Friday, December 25, 2009

Tech Merger Update and Forecast, 2009-2010


Tech Mergers and Acquisitions to grow in 2010


After a glacially slow start to 2009 in the mergers and acquisitions market, technology companies started buying again in the second half of the year and analysts expect the resurgence in takeover activity to continue in 2010.

Technology M&A activity in the United States hit lows of $US3.1 billion in the first quarter and $2.3 billion in the second quarter of this year, as measured by value of closed deals. Those numbers were a far cry from the $13.8 billion posted in the second quarter of 2008 and the $44.6 billion in the third quarter of 2008, according to a report by PricewaterhouseCoopers.

But the industry is starting to rebound with $9.8 billion worth of closed deals in the third quarter of 2009. Future M&A activity is always hard to predict, but the trends are going in the right direction, analysts say.

"If you look at the first two quarters of the year it was almost at decade lows, which is pretty meaningful if you consider what else happened this decade" with the dot-com bubble bursting, says Rob Fisher, leader of PwC's tech M&A services group. "What we saw was basically the deal volumes doubled in Q3 compared to Q2 and actually basically doubled the year to date stats. Given the announcements we've seen over the last few months it's our expectation we will see another doubling."

Billion-dollar deals made a comeback in the third quarter of this year with announcements such as Xerox's $6.5 billion purchase of Affiliated Computer Services and Dell's planned acquisition of Perot Systems for $3.9 billion.

Dell's acquisition of Perot closed in the fourth quarter and Xerox-ACS is still pending and so they are not included in the third-quarter figure. Another pending deal that could boost the stats is Oracle's $7.4 billion purchase of Sun, which is being reviewed by European regulators.

A shortage of M&A activity as well as a slowdown in the IPO market has made it difficult for new technology companies to secure venture capital funding, because investors are wary of putting money into new companies when they haven't received liquidity on prior investments. The venture capital industry will continue to shrink dramatically over the next three to five years, according to the National Venture Capital Association (“NVCA”).

But as long as the stock market doesn't crash again, the tech industry should see healthy levels of acquisitions and IPOs in 2010, says an analyst at Dow Jones. "There's been a pretty torrid pace of tech deals in the second half of 2009. Even if the stock market can just bumble along where it is, we think M&A will continue to increase its pace." As the market stabilizes, it's easier to determine a fair price for an acquisition, reported the analyst at Dow Jones.

"2009 was kind of an odd year because the macroeconomic environment was so uncertain," Dow Jones reports. "The uncertainty and instability is always a problem when you think about making big decisions about mergers and acquisitions. A degree of stability next year should definitely help."

Many small start-ups that were nearly ready for an IPO but did not go public because of economic conditions are likely to take the plunge in the first half of 2010. This in turn will drive further M&A activity as big companies go for takeovers to pre-empt the IPOs.

One of the next logical questions is which types of tech companies will do the buying in 2010, and what types of companies will they take over.

Facebook, Twitter and LinkedIn are potentially hot properties in the social networking industry. Creating financial value in Facebook and Twitter will be a challenge, however, and therefore the list of companies willing to shell out big bucks for the sites is limited, Armstrong said. Armstrong believes LinkedIn may have more value to potential acquirers because the site is built around a quite significant type of transaction – the hiring of new employees.

In the enterprise market, Xerox-ACS, Dell-Perot and HP-EDS are examples of big tech vendors buying IT services firms, part of a trend in which IT vendors are seeking to become one-stop-shopping destinations. Oracle, a software company, is attempting to buy Sun, a hardware company, and HP is trying to become more like Cisco by purchasing switch and router vendor 3Com.

The convergence of historically segregated markets like networking, storage and server technologies, and convergence of hardware with software and services, is likely to trigger further acquisitions, Fisher says. Customers are demanding better pricing and vendor and product consolidation, putting the squeeze on pure-play vendors competing against larger, diversified product and service providers, he says.

Trying to predict unpredictable events like mergers and acquisitions "is a great way to make yourself look stupid," Armstrong says, noting that analyst forecasts often turn out to be wrong. Many of the big vendors don't have an obvious need for a giant transaction along the lines of Oracle-Sun, so it's hard to say which companies are likely to pull off a blockbuster deal, he said."Does Cisco need to buy anything now? No. Does HP? No. Does IBM? No. They might be opportunistic and snap up something small, but they all have big, complete portfolios. There's nothing that screams out 'how can they compete without X'?" Armstrong says.

Still, there are interesting cases like Juniper. Many of Juniper's investors would likely be happy if Cisco bought the company, but assuming that doesn't happen perhaps Juniper would bulk up itself by taking over competitors Riverbed, F5 or Blue Coat, he says.

More broadly, interest in healthcare IT and the desire of tech companies to expand market presence in China are factors likely to create more M&A activity.

Ultimately, the downturn in 2009 will just be seen as a temporary interruption of a longer-term trend toward industry consolidation through mergers and acquisitions, Fisher says.

"Our perspective is this is basically the continuation of what's been a five-year trend in which the technology industry in general, which is consolidation," he says. "We view that as having been interrupted by the recession. At least in the last two quarters, that consolidation wave has reignited and we're seeing increases in activity and overall deal volumes and values as a result. In a broad sense, we no reason to expect that won't continue."


Gartner Says IT Spending to Rebound in 2010 with 3.3 Percent Growth After Worst Year Ever in 2009

The IT industry is exiting its worst year ever, as worldwide IT spending is on pace to decline 5.2 percent, according to Gartner. When the recovery does settle in, Silicon Valley will no longer be in the driver's seat.

Worldwide enterprise IT spending will struggle more with IT spending dropping 6.9 percent. The IT industry will return to growth with 2010 IT spending forecast to total $3.3 trillion, a 3.3 percent increase from 2009.

