Q3 2011 - Software Mergers Update

Q3 2011 - Software M&A Update

After a strong start, M&A slows for Q3

According to The 451 Group, and our own research, from the start of July until the middle of August, dealmaking followed the same arc of recovery that it had tracked for most of 2011. And then, seemingly overnight, the stability and confidence vanished, swept away by renewed concerns about the state of the global economy. That left M&A in the back half of the quarter looking a lot like it did in the recession years of 2008 and 2009, rather than earlier this year. Of course, the abrupt decline in M&A during the second half of the third quarter correlates very closely with the performance of the equity market during Q3.  After topping out at nearly 2,900 in early July, the NASDAQ had plummeted to just above 2,300 a mere month later.

Acquisitions became less of a priority in the second half of the quarter, as the storm clouds that have been swirling over the global economy since the summer have left dealmakers uncertain about what – if anything – they should be buying right now. A number of recent economic indicators appear disconcertingly similar to levels we sank to during the Great Recession. Meanwhile, many of the problems that got exposed during the economic downturn have proven intractable, whether we look at the stubbornly high 9.5% unemployment rate or the lingering mortgage mess.

Compounding all of the worries around this is the sobering realization that what got us out of the first part of the recession – for the most part, federal spending – isn't going to be available to get us out of what could be the next recession. Don't forget that the historic downgrade of the creditworthiness of the US came during the third quarter.

As the possibility of a double-dip recession started getting talked about in August and September, no area of the market got hit harder than the IPO market. The pipeline got dramatically thinned out in the third quarter as companies that had put in their paperwork pulled their S1’s, either to stay independent or become part of a larger company. Both WageWorks and Trustwave withdrew their S1s in early August, while BlueArc, The Telx Group and Force10 Networks all dual-tracked their way into trade sales in the past three months.

Against those five IPO candidates in the US that didn't make it to market in the third quarter, we tallied only two enterprise technology vendors that actually did manage to get public. And both, to be candid, have had rather muted debuts. Tangoe, which went out in late July, and Carbonite (Nasdaq: CARB), which followed in early August, both trade at essentially where they came out and have created just $700m of market value between them.

The third quarter saw promising firms such as Jive Software and Eloqua put in their IPO paperwork in August.

Given the dramatic decline in M&A activity during Q3, the remainder of 2011 is shaping up to be a tough time for dealmaking. The year had been tracking to a level of dealmaking that basically put it at twice the rate we saw during the Great Recession. But now the recovery seems much less certain, as the broader economic woes appear to be increasingly weighing on M&A.

And those concerns may get even heavier before the year is out. ChangeWave Research surveyed more than 2,600 consumers in the first half of September about their expectation for the economy through the end of 2011. Fully three out of five respondents (61%) said they expected the economy to worsen in the coming three months, compared to just 8% who said it will improve through the end of year. The sentiment hasn't been that heavily bearish since March 2009.

Overall, Q3 doesn't appear to raise many concerns for the tech M&A market. After all, compared to the same quarter last year, spending on July-September deals ticked up a healthy 20% to $62bn.

A few notable announced M&A transactions for Q3 2011 included:

ü  Google (Nasdaq: GOOG), looking to bolster its mobile business through both hardware and patents, acquired Motorola Mobility. The $12.5bn deal will cost the search giant twice as much as it has spent, collectively, on all of its previous M&A.

ü  Hewlett-Packard (NYSE: HPQ) started an overhaul of its business, perhaps looking to divest its PC unit while, simultaneously, acquiring Autonomy Corp (LSE: AU.L) for $11.7bn, which stands as the largest software acquisition in seven years.

ü  Broadcom (Nasdaq: BRCM) announced its largest-ever purchase, paying $3.9bn in cash for NetLogic Microsystems (Nasdaq: NETL). The transaction valued the maker of network communications processors at more than 9 times revenue.

ü  Buyout shops also remained active, with Blackstone Group and Providence Equity Partners each erasing a publicly traded company in a pair of billion-dollar take-privates.

