Omniture ............................................................................................................................................................................... 4

2.2.1 Acquisitions: ............................................................................................................................................................ 4

2.2.2 Business Description ............................................................................................................................................. 4

3. SOWT analysis ........................................................................................................................................................................... 7

3.1 Adobe .............................................................................................................................................................................. 7

3.1.1 Strengths ................................................................................................................................................................... 7

3.2.2 Weaknesses: ............................................................................................................................................................. 7

3.2.3 Opportunities ........................................................................................................................................................... 9

3.2.4 Threats ...................................................................................................................................................................... 9

3.2 Omniture ..................................................................................................................................................................... 10

3.2.1 Strengths: .............................................................................................................................................................. 10

3.2.2 Weaknesses: .......................................................................................................................................................... 13

3.2.3 Opportunities: ....................................................................................................................................................... 14

3.2.4 Threats: .................................................................................................................................................................. 15

4. Synergy ..................................................................................................................................................................................... 16

4.1 Optimize value chain ....................................................................................................................................................... 16

4.2 Financial performance enhancement ........................................................................................................................... 16

4.2.1 Smoother revenue structure ............................................................................................................................... 16

4.2.2 Future revenue growth potential ...................................................................................................................... 16

4.3 Maintain technological advancement .......................................................................................................................... 17

5. Comprehensive acquisition strategy ................................................................................................................................... 18

5.1 Acquisition method .......................................................................................................................................................... 18

5.2 Valuation ............................................................................................................................................................................ 19

5.3 Comparable Analysis ...................................................................................................................................................... 19


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1. Industry Review

The number of Internet users globally has grown dramatically in the past 15 years. In 1995, there were only 16 million Internet users, equating to 0.4 percent of the world's population. By 2009, this had risen to 1.7 billion users, corresponding to more than a quarter of the world's population. In most West European and North American markets, Internet usage penetration now surpasses 75 percent of the population. With increasing share of time, the Internet is inevitably capturing an increasing share of consumer and advertiser spend from 5 percent in 2000 to 42 percent of total by 2015, potentially twice as much as TV and Radio combined. Internet usage is expanding to a broader range of services and becoming central to everyday lives.


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2. Company overview

2.1 Adobe

Adobe Systems Incorporated is an American multinational computer software company. The company is headquartered in San Jose, California, United States. Adobe has historically focused upon the creation of multimedia and creativity software products, with a more-recent foray towards rich Internet application software development. It is best known for Photoshop, an image-editing software, Adobe Reader, the Portable Document Format (PDF) and Adobe Creative Suite.

2.1.1 Business Descriptions

Mission: To revolutionize how the world engages with ideas and information Business Model:

• To move from selling customers perpetual software licenses and increasing revenue by upgrading current clients and attracting new clients

• To a monthly subscription model • Implementation Strategy to be carried out, new technologies need relevant human supports • Acquire a vendor targeted at a different phase of the customer value chain whose revenues are

based on the subscription model Products: Adobe is the world's leading digital media content creation tool provider and online marketing solutions provider with variable products.


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2.2 Omniture

Omniture (NASDAQ: OMTR, 2006), the industrial leader in web analytics and online business optimization. The Omniture® Online Marketing Suite is the leading solution to optimize ad spend and conversion. It includes a comprehensive portfolio of applications for visitor acquisition, conversion, online analytics, and multichannel analytics built on an open business analytics platform.

2.2.1 Acquisitions:

Omniture made some acquisitions during past several years.

Date Acquired Amount

Nov 5, 2008 Mercado $6.5M (terms undisclosed)

Oct 25, 2007 Visual Sciences $394M in Stock

Sep 11, 2007 Offermatrica $65M in Cash & Stock

Feb 14, 2007 Touch Clarity $51.5m in Stock

2.2.2 Business Description

Business Strategy: • Rapidly Expand Customer Base. • Extend Technology Leadership Position. • Broaden Online Business Optimization Platform Capabilities. • Develop and Expand Strategic Relationships to Extend Platform and Distribution Channels. • Remain Intensely Focused on Customers’ Success.