Gartner provided that while IT spending will increase next year, they cautioned IT leaders not to be overly optimistic. “While the IT industry will return to growth in 2010, the market will not recover to 2008 revenue levels before 2012,” said Peter Sondergaard, senior vice president at Gartner and global head of Research. “2010 is about balancing the focus on cost, risk, and growth. For more than 50 percent of CIOs the IT budget will be 0 percent or less in growth terms. It will only slowly improve in 2011.”

• The computing hardware market has struggled more than other segments with worldwide hardware spending forecast to total $317 billion in 2009, a 16.5 percent decline. In 2010, spending on hardware spending will be flat.

• Worldwide telecom spending is on pace to decline 4 percent in 2009 with revenue of nearly $1.9 trillion. In 2010, telecom spending is forecast to grow 3.2 percent.

• Worldwide IT services spending is expected to total $781 billion in 2009, and it is forecast to grow 4.5 percent in 2010.

• Worldwide software spending is forecast to decline 2.1 percent in 2009, and the segment is projected to grow 4.8 percent in 2010.

On a regional basis, emerging regions will resume strong growth. “By 2012, the accelerated IT spending and culturally different approach to IT in these economies will directly influence product features, service structures, and the overall IT industry. Silicon Valley will not be in the driver’s seat anymore,” Gartner’s Mr. Sondergaard said.

From a budget perspective, there are three important items that IT leaders must consider in 2010:

A Shift from Capital Expenditure to Operational Expenditure in the IT Budget — Concepts such as cloud services will accelerate this shift. IT costs become scalable and elastic. CIOs need to model the economic impact of IT on the overall financial performance of an organization. For public companies, they must show how IT improves earnings per share (EPS).

Impact of the Increased Age of IT Hardware — With delayed purchases of servers, PCs and printers likely to continue into 2010, organizations must start to assess the impact of increased equipment failure rates, and if current financial write-off periods are still appropriate. Approximately 1 million servers have had their replacement delayed by a year. That is 3 percent of the global installed base. In 2010, it will be at least 2 million. “If replacement cycles do not change, almost 10 percent of the server installed base will be beyond scheduled replacement be 2011,” Mr. Sondergaard of Gartner said. “That will impact enterprise risk. CFOs need to understand this dynamic, and it’s the responsibility of the CIO to convey this in a way the CFO understands.”

IT Must Learn to Build Compelling Business Cases — 2010 marks the year in which IT needs to demonstrate true line of sight to business objectives for every investment decision. IT leaders can no longer look at IT as a percentage of revenue. CIOs must benchmark IT according to business impact.

Gartner’s Mr. Sondergaard said three additional topics that were important in 2009 will continue to dominate IT leaders’ agendas in 2010. These three topics include:

Business Intelligence — Users will continue to expand their investments in this area with the focus moving from “in here” to “out there.”

Virtualization — IT leaders should not just invest in the server and data center environment, but in the entire infrastructure. In 2010, users will create the cornerstone for the cloud infrastructure. They will enable the infrastructure to move from owned to shared.

Social Media — Organizations are starting to scale their efforts in this space. The technologies are improving and organizations realize this is not only about digital natives. It’s about all client segments including the most significant: the population in the next 10 years, the above 60 year old generations.

While those topics are key to IT agendas today, Mr. Sondergaard highlighted three themes that will become important going forward. They include:

Context-Aware Computing — This is the concept of leveraging information about the end user to improve the quality of the interaction. Emerging context-enriched services will use location, presence, social attributes, and other environmental information to anticipate an end user’s immediate needs, offering more sophisticated, situation-aware and usable functions.

Operational Technology (OT) — OT is devices, sensors, and software used to control or monitor physical assets and processes in real-time to maintain system integrity. The rapid growth of OT is increasing the need for a unified view of information covering business process and control systems. OT will become a mainstream focus for all organizations.

Pattern-Based Strategy — This is a new model about implementing a framework to proactively seek, model, and adapt to leading indicators, often termed “weak” signals, that form patterns in the marketplace, and to exploit them for competitive advantage. A Pattern-Based Strategy will allow an organization to not only better understand what’s happening now in terms of demand, but also to detect leading indicators of change, and to indentify and quantify risks emerging from new patterns rather than continuing to focus on lagging indicators of performance.

In Technology, transformative deals are the goal and “the battle over the data center and end-to-end services continues to drive the larger players.” Smaller players with intellectual property that can be leveraged will be a fit for large technology companies. Simultaneously, there will be consolidation of smaller and weaker companies, with a particular highlight on semiconductors.

In media and entertainment, strategic buyers are expected to focus on content and distribution buyouts, as well as opportunities in new media.

On the IPO front, there is expected to be more private equity firms continuing to pursue exiting portfolio companies through IPOs in 2010. That is on the heels of Q4-2009 being the most active private equity IPO-exit strategy since 2007. The big question, and risk, is of course a double-dip. As long as no significant equity market correction occurs, PwC is looking for IPO activity to gain in 2010.


The 10 Biggest Tech Mergers and Acquisitions of 2009


The top 10 mergers and acquisitions in the network industry in 2009 all cracked the billion-dollar barrier, and involved vendors in hardware, IT services, collaboration, storage, wireless infrastructure and other segments. IT behemoths such as Oracle, Cisco, Dell, HP, EMC and IBM were among the biggest spenders, according to Network World.


Here are the top 10 acquisitions from 2009 based on publicly disclosed transaction values, including some deals that are still pending and may not be completed until 2010.

1. Oracle-Sun: $7.4 billion

It seems a long time ago that Oracle announced its blockbuster deal to purchase the struggling Sun Microsystems, giving the industry's largest database software vendor entry into the server and storage markets. The acquisition, still pending, was announced in April, and may even be blocked because European regulators are contending that combining Oracle's technology with Sun's open source MySQL database would violate competition laws. Oracle-Sun is by no means a done deal, but if it goes through it would give Larry Ellison new ammunition against Microsoft (in the database market) and against big hardware vendors such as IBM, HP and Dell.