2011 M&A activity, month by month

Period	Deal volume	Deal value
September 2011	279	$8.5bn
August 2011	335	$40.2bn
July 2011	319	$12.9bn
June 2011	332	$14.3bn
May 2011	322	$27.2bn
April 2011	288	$25.7bn
March 2011	300	$63.7bn
February 2011	285	$10.3bn
January 2011	323	$11.7bn

Source: The 451 Group


For more info, including a free download of the report, go to:  www.techmediamergers.com

Q3 2011 - IT Services Merger Update

Mergers and acquisitions slowed significantly in Q3 2011, hindered by economic uncertainty that stifled the confidence and growth projections of corporate executives.

The few companies eager to seize on opportunities are bumping up against reluctant lenders.

High-yield debt that serial acquirers in the private equity world rely on for deal-making has become harder to find, in part because troubled European banks are bowing out of financing deals. Private-equity backed M&A, which typically relies heavily on high-yield financing, is down 22 percent from Q2 2011.

Announced M&A deals for the volatile Q3 will have declined about 23% from the previous three months, according to Thomson Reuters Deals Intelligence, as stock market fluctuations, the European debt crisis and the U.S. budget stalemate put many planned deals on hold.

The $16.5 billion purchase of Goodrich Corp that United Technologies unveiled last week was on track for an August announcement before wild market fluctuations side tracked deal talks, a source familiar with the deal said.

The good news is that well-capitalized companies such as United Technologies, Google, IBM, Dell, Xerox and Oracle can get financing when they want it.

Once economic and geopolitical clouds clear, deal books will circulate again. Regardless, smaller M&A transactions are getting done and are expected to remain strong for the next few quarters.

The global deal count for the first nine months is up 20 percent over last year, mostly due to strength in the first half of the year, the data shows. Deals in Q3, through September 22, fell to $539 billion from $699 billion in the previous quarter (Q2 2011), according to Deals Intelligence.

Europe and Asia Pacific have been hit particularly hard, with deals in each region falling 34%  from the previous quarter.

FINANCING WOES

The lack of financing for deals involving non-investment-grade companies is a significant cause of the drag. A number of deals have gone sideways, but are likely to be resurrected when the markets rebound.

Investment-grade companies have had more luck but even they have bumped up against tighter lending as banks fret over the effects of the European debt crisis.

BIG DEALS

One bright spot for M&A is that the size of deals announced in the quarter increased to an average of $155.9 million, the second-highest level in the last three years, according to Thomson Reuters data.

Large companies with strong reserves of cash will continue to be aggressive, in spite of the current uncertainty.

After starting with a bang, deal volume for 2011 is on track to end only 5 to 10 percent higher than last year, according to research estimates. That points to a dreadful fourth quarter since deal value is currently about 20 percent up from last year.

The themes that drove healthier deal making last year -- strong cash balances and available financing -- are still present.

Uncertainty about the global economy is the swing factor that could impact the next few quarters.

IT Services M&A Transaction Highlights and Multiples

M&A transaction multiples for the latest quarter (Q3 2011) in the IT services sector averaged 0.7x transaction value-to-trailing twelve months revenue (TTM), with a low of 0.1x and a high of 1.8x.

Highlights and most active acquirers in Q3 2011 include:

ü  Fusionstorm filed to go public in August and also acquired two companies, Global Technology Resources and Red River Computer Co.

ü  All Covered (Konica Minolta Business Solutions) acquired two companies, Vertical IT Solutions and LAN Associates.

ü  CSC acquired two companies, AppLabs Technologies and Maricom Systems.

ü  Cognizant Technology Solutions acquired two companies, Zaffera and CoreLogic Global Services.

ü  Affiliated Computer Services (Xerox) acquired Italy-based BPO and call center firm XL World.

For the complete report and download (free), go to:  www.generationequityadvisors.com

Data Sources: Thompson Reuters, FactSet Mergerstat, The 451 Group, Ernst & Young, Generation Equity Advisors Research and Company websites.