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Core Products:

Omniture SiteCatalyst provides marketers with actionable, real-time intelligence about online strategies and marketing initiatives. SiteCatalyst helps marketers quickly identify the most profitable paths through their Web site, determine where visitors are navigating away from their site, and identify critical success metrics for online marketing campaigns.

Core features of the products:

• Pre-Built Reporting and Analytics • Innovative Work Flow • Video & Web 2.0 Optimization • Advanced Segmentation • Flexible Data Integration

SiteCatalyst is the core product of Omniture, makes more than 50% of total revenue.

Other Products:

Clients:

MEDIA 5 of Top 10 Media Companies RETAIL 6 of Top 10 Retailers FINANCE 4 of Top 5 Banks TRAVEL 4 of Top 5 Travel Companies TELECOM 23 of the Wired 40 MANUFACTURING 7 of the Top 10 Consumer Products Companies TECHNOLOGY 6 of the Top 10 Business Week IT-100 AUTOMOTIVE 11 of Top 15 Automotive Companies


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Global Appearance: 14 International Offices: Americas: Orem, UT; San Diego, CA; Herndon, VA; San Francisco, CA EMEA: London, UK; Paris, France; Munich, Germany; Copenhagen, Denmark; Stockholm, Sweden APAC: Tokyo, Japan; Beijing, China; Seoul, Korea; Singapore; Sydney, Australia

Competition:

Main competitors: Google Analytics, Coremetrics, Webtrends Compared with Google Analytics, Omniture has only 1% of market share. Compared with Google Analytics, the advantage is the quality of the online marketing provider:

Omniture Google Analytics Cost $100k/year for large corprations Free Conversion Tracking No limits 4 goals minimum DashBoard Reports Deeper Level Normal Level Access Management Different levels 2 levels Site Outlay Tools Problem with new browsers Best Import/Export Data Delivers more Delivers less Custom Tracking Beats up each and every boundary Only 5 custom variables Application Support Handled in no time Slow process Segmenting Setup Complex Flexible and Easy

99%

1%

Google Analytics vs OmnitureMarket Share

Google Analytics Omniture


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Free to use is the main course why google has this massive market share. Moreover, Google has a great reputation to make the user more likely to use their services. (This is partially the reason why Omniture need adobe)

Apart from Google Analytics, the competition of market share show as follow. Omniture has superiority in the industry and it is the only one who has global business experience and business strategy.

3. SOWT analysis

3.1 Adobe

3.1.1 Strengths

• One of the largest software companies in the world. • Professional Products: Adobe’s products are known as the standard for creative professionals,

knowledge workers and enterprises, giving Adobe a unique opportunity to continually produce market leading software.

• Diverse Product Base: Along with Adobe’s diverse product base, they offer comprehensive support and solutions to assist their customers.

• Strong Balance Sheet: Adobe has a strong balance sheet with very low levels of long-term debt enabling them to stay solvent through volatile market conditions.

3.2.2 Weaknesses:

Revenue Instability: Prior to 2008, Adobe’s revenue experienced a constant increase since 2003. However, the below line chart which has presented Adobe’s revenue growth in percentage surprisingly shows a few fluctuations

89%

9%

2%

Omniture vs Webtrends vs CoremetricsMarket Share

Omniture Webtrends Coremetrics


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that have happened over the course of the 8 years and a downward trend from 2007.

In regards to Adobe’s gross profit, it had gone through the same situation as the revenue. Though its gross profit kept increasing in numbers during these eight years, the actual gross profit margin (GPM) had not increased along with the gross profit numbers. In contrast, the GPM had fluctuated significantly and had experienced a huge drop from 95% (2005) to the bottom level at 88% (2006).

0

1000000

2000000

3000000

4000000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Revenue (In Thousands)

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2000 2001 2002 2003 2004 2005 2006 2007 2008

Revenue Growth rate(In Percentage)

0.8400

0.8600

0.8800

0.9000

0.9200

0.9400

0.9600

2000 2001 2002 2003 2004 2005 2006 2007 2008

Gross Profit Margin(In Percentage)


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Huge spending on acquiring analytical tools: It has announced at Omniture’s end that you plan to release numerous new product offerings and employ new software delivery methods in connection with Omniture’s transition to new business models. The process of developing new high technology products and enhancing existing products in this special industry can be complex, costly and uncertain, and any failure to accurately anticipate customers’ changing needs and emerging technological trends could significantly harm Omniture’s market share and results of operations. In the last a few years, you have been spending quite a large amount of money to acquire new technology rights. On the other hand, amortization of acquired rights to use technology increased Omniture’s cost of revenue and subsequently affect Omniture’s operating results. For example, the amortization of acquired rights increased primarily due to the fact that you entered into certain technology licensing arrangements totaling $100.4 million and $60.0 million during fiscal 2008 and fiscal 2007, respectively.