2. Xerox-Affiliated Computer Services: $6.4 billion

In one fell swoop Xerox was able to triple its services revenue from $3.5 billion to $10 billion a year with the purchase of business process outsourcer Affiliated Computer Services. The agreement, announced in September, combines 74,000 ACS employees with Xerox's staff of 54,000, which runs the company's longtime photocopier business and various document management technologies and services. Xerox believes ACS will help it penetrate new markets without huge amounts of overlap, saying that only about 20% of the companies' customers are common to both businesses.


3. Dell-Perot Systems: $3.9 billion

Just days before Xerox's big move, Dell announced an agreement to buy Perot Systems, another major IT services firm founded by Ross Perot. Dell is betting that Perot will help it become a leading services company, and allow it to sell more hardware to existing Perot customers, many of whom are in the healthcare and government industries. Dell's purchase can also be seen as a response to rival HP's $13.9 billion acquisition the previous year of EDS -- another services company founded by Perot.

4. Cisco-Tandberg: $3.4 billion

Cisco, already a major player in collaboration products with WebEx and TelePresence, signed an agreement in October to purchase videoconferencing vendor Tandberg, which makes both video devices and network infrastructure products. The acquisition, if completed, could have both a direct and indirect impact on Cisco's bottom line, because expanded use of videoconferencing may increase network traffic, letting Cisco sell more switches and routers.

The deal, announced in October, is still pending. Shareholders initially objected to the acquisition but Cisco now appears to have won enough support to complete the merger.

5. Cisco-Starent Networks: $2.9 billion

Cisco's multibillion dollar purchase of Starent, announced in October, boosts the vendor's IP-based mobile infrastructure for several types of wireless networks, including LTE and WiMAX. Cisco had already made an investment in WiMAX with the $330 million purchase of Navini Networks in 2007, and a supply contract with Clearwire in 2009. But LTE is gaining steam as well, with both Verizon and AT&T saying they will use LTE for their 4G networks. Starent's technology has been deployed by more than 100 mobile operators in 45 countries.

6. HP-3Com: $2.7 billion

HP is launching an assault on Cisco in the data center networking and convergence markets with its purchase of 3Com, a maker of switches, routers and security products. The deal, announced in November, gives HP a core switch, the H3C 12500, to compete against Cisco's Nexus 7000, as well as significant market presence in China. But the acquisition, which is facing a shareholder lawsuit, also suffers from overlap at the low end of the companies' switching lines and in wireless networking.

7. EMC-Data Domain: $2.1 billion

EMC had to outfox rival NetApp to make this top 10 list, as the storage vendor won a six-week bidding war to purchase Data Domain and gain new technology in the data de-duplication market. De-duplication helps companies save money by reducing data storage needs, which is why both EMC and NetApp believe it will play a major role in the storage market in the coming years. NetApp originally had a $1.5 billion signed agreement to purchase Data Domain, but EMC swooped in and kept raising the price until the smaller NetApp could no longer afford to stay in the bidding.

8. Emerson-Avocent: $1.2 billion

Emerson is expanding its IT operations management portfolio with the addition of Avocent, which makes software, hardware and embedded technologies designed to simplify management of complex data centers. Emerson said Avocent's configuration and monitoring technologies are complementary to its own power, energy management and cooling systems, and will thus help customers tackle the growing problem of energy inefficiency. The acquisition, which will also expand Emerson's capabilities in the KVM switching market, is expected to close around Jan. 1, 2010.

9. IBM-SPSS: $1.2 billion

IBM is spending more than $1 billion to expand its analytics software capabilities, with SPSS and its predictive analytics tools that help companies mine historical business data to identify future trends. "IBM sees potential applications for SPSS tools in helping financial services companies retain customers, preventing crime and picking the optimal site for a new store or factory," the IDG News Service reported in July when the acquisition was announced. The purchase is just the latest step in IBM's strategy of bolstering its line of business analytics tools. Previously, Big Blue acquired data discovery technology from Exeros and paid $5 billion for business intelligence vendor Cognos.

10. Ericsson-Nortel Networks' wireless assets: $1.13 billion

Ericsson won a bidding war over the wireless assets of bankrupt Nortel Networks, beating out offers from Nokia Siemens Networks, the private equity firm MatlinPatterson and Research in Motion. Specifically, Ericsson won Nortel's CDMA and LTE wireless networking business, allowing the Swedish company to strengthen its presence in North America. "Nortel customers in North America that will now be supplied by Ericsson include Verizon Wireless, Sprint, U.S. Cellular, Bell Canada, Leap and Telus," Network World reported when the deal was announced in July. Because of the Nortel purchase and other strategic deals, Ericsson will have 14,000 employees and $5 billion in revenue from North America.



NABE Economists predict GDP growth of 3.2 percent in 2010

Reaffirming last month's call that the Great Recession is over, panelists for the National Assn. for Business Economics (“NABE”) have marked up their predictions for economic growth in 2010 and expect performance to exceed its long-term trend. "While the recovery has been jobless so far, that should soon change. Within the next few months, companies should be adding instead of cutting jobs," said NABE President Lynn Reaser. Panelists predict a relatively sluggish consumer upturn but look for a sizable housing rebound, low inflation, and further rise in stock prices. Importantly, panelists are mostly (though not entirely) optimistic that the Federal Reserve's policies will not lead to higher inflation.

At the same time, NABE panelists are "extremely" concerned about high federal deficits over the next five years.

The fourth quarter of 2009 is now slated for a 3.0 percent pace of real GDP growth and 2010 is predicted to experience a gain of 3.2 percent over its four quarters. For the two years combined growth is expected to be one-half of a percentage point above the forecast made in October. Economic growth is projected to slightly exceed its trend pace-which NABE panelists estimate at 2.7 percent-over the next five quarters.

Real GDP growth should also be enough to recover losses from the recession and return output to an all-time high by the end of 2010, the panelists said.

