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.