3.2.3 Opportunities

• Transit from Omniture’s old perpetual software licensing business model to a monthly subscription model, which is also known as the software as a service (“SaaS”) business model in order to make constant recurring revenue.

• Acquire Omniture. The SaaS expertise of Omniture will bring the company a recurring stream of revenue and Adobe will definitely be able to leverage to sell their products as SaaS.

3.2.4 Threats

Companies, such as Google, Sun, Apple, and Microsoft, may introduce competing software offerings for free or open source vendors may introduce competitive products.


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3.2 Omniture

3.2.1 Strengths:

Good quantity and quality customers.

Omniture has a large customer database.

The company currently have over 5,100

customers in 91 countries, including

America Online, British Telecom, Disney,

eBay, Ford Motor Company, Microsoft,

Sony and Telstra. The number was doubled

after the company was listed and it is still

increasing.

High growth rate Omniture has a high growth rate in the company size in last 3 years

• Total transactions • The growth of Large accounts

Innovative products SiteCatalyst is the best online marketing suite compared with other web analytics. Research and Development are not only focused on the SiteCatalyst but other products. Omniture now has


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dedicated engineering teams for Omniture Test&Target, Omniture Discover OnPremise, and Omniture Merchandising product offerings. The revenue from other products is gradually increasing as a larger part of the total revenue. Subscription Revenue

Omniture’s business depends substantially on customers renewing their subscriptions for our online business optimization services. Omniture sells online business optimization services pursuant to service agreements that are generally one to three years in length, which provide a constant revenue from customers. By implementing this expansion strategy, Omniture had successfully derived a majority of its revenue from subscriptions to its key service, that is, Omniture SiteCatalyst which was responsible for 89%, 78% and 64% of its total revenue during 2006, 2007 and 2008. In 2007 and 2008, only 22% and 36% of its total revenue account for other services. Although the percentage figure declined, the absolute value was increasing which reached nearly 190 million in 2008. This sufficient, direct experience in subscription area demonstrates its strong market position.

Total Revenue and Growth Rate The graph perfectly shows that Omniture had strong ability to generate revenue which had 42.8 million in 2005 but reached 295.6 million in 2008. Even though the figure during 2009 only includes six months’ revenues, it had already reached 174.7 million. According to the revenue growth rate chart, it

SiteCatalyst78%

Other Services

22%

REVENUE BY PRODUCT IN 2007

SiteCatalyst

64%

Other Services

36%

REVENUE BY PRODUCT IN 2008


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is evident that Omniture’s revenue had high revenue growth rate, arriving at 186.31%, 179.47% and 206.54% in 2006, 2007 and 2008 respectively. All of this evidence unveil Omniture’s high growth momentum in the future.

The gross profit margin tells us that Omniture has 60% of its revenue left over after it pays the direct costs associated with making its products and services in 2006 and it remained at this level, which reached 62% in 2007 and 57% in 2008. The current ratio also shows that Omniture was stable and not highly leveraged. In 2006, the current ratio is 2.24 which suggests that Omniture had 2.24 times more current assets than current liabilities and can easily pay off all the current liabilities. The current ratio in the following years also demonstrates high liquidity and efficiency ability. The table implies a gradually lower debt to equity ratio. However, this is mainly due to its frequent share dilution actions which would generate more liquid assets to support its operation.