NABE panelists believe the end of net employment losses is near, with modest declines during the fourth quarter followed by a "bottom" in the first quarter of 2010 and gains thereafter. Still, given the severity of employment losses during the past two years, most panelists (61 percent) do not expect a complete recovery of the previously lost jobs until 2012. Additionally, the unemployment rate is predicted to remain stubbornly high, averaging 9.6 percent in the final quarter of next year. When asked to rank "concerns" over the next five-year period, panelists ranked high unemployment second only to the federal deficit.

The November 2009 NABE Outlook presents the consensus of macroeconomic forecasts made by a panel of 48 professional economic forecasters. The survey, covering the outlook for 2009 and 2010, was taken October 24-November 5, 2009.

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Generation Equity Advisors, LLC is an independent M&A advisory firm focused exclusively on the technology and digital media industry sectors.

For further information, refer to the company’s website at:

http://www.generationequityadvisors.com/



Contact info:

Aaron Solganick
aaron@generationequityadvisors.com

President and Managing Director
8391 Beverly Blvd, Ste 480
Los Angeles, CA 90048
(310) 465-8940 Direct



Sources: Gartner, Computer World, NABE, NVCA, Network World, Generation Equity Advisors Research, Capital IQ

Friday, October 23, 2009

Divestitures to Rule Deal Market, PwC Reports




Finance executives believe that corporations will over the next 12 months begin spinning off or selling businesses with increasing frequency. That was one of the findings of a survey title "Divestitures in Difficult Times" from PricewaterhouseCoopers Transactions Services. 

Sixty-nine percent of the 215 private and public company executives surveyed in August and September anticipate similar or increased levels of divesture activity in the coming year as compared to the pervious 12 months. The trend will be driven by corporates looking to streamline their businesses by selling non-core assets. 

Strategics will also lead activity on the buy side, according to PwC, as companies pursue targets "in order to strengthen their positions by filling a gap in their business models," said PwC partner Bryan McLaughlin. 

The survey also confirmed what we've been hearing for sometime: That due diligence is taking longer. Seventy-two percent said the divestiture process has taken longer to complete in recent months, as buyers dig deeper to uncover potential liabilities and mitigate risk. "In this type of environment, you also have buyers who are suspicious that a divestiture may just be a simple way for companies to rid themselves of a problematic asset, which adds additional pressure on the process," said PwC partner Mark Ross. 

Divesting will be driven in part by pent up demand. Thirty-five percent of respondents said they had delayed or deferred a sale this year because of difficult economic conditions. As markets and the broader economy stabilize, those sellers may move forward with those deals.  - Suzanne Stevens, The Deal.com




Generation Equity Advisors, LLC
Technology and Media Investment Banking

Aaron Solganick
Managing Director and President
8391 Beverly Blvd, Ste 480
Los Angeles, CA 90266
(310) 465-8940 direct
asolganick@generationequityadvisors.com




Monday, September 28, 2009

Xerox acquires ACS, Dell just acquired Perot Systems....IT services M&A is hot


Two very large IT services industry M&A transactions were recently announced back-to-back......Xerox acquires Affiliated Computer Services Corp. for $6.4 billion (USD) and Dell Computer Corporation acquires Perot Systems Corporation for $3.9 billion (USD).   Both were deals that combined computer hardware and documents with IT services and outsourcing as more and more U.S. based firms are moving more and more to the services side of the IT business.

Shares of the major IT services companies practically all gained on Monday (9/28/2009), as merger mania appeared to draw more attention to the $806 billion IT services industry.

Some analysts think that the economic downturn is apparently giving some tech giants an opportunity to go shopping for companies that could give them expanded services capabilities, including different areas of business and IT consulting.

Large tech companies are currently making bold moves in the downturn to attach themselves to long-term revenue streams and to keep their customers longer.

We expect tech M&A deals to keep picking up steam for the next 12-18 months, along with IT services and enterprise software among the most active sectors. In addition, there are likely to be a few more "copy-cat" mergers similar to Xerox-ACS and Dell-Perot Systems that will most likely be announced.  CSC and Infosys are likely prospects for the next wave mega tech-services mergers.

Tuesday, September 1, 2009

IT Services Market and M&A Update, September 2009

IDC expects the strongest growth in IT services to come from outsourcing, as businesses look to improve operating efficiencies across the enterprise. Implementation services, on the other hand, are expected to slow as purchases of new hardware and software suffer from tight and delayed spending. On the other hand, global spending on IT could drop by 10 percent this year, according to Forrester. The plummeting spend will be felt across all areas of tech, with hardware suffering the most while outsourcing is expected to experience an 8.6 percent fall.

On the whole, we believe the remainder of 2009 will see an uptick in consolidation as companies become more comfortable opening their wallets to take advantage of the many still-discounted assets available across the sector. The mean enterprise value for IT Services M&A activity over the LTM dropped to $128.6 through June 30, 2009 compared with $240.3 in the same period last year, and at a more granular level, recent deal multiples contrast markedly with last year -- blended EV/Rev in Q2 2009 was 0.5x compared with 1.0x in Q2 2008. Quarter over quarter in 2009 the number of deals remained basically flat (49 in Q2 compared to 50 in Q1). Government-related transactions also continued to prop up valuations and deal activity. Aggregate deal enterprise value fell almost 76.5% to $352 million in Q2 2009 from $1.5 billion in Q1 2009, with the majority of Q1 2009 comprised of two deals -- Softbank IDC Solutions' $488 million acquisition by Yahoo Japan Corporation and Deloitte's $350 million acquisition of BearingPoint's public services sector.



A few trends that stand out in the IT Services sector are:


• Faltering businesses are selling. The very visible and ongoing breakup of BearingPoint was hard to miss over the past few months. As the bankrupt management and technology consulting firm continued operations and was actually winning large deals throughout its bankruptcy proceedings in Q1, PwC, Deloitte, CSC and Keane picked up BearingPoint assets at very attractive valuations. BearingPoint's commercial practice, public sector practice and NYC branch have been officially sold off and a deal is in the works for its Brazil operations. Deloitte scooped up the public sector practice for 0.3x revenue, PwC nabbed the commercial practice for less than 0.1x revenue, and CMA acquired the NY branch without disclosing details. Another famously faltering business, Satyam Computer Services, was sold in early April for $1.1 billion to Tech Mahindra, at a revenue multiple of 0.5x and an EBITDA multiple of 2.3x.


