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