2234547923

89763

169673

102249

0

50000

100000

150000

200000

2005 2006 2007 2008 2009

Gross Profit (In Thousands)

Gross Profit

186.31%

179.47%

206.54%

160.00%

170.00%

180.00%

190.00%

200.00%

210.00%

2006 2007 2008

Revenue Growth Rate- Omniture

4280479749

143127

295613

174729

0

50000

100000

150000

200000

250000

300000

350000

2005 2006 2007 2008 2009

Revenue from 2005 to 2009

Revenue（In Thousands）


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3.2.2 Weaknesses:

small business unit Omniture is still expanding the international market. Though the percentage of international business have already increased 17% from 2005 to 2008, it is still hard to compete with a large-size company such as Google Analytics due to the lack of effects from brand name and small-size company. Net profit loss Omniture has suffered from the net profit loss in recent years. As seen from the graph, Omniture incurred significant losses in many years, including a net loss of 44.7 million in 2008 which primarily as a result of huge investment expenses in network infrastructure and sales and marketing. This is not a surprising result as Omniture had plans for international expansion, expansion of infrastructure, the development of new services as well as a large amount of amortization of intangible assets acquired in its acquisitions. High friction cost Omniture failed to integrate those acquired products and services into its online marketing suite, had difficulty in migrating its existing customers to several new products and combining various business culture. It had duplicative facilities and resources, lost the economics of scale. The integration of these acquisitions, particularly the integration of the Visual Sciences acquisition and two European acquisitions, was a time-consuming and expensive process, had resulted in the incurrence of significant ongoing expenses, including the addition of a number of personnel to manage and oversee the integration efforts, and the opportunity cost such as the cost resulting from the diversion of the attention of management team from its existing business. All of this evidence show that Omniture lacks experience operating in the geographic market and competing with international competitors.

-17441

-7725 -9429

-44766

-10199

-50000

-40000

-30000

-20000

-10000

02005 2006 2007 2008 2009

Net Profit & Loss (In Thousands)


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Key Ratio Analysis

The gross profit margin tells us that Omniture has 60% of its revenue left over after it pays the direct costs associated with making its products and services in 2006 and it remained at this level, which reached 62% in 2007 and 57% in 2008. The current ratio also shows that Omniture was stable and not highly leveraged. In 2006, the current ratio is 2.24 which suggests that Omniture had 2.24 times more current assets than current liabilities and can easily pay off all the current liabilities. The current ratio in the following years also demonstrates high liquidity and efficiency ability. The table implies a gradually lower debt to equity ratio. However, this is mainly due to its frequent share dilution actions which would generate more liquid assets to support its operation.

3.2.3 Opportunities:

New markets As the innovation of mobile terminals, mobile clients’ behavior are acted as a new market for Omniture to expand. Omniture’s research and the department were aware of this and the relevant products (mobile analytics and video analytics) have been introduced to the public.

Growing demand Due to the rapid development in internet industries, individuals are a trend to using the internet as a part of life. Therefore, the client behaviors study and online marketing are more important for most industries. The demand for web analytics system and online marketing suite is constantly growing at this moment.


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3.2.4 Threats:

Competition threats: Coremetrics has a valuable relationship with IBM since Coremetrics acquires IBM’s web analytics package, Surf-Aid in 2006. It may be acquired by IBM in the future and get really strong monetary support. Google attracted many small businesses with simple and free analytics systems. Omniture creates a trial account for potential clients to experience the online market suite demo. Limited experiences in charging acceptable price: other competitors can provide similar products and services with a lower price or for free. Omniture failed to set an appropriate price for its customers.


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4. Synergy

4.1 Optimize value chain

By combining Adobe’s content creation tools and ubiquitous clients with Omniture’s Web analytics, measurement and optimization technologies, Adobe will be well positioned to deliver solutions that can transform the future of engaging experiences and e-commerce across all digital content, platforms, and devices. The combination of the two companies will increase the value Adobe delivers to customers. For designers, developers and online marketers, an integrated workflow—with optimization capabilities embedded in the creation tools—will streamline the creation and delivery of relevant content and applications. This optimization will enable advertisers and advertising agencies, publishers, and e-tailers to realize greater ROI from their digital media investments and improve their end users’ experiences.