• Cross-border deals are on the rise. We've seen a lot of action in IT Services cross-border deals this year -- with 10 happening in the past three months alone. Examples include Sparxent, a provider of consulting and outsourcing solutions focused on the middle market, backed by vSpring Capital, which went shopping for two companies in Russia -- Arbyte and Rikkon. Exigen and Atos, both looking to expand their geographic footprint, picked up assets in China through their acquisitions of Taihoo and Shanghai Covics, respectively.


• Government is still an attractive vertical. In the first quarter we noted that the government was a very important IT services customer, and we've seen that manifest in M&A activity during Q2 with 7 federal government-related deals, 5 of which had backing of private equity investors, either directly or indirectly. This is also notable because there has been very little PE activity in any other IT Services subsector.


• Some services transactions are the result of companies divesting business lines to focus on core competencies. A number of companies offloaded non-core services units. Kroll, for example, sold its Government Services unit to Veritas Capital and noted that "the divestiture...is in line with Marsh & McLennan Companies' parent company stated intention to focus on core business offerings at Kroll and across the firm." ADP sold its retirement plan recordkeeping business to ExpertPlan in June, and Towers Perrin was busy spinning out both its SAP HCM practice to U.K.-based consultancy ROC Global and its Oracle/PeopleSoft HCM practice to CherryRoad Technologies.

Source: IDC, Forrester, Generation Equity Advisors Research

Wednesday, July 29, 2009

Digital Media M&A Update for 1H 2009

July 29, 2009

In line with market-wide M&A trends, both the volume and value of Media Industry transactions dropped sharply during the 1st Half of 2009 compared with the same period last year. In addition, the ongoing user-driven transition from traditional format to new media, which the industry has had difficulty monetizing, has compounded the effect of the global economic slowdown and resulted in a more marked decline in M&A activity than was seen in other Information industries.

The most active buyers in the Media Industry, in terms of volume of transactions announced for the 1st Half of 2009, were Time Warner, Inc. and Veronis Suhler Stevenson with 4 transactions each. These include Time Warner, Inc.’s acquisitions of Going, Inc., Patch Media Corporation, Midway Games Inc. and Snowblind Studios, and Veronis Suhler Stevenson’s acquisitions of HealthCommunities.com, Inc., Voyager Learning Company, Two Tradeshows from Technology Systems Corporation and Medical Education Partnership, Ltd.

The segment with the largest transaction • volume for the 1st Half of 2009 was Internet Media with 59 transactions.

In the 1st Half of 2009, there were 40 financially sponsored transactions with an aggregate • value of $2.58 billion. These figures represent 18 percent of the total volume and 49 percent of the total value, respectively.

One bright spot in the Media Industry was the Entertainment Content segment, where aggregate transaction value grew by 10% during the 1st Half of 2009 to $612 million, from $557 million in the same period of 2008. Interestingly, this increase was due in large part to a small number of high-value game development studio acquisitions. For comparison, M&A activity in Entertainment Content has historically been dominated by Film, Television, and Music Studio transactions.

Reflecting the transition from traditional to new media, the Internet Media segment continues to generate the most M&A interest, outpacing all other media industry segments in terms of the number of transactions announced in the 1st Half of 2009.

Media companies are embracing the evolution from a “publishing” model to a multi‐channel, increasingly digitized “consumer connection” model, delivering highly targeted, relevant content when and how consumers want to receive it. Additionally, in order to meet the evolving needs of CMOs, media companies are offering a complete advertising and marketing platform that combines marketing services, metrics and analytics. Measureable results to help clients build more meaningful relationships with customers and provide essential consumer data and intelligence are essential components, and this servicebased revenue provides an important diversification for ad‐driven models.

Wednesday, April 29, 2009

Technology M&A Update

Technology M&A Deal-Making Grinds to a Near-Halt…Except for Small Deals



For the first quarter of 2009, we witnessed a near halt in large M&A deals, including technology (globally).



The volume of technology mergers and acquisitions in the first three months of 2009 was just $8 billion, consisting of 625 deals — that’s down from $40.7 billion in the fourth quarter, comprised of 721 deals, and about $55 billion, from 835 deals, in the first quarter of 2008.



More striking, perhaps, was the lack of any technology M&A deals with prices above $1 billion during the quarter.



It was the first time in the seven years that The 451 Group has been tracking such data that no deal cracked the billion-dollar mark. (There’s already been one deal above that price — Fidelity National’s acquisition of Metavante Technologies — in the second quarter, however). The report suggests that, as with the broader M&A market, widespread economic uncertainty is causing much of the slump.



“As indicated by the dozens of companies that have scrapped their traditional practice of giving annual sales and profit guidance to Wall Street, there’s a tremendous amount of uncertainty about the outlook for 2009,” the report said. “Given that, few companies were willing to introduce additional uncertainty in the form a significant acquisition.”



Our additional research noted recent M&A transaction activity, including global technology, is down 50% year-over-year, down 60% compared to 2007, and down even more on a dollar-value basis. So far this year, only 6 out of roughly 400 M&A global technology transactions have had values of $100 million or greater.



On the technology financing front, there have been no follow-on offerings or IPOs, and there have been only 11 private investments in public equities (PIPEs) and 91 Private Placements of $5 million or greater YTD, as compared to 37 PIPEs and 190 Private Placements in the same time period last year.



We expect technology transactions for 2009 and the foreseeable future to be dominated by small (under $30 million) private placements, some PIPEs, very few IPO’s, and 90% of M&A transactions valued under $100 million.



The top 11 technology giants, such as IBM, Microsoft and Cisco, have only announced 8 deals YTD (compared to 16 at the same time last year).