4.2 Financial performance enhancement

4.2.1 Smoother revenue structure

4.2.2 Future revenue growth potential


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4.3 Maintain technological advancement


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5. Comprehensive acquisition strategy

5.1 Acquisition method

Taken the financial position of Adobe and Omniture into consideration, Cash Only is sincerely recommended. The reasons are as follows:

� Global Financial Crisis has a serious influence on Omniture’s stock price, giving Adobe possibility to take over Omniture with its own cash.

� Adobe has adequate cash in hand � Adobe’s share price is in the process of recovering after dropping extremely in the GFC in

2008

$-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

2006 2007 2008

Mill

ion

Adobe Cash Flow

Cash flow from Operation Cash & Equivalents at Year End


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5.2 Valuation

Discounted Cash Flow valuation model The Discounted Cash Flow (“DCF”) valuation represents the net present value (“NPV”) of projected cash flows to all providers of capital using the weighted average cost of capital (“WACC”) as the discount rate to reflect the time value of money and the riskiness of the cash flows. The DCF method needs stable and predictable cash flow in years, so it is not suitable for Omniture. The reasons are as follows:

� Omniture went public in 2006, just three years ago. � Omniture has negative cash flow in the past years � Internet & Software industry always cannot fit in the qualification of DCF model

5.3 Comparable Analysis

Comparable company analysis values a company by reference to other publicly-traded companies with similar operating and financial characteristics. It compares the public company value of operating statistics to calculate the valuation multiple Here is the listing of companies in the same industry with Omniture:

Symbol Company MarketGap SectorGOOGL AlphabetInc. 96.74B ComputerSoftwareMSFT MicrosoftCorporation 172.93B ComputerSoftwareBIDU Baidu,Inc. 4.51B ComputerSoftwareCHKP CheckPointSoftwareTechnologiesLtd. 3.99B ComputerSoftwareCTXS CitrixSystems,Inc. 4.28B ComputerSoftwarePRGS ProgressSoftwareCorporation 766.97M ComputerSoftwareMSTR MicroStrategyIncorporated 441.43M ComputerSoftwareFALC FalconStorSoftware,Inc. 130.99M ComputerSoftware


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Here we choose 2 huge-capitalization companies (market gap > 10 billion), 3 mid-capitalization companies (1 billion < market gap < 10 billion), and 3 small-capitalization companies (market gap < 1 billion). We use P/E Ratio, P/B Ratio, and EV/EBITDA indicators as valuation metrics. Internet & computer software industry is a new area for valuation. It doesn’t fit in well in any single traditional valuation models. So, we use three major and effective indicators to fairly evaluate Omniture.

Now the average stock price of Omniture in the past three trading days is about $17.2 per share. With a 16% premium, we believe $20 per share is a reasonable price for Adobe to take over. 1.63x P/B ratio is excellent, lower than the average level of selected companies. Because of a low EPS, Omniture has a P/E ratio more than 100x but doesn’t mean the price offered is expensive. With the Price we offered, the EV/EBITDA is 30.09, which is also a reasonable level in this industry.

Company Market Firm P/E Ratio P/B Ratio2 EV/ EBITDAGap Value 2008 2009E 2008 2009E 2008 2009E

LargecapitalizationGOOGL 96.74B 80.89B 23.09 40.16 3.43 5.85 9.95 18.98MSFT 172.93B 154.21B 10.34 21.56 5.11 6.67 5.97 11.81Mean 16.72 30.86 4.27 6.26 7.96 15.40MidcapitalizationBIDU 4.51B 4.11B 19.13 45.25 9.94 18.84 23.49 40.65CHKP 3.99B 3.07B 12.66 20.65 1.98 3.24 7.65 14.1CTXS 4.28B 3.71B 24.81 44.45 2.23 3.64 11.54 24.42Mean 18.87 36.78 4.72 8.57 14.23 26.39SmallcapitalizationPRGS 766.97M 649.80M 17.83 37.2 1.59 2.26 6.88 10.88MSTR 441.43M 313.55M 10.92 16.44 3.21 5.81 4.19 9.57FALC 130.99M 89.34M 92.67 62.25 2.013 3.55 13.92 25.43Mean 40.47 38.63 2.27 3.87 8.33 15.29BlendedMean 25.35 35.42 3.75 6.24 10.17 19.03OMTR 1.67B 1.79B 142 106 1.63 1.98 30.09 35.52

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