The top 15 Financial Buyers of technology, such as Warburg Pincus and the Carlyle Group, have yet to do a deal this year.



Strategic and Financial Buyers have the cash for acquisitions and are attracted to the depressed valuations (public valuations have dropped over 50%), yet have been reluctant to deploy capital as these valuations have continued to fall.



Sellers are also reluctant to strike a deal given battered valuations and are generally opposed to relinquishing control (and their current income) during these turbulent times.




Global M&A Activity Lowest Since 2003 / Private Equity Deals Near Halted



The grand total of global buyout deals done in the first quarter was 523 compared to 1,055 for the first quarter of 2008. That’s the lowest number of deals in a quarter since 2003. It’s interesting to note that even in 2008 and the back half of 2007, deal volume topped 1,000 every quarter, until Q4 of last year, which saw 757 deals. The decline continues…



Private equity deals as a percentage of total M&A were at their lowest level since 2000 in the first quarter of ’09. Buyouts represented a mere 3.4% of all M&A this quarter, a number last seen in the Q2 of 2000. Our data goes back to 1985, and since then buyout deals as a percentage of total M&A has dipped below 2% just five quarters out of 96. Those instances happened between 1991 and 1994. It’s fallen below 4% in 27 of the 96 quarters. For context, the percentage of buyout deals as a percentage of the total hit record highs during the boom years, shooting up to 24.1% in Q4 of 2006.



Naturally, deal value saw another sharp drop this quarter. The value of buyout deals was $15.8 billion, down from $22.5 billion in Q4 and 76.3 billion in Q1 of 2008.




Global Software Spending will be flat in 2009



Worldwide enterprise software revenue will be virtually flat in 2009, rising only 0.3 percent from 2008, according to research firm Gartner. The enterprise software market, led by Microsoft, Oracle and SAP, has been weathering the current economic storm better than consumer software, and analysts feel the segment is well-positioned to ride out the remainder of the recession.



Worldwide enterprise software revenue will continue to be flat in 2009, growing at a miniscule 0.3 percent, according to research firm Gartner in a report issued on March 30.
In dollar amounts, Gartner forecasts that enterprise software revenue will hit $222.6 billion, compared to 2008 revenues of $221.9 billion.



U.S. business and government purchases of IT goods and services will decrease by 3.1 percent in 2009, compared with the 1.6 percent annual increase previously projected by Forrester Research. With the US economy dropping at an annual rate of 6.3 percent in Q4 2008 and most professional economic forecasters reducing their predictions for 2009 U.S. real GDP growth, Forrester has revised its forecast for technology spending in the U.S. to reflect these changes. Forrester expects growth in IT investment will resume in Q4 2009 and gather strength in 2010.
"In many ways, the biggest factor affecting the tech market is not the recession but the breakdown of the financial system," said Andrew Bartels, Forrester Research vice president and principal analyst. "The credit crunch is still causing companies to dramatically cut back on all forms of capital investment, including many IT goods and services, and this will affect 2009 revenues for most IT vendors."



Forrester uses several metrics to determine the health and size of the IT market on a quarterly basis. The data in the new Forrester forecast report focuses on IT purchasing -- how much computer and communications equipment, software, IT consulting and integration services, and IT outsourcing businesses and governments buy from technology vendors. It is one of the most important metrics for evaluating the health of technology vendors.




2009 U.S. IT Spending Outlook by Sector



The new Forrester forecast report makes the following predictions:



  • Computer equipment will fall even more in 2009. Forrester expects that US business and government purchases of computer equipment will drop by 6.8 percent in 2009, on top of a 4 percent decline in 2008. However, growth is expected to bounce back in 2010 to 7 percent.
  • Communications equipment demand will shift from 2008 growth to a big cut in 2009. A mixture of enterprise demand for videoconferencing and mobile technologies and telco demand for 3G wireless and broadband equipment kept purchases growing by 3.7 percent in 2008. Both factors will erode in 2009, leading to a 7.8 percent decline, but growth will revive modestly in 2010 to 4.8 percent.
  • Software purchases will decline slightly in 2009, with license revenues falling. Since about half of software purchases each year are maintenance fees and subscription fees that grow at relatively constant rates, the flat growth of total software purchases means that license revenues will continue to fall in 2009. The picture will improve in 2010, with growth of 6.3 percent.
  • IT consulting and systems integration services will slip in 2009. Cutbacks in the project portfolio of most companies will lead to a decline of 2 percent in 2009 for IT consulting and systems integration services. The outlook for 2010 remains positive, with 7.4 percent growth expected in 2010.
  • IT outsourcing growth will remain moderate in 2009 and 2010. IT outsourcing turned out to be weak in 2008, with 2.8 percent growth as economic uncertainty froze potential clients, increased competition and smaller-scale projects cut prices, and the recession caused prospects to wait to see if prices would get even lower. These same forces will continue through the first half of 2009, with revenues starting to improve in the second half of 2009 and in 2010. Growth in 2009 will be small but positive at 2.1 percent, improving to 6.8 percent in 2010.


"There is a light at the end of the tunnel -- demand has been delayed but not cancelled," said Bartels of Forrester Research. "Growth will come back strong once the recession and tight credit conditions start to ease, so IT Vendor Strategy professionals should get prepared by investing in research and development and focusing on building the proof points, case studies, and success stories about how their technology solutions have helped businesses."


Recent M&A News and Announcements


April 6, 2009 (Bloomberg) - Cisco Systems Inc. is ready to pick up the pace of mergers and acquisitions over the next year after the valuations of technology companies slumped, said Ned Hooper, the company’s top dealmaker.


“We will be active -- not hope to be -- will be,” Hooper, Cisco’s senior vice president of corporate business development, said in an interview. “We continue to use M&A as a key part of our growth strategy. The downturn for us is a big positive.”


Few Silicon Valley companies have made more acquisitions than Cisco, the world’s largest maker of networking equipment. The company has bought about 130 businesses in its 25-year history, using them to enter new markets, such as cable set-top boxes and wireless routers for the home. Cisco bought 11 firms in 2007 and five in 2008.


“The pace has slowed a bit as we make sure we do the right deals,” Hooper said. “We expect to be active over the next 12 months.”


Chief Executive Officer John Chambers said in February that he plans to use Cisco’s $29.5 billion in cash to make purchases. Last month, Cisco bought Pure Digital Technologies Inc., the maker of the Flip Video camcorder, for $590 million in stock.


“Bigger companies are saying these are times you gain market share and consolidate your position,” said Sarah Friar, an analyst at Goldman Sachs Group Inc. in San Francisco. “It’s the perfect time to sidestep competitors that don’t have the size to make these moves.”

April 6, 2009 (Bloomberg) - International Business Machines Corp., the world’s largest computer-services company, was in discussions last week to buy Sun Microsystems Inc. for $9 to $10 a share. The talks fell apart over the weekend because Sun officials said the price was too low, a person familiar with the matter said. Oracle Corp. stepped in a few days later and announced the acquisition of Sun Microsystems, which likely hurts both IBM and SAP (its competitors).


The boards of most companies are telling their merger-and- acquisition teams to go slow, said Pete Bodine, managing director of Allegis Capital, a Palo Alto, California-based venture-capital firm. Suitors are waiting for prices to drop further, while some acquisition targets are holding out for the kind of prices they used to command.


“There’s no force compelling anyone to get into the checkout line,” Bodine said. “Everyone is just pushing the empty cart up and down the aisle.”


Acquisitions of technology companies in the U.S. fell 82 percent to $2.2 billion in the first quarter of 2009 from a year ago, according to data compiled by Bloomberg. The number of purchases announced fell to 206 from 337.


Chambers has said he wants to acquire companies with products that help people work together, as well as businesses in digital video and so-called virtualization -- software that helps manage computer servers. Cisco, based in San Jose, California, is also pushing further into systems for data centers, the vast rooms of computers that store company files and information.


That focus may make BMC Software Inc., a Houston-based enterprise-software maker, an acquisition target for Cisco, UBS AG analysts wrote in a March 23 note. NetApp Inc., a maker of storage computers, may also be a takeover candidate, UBS said.


April 6, 2009 (Associated Press) - SupportSoft to sell enterprise business to Consona.
SupportSoft Inc., a provider of computer support services, said it has agreed to sell its enterprise business to privately held Consona Corp. for $20 million in cash. SupportSoft's enterprise business has been shrinking while its consumer business, anchored by Support.com ( SPRT - news - people ), is growing, but the enterprise business still accounts for two-thirds of the Redwood City-based company's revenue.


"The transaction enables us to become a pure play provider of technology enabled services for the digital home and small office," said Josh Pickus, chief executive of SupportSoft, in a statement. Indianapolis-based Consona provides customer relationship management and enterprise resource planning software and services. The assets bought from SupportSoft will be part of the CRM group. The deal is expected to close during the second quarter.


SupportSoft said it expects to post enterprise revenue of $6.8 million to $6.9 million for the first quarter. That's down from $9.7 million in the fourth quarter and $10.9 million in the first quarter last year. Meanwhile, SupportSoft expects to post consumer revenue of $3.5 million to $3.6 million for the first quarter, up from $3.1 million in the fourth quarter and $703,000 in the first quarter of 2008. In total, SupportSoft said it expects revenue of $10.3 million to $10.5 million for the quarter that ended March 31, up from an earlier estimate of $9.5 million to $10.3 million.


March 23, 2009 (CNet News.com) - Oracle announced plans to acquire Relsys, which develops drug safety and risk management applications. The acquisition, which is expected to close by June, is designed to bolster Oracle's Health Sciences Global Business Unit, formed last summer. Health sciences is one of a number of industry sectors into which Oracle is delving via a buying spree.

Relsys develops applications designed to aid drug, biotech, and medical-device companies in streamlining their operations, adhering to regulatory compliance and improving the safety of their products.


With the acquisition, Oracle aims to provide its customers with the ability to identify safety risks earlier in the development cycle, as well as improvements in tracking the performance of their products after they hit the market. Financial terms of the deal were not disclosed.


March 12, 2009 (NY Times) - The sale of Satyam Computer Services may be one of the more bizarre corporate auctions.


The Indian government and a new corporate board, scrambling to save Satyam from bankruptcy or dissolution, asked bidders interested in buying a 51 percent stake to make themselves known by Thursday night, even though the company’s numbers are in flux and its future uncertain.


By Thursday afternoon, a few potential bidders had raised their hands, including the Indian engineering company Larsen & Toubro; the Indian telecommunications company Spice; and Tech Mahindra, a venture of Mahindra Group and BT Group of Britain.


Although other bidders may step forward, the deal has not attracted big-name foreign buyers or private equity firms. Whoever does seal a deal may get a bargain, some analysts say.
Satyam’s market capitalization on the New York Stock Exchange was $7 billion last May; it is now slightly more than $600 million. Satyam’s co-founder said in January that he had made up $1 billion in cash and inflated numbers on the balance sheet. Satyam, the fourth-largest Indian outsourcing company, claims some 53,000 employees, but those numbers, sales and profits, are under review.


Spice’s chairman, B. K. Modi, told The Times of India that he thought the lawsuits could cost $440 million to $840 million, but analysts in the United States say those figures might be high.
The situation may make closing a deal extremely difficult.


March 5, 2009 (RTT News) - Gevity HR, Inc. (GVHR: News ), a provider of human resource outsourcing services, said Thursday it signed a definitive agreement with privately held TriNet Group, Inc., pursuant to which TriNet will acquire all of the outstanding common stock of Gevity in an all-cash transaction valued at $4.00 per share.


The cash value of the proposed deal represents a premium of approximately 97% over the Gevity HR's closing stock price on March 4, 2009.


The transaction is expected to close in the second quarter of 2009 subject to the approval of Gevity's shareholders. Gevity's largest shareholder, ValueAct Capital Management, LP, has agreed to vote its shares in favor of the merger transaction.


Gevity's chairman and chief executive officer, Michael Lavington, said, "The Company's board of directors has concluded a lengthy evaluation of numerous strategic alternatives to enhance shareholder value and has concluded that joining forces with TriNet is in the best interests of our shareholders. We believe the new organization created by this merger will build upon the complimentary strengths of both companies to provide superior value for our clients, employees and all stakeholders."


The San Francisco Bay Area-based TriNet Group, Inc. is a privately held provider of human resource outsourcing services for small businesses. TriNet's largest shareholder, General Atlantic, LLC, a global growth equity firm, also owns approximately 9.5% of Gevity's outstanding common stock.


Upon closing the transaction, the combined companies will be privately held and will operate under the leadership of TriNet president and chief executive officer Burton Goldfield.


Additionally, the Bradenton, Florida-based Gevity announced a cash dividend of $0.05 per share of common stock payable on April 30, 2009 to shareholders of record on April 16, 2009.

Jan 23, 2009 (ZD Net) - Xactly announced it has completed the acquisition of Centive, its closest pureplay SaaS rival in the sales performance management sector. The all-stock deal almost doubles San Jose-based Xactly’s revenue and customer base, and had first been discussed by the two CEOs as much as a year and a half ago, Xactly’s CEO Chris Cabrera told me this morning. Having eliminated the distraction of competing with each other, the combined company will now be able to focus on winning market share from conventional and hybrid-SaaS competitors such as Callidus Software. “We think that by taking the only two 100-percent SaaS companies in the game and making them one, we make it easier for our customers to choose,” said Cabrera.


When asked whether current economic conditions had played a part in crystallizing the acquisition, Cabrera was at pains to assert that both companies had been doing well independently. “Both companies had a very good Q4 — our space is doing very well,” he said. “By combining these two companies together we come so much more of a strong competitor.” New Centive customers in 2008 included over 1000 seats at a division of Motorola, and several hundred seats each at Flowserve, Honeywell, Intergraph, Parametric and WebSense, while Xactly recorded notable wins at 3Com, NTT America, Omniture, PayPal, Rackspace, TIBCO and others. The combined company now has “well over 200 customers” said Cabrera.


“Size really matters in the SaaS world,” he added, noting that the acquisition will bring operational savings as back-office functions are merged, helping reduce costs as a proportion of revenue — although the company will retain a significant presence in New England, where Centive has its headquarters. “Doubling in size helps us get there much more quickly,” said Cabrera. “This really was a no-brainer from a financial point of view.”


Convergence of the two product sets won’t begin until the company has had time to evaluate how best to bring them together. Although there’s inevitably a great deal of overlap, there are areas of functionality that are unique to each and so it won’t be a case of completely eliminating one product, as has been seen in some other SaaS acquisitions recently. Xactly will also be seeking to preserve and build on Centive’s OEM partnership with ADP, which has brought in contracts ranging from 70 to 650 seats since it was announced in late 2007.


The combined company has significant venture capital backing. According to peHUB, Xactly has raised $60 million since 2005, while Centive has raised over $96 million in the past ten years, although MassHighTech notes that $80 million of that sum predates a recapitalization that took place in 2005, prior to Centive selling off its on-premise software business to private equity investors.


Jan 1, 2009 (Channel Insider) - Tata Buys Citigroup's Tech Services Group for $512 Million
TATA Consultancy Services (NYSE: TCL), India‘s largest software services firm, acquired Citigroup Global Services, the India-based business process outsourcing unit and subsidiary of U.S.-based financial services giant Citigroup.


Citigroup will receive $512 million in cash. The two sides first announced the deal in October, when they also inked a $2.5 billion contract for Tata to provide outsourcing services to Citigroup and its affiliates for the next decade.


This acquisition gives us the ability to offer an end-to-end, domain-led third-party solution for business operations to our large financial services clients. We will also work to create platforms for the future and integrate our strong domain expertise in operations along with our suite of products for the financial services sector” said N. Chandrasekaran, chief operating officer and executive director at Tata.


The sale is expected to help reduce Citigroup’s operating expenses related to business processing and increase focus on their financial services competencies. It is anticipated that Citigroup will recognize a reduction of more than 12,000 jobs, most based in India.

Saturday, January 3, 2009

Venture exits were the slowest in five years for 2008

Hopefully a little New Year’s Eve champagne helped soften venture capitalists’ view of 2008. But when they return to their offices, U.S. VC’s might heave a sigh of relief when they turn their calendars to 2009.

That’s because 2008 was the slowest in five years for initial public offerings and merger and acquisition exits. Dow Jones VentureSource confirmed that bad news in its quarterly study of venture liquidity.

Venture-backed companies generated $24.1 billion in liquidity via IPOs and M&A in 2008, a 58 percent decline versus $57.6 billion the prior year. M&A also fell sharply, dropping 54 percent to $23.5 billion in deals for 325 venture-backed companies. The $3.9 billion of M&A activity for 65 companies in the fourth quarter was the lowest quarterly transaction number in nine years.“Overall, the median amount paid for a VC-backed company in 2008 was roughly $45 million—half of the median $90 million paid in 2007,” Jessica Canning, global research director for VentureSource, said in a statement. “Since the fourth quarter of 2007, we’ve seen the median acquisition price drop steadily from quarter to quarter in lock-step with the decline of M&A transactions.”The top fourth quarter M&A deal was eBay’s $945 million acquisition of online transaction firm Bill Me Later, while the No. 1 deal of the year was Dell’s $1.4 billion of Equalogic, a data storage company.Among the companies that mounted an IPO in 2008, the median amount of venture funding fell 19 percent to $56 million. The median period it took companies to reach liquidity climbed to 8.3 years versus 7.2 years in 2007.


Source: RedHerring.com