Q2 2011 - Digital Media M&A and Financing Update

M&A is Active

47 M&A deals in the Digital Media sector closed in Q2 2011.  With the exception of Microsoft’s announced acquisition of Skype, most deals in this last quarter were small, under $1 billion. We expect 2011 to show further improvement in transaction volume and value. 

There is strong support for recent valuations of social media sites. In 2000, Price/Earnings (PE) ratios for UK listed technology companies peaked at close to 90x, compared to a wider multiple of around 25x for the market as a whole.  Today, the PE ratio for listed technology companies of 16x is only slightly higher than for the overall market multiple of 15x, with a similar picture in the US. PwC shows that PE for listed technology companies are down since 1999…

For businesses in sectors like social media, PE is not necessarily the best metric on which to draw valuations PwC partner Ian Coleman says: “When you look at value per user metrics, the valuations for some of these businesses begin to make more sense.” So they have picked another metric - value per user…

Global M&A activity dips in Q2 vs. Q1, but is up overall in 2011 vs. 2010

According to Thompson Reuters, Global M&A for Q2 2011 came in at $710 billion for 9,664 deals, compared to $786 billion (10,410 deals) in Q1 and $553 billion (10,407 deals) in Q2 2010. Private equity M&A deal activity came in at $70.53 billion for 961 deals, compared to $53 billion for 983 deals the prior quarter. Q2 2010 had been $51 billion for 880 deals.

The driving sector in M&A for the first half of 2011 was "high-tech" with a 13.5% market share of dollars, followed by real estate (13.4%) and consumer products/services (12.2%).

The leading region for PE M&A deal activity in the first half was the Americas, although it's lead over Europe dropped from 55.4% in the first half of 2010 to 44.4% in 2011 (even though the actual deal totals increased).

Strong Venture Investment Activity

There were 28 venture investments greater than $10 million in Q2 2011, worth a combined $1.2 billion.  During the quarter, there were three investments with transaction values above the $50 million. Among the largest investments announced during the quarter were Dorsey’s Payment’s $100 million capital raise from Kleiner Perkins Caufield & Byers, Spotify’s $100 million investment by DST, Kleiner Perkins and Accel, and LivingSocial’s $400 million investment.

Venture capitalists poured $2.23 billion into hot social media companies in the second quarter of 2011, according to Wall Street research, up from $643 million one year ago. The influx of money comes as some of the biggest social media upstarts are going public, or preparing to do so, and reflects huge investor demand for a piece of the action.

Social media investments in the second quarter declined from the first quarter, when venture capitalists poured a whopping $3.17 billion into companies, but that figure is inflated due to Goldman Sachs’ $1.5 billion investment in Facebook, and Groupon’s $950 million fundraising round. Excluding those two investments, second quarter VC investments in social media companies rose by 35 percent compared to the first quarter,

Social commerce companies saw the largest infusion as investors jumped on the daily deal bandwagon, hoping to ride the coattails of market leader Groupon, which is growing wildly and preparing an IPO.

IPO Activity – The flood gates are open

Already this year, LinkedIn (NYSE: LNKD), the business-focused social network, has gone public, and now has a market capitalization of over $8 billion. Social gaming site Zynga filed IPO documents last week, and aims to raise at least $1 billion, and as much as $2 billion. Groupon, the social commerce leader, filed IPO documents last month, and hopes to raise at least $750 million.

The following six companies that have either gone public this year, or are expected to within the next 12 months:

Demand Media: The company runs a web registrar operation and a content business anchored by eHow, a massive repository of low-cost articles on virtually every subject imaginable. The company pays thousands of freelancers to produce articles it hopes will have a longer shelf-life than traditional news articles. Demand went public in January and saw its stock jump 33 percent.

IPO: January 16, 2011. Raised $67 million. Open: $17. Last close: $13.27.

Revenue: $253 million

Net Income (Loss): ($5.3 million)

Revenue growth: 48 percent

Valuation: $1.11 billion

P/E: N/A

Competitors: Yahoo (NSDQ: YHOO), AOL

Challenges: Demand is heavily dependent on Google (NSDQ: GOOG), which has been moving aggressively to crack down on low-quality content. As a result, Demand is focusing on increasing the quality of its content and growing its traffic from social media like Facebook.

LinkedIn: The social network for professionals has over 100 million users. Its shares soared as high as 109 percent in its first day of trading in May.

IPO: May 19, 2011. Raised $353 million. Open: $83. Last close: $90.66.

Revenue: $243 million

Net Income (Loss): $15 million

Revenue growth: 110 percent

Competitors: Facebook, Monster

Challenges: LinkedIn (NYSE: LNKD) is growing rapidly, but needs to begin generating substantial profits in order to justify its sky-high valuation.

Pandora: The internet radio service went public at $20 two weeks ago, then dropped sharply, as early investors cashed out. Since then Pandora (NYSE: P) stock has moved back up toward the offering price.

IPO: June 15, 2011. Raised $235 million. Open: $20. Last close: $19.02

Revenue: $167 million

Net Income (Loss): ($17 million)

Revenue growth: 136 percent

Valuation: $3 billion

P/E: NA

Competitors: Sirius (NSDQ: SIRI), Clear Channel (OTCBB: CCMO), Apple (NSDQ: AAPL), Google, Spotify

Challenges: Pandora faces crushing royalty payments due to the major record labels, and unless there are structural changes in the nature of those royalty agreements with the labels, half of Pandora’s revenues will continue to pour into label and rights-holder coffers.

Groupon: The Chicago-based daily deals service, filed IPO documents with the SEC last month. The company hopes to raise $750 million.

Revenue: $713 million (2010), $645 (2011 Q1)

Net Income (Loss)): ($413 million)

Revenue growth: 1,463 percent

Valuation (est): $15 billion to $25 billion

P/E: NA

Competitors: LivingSocial, Google, Facebook

Challenges: Groupon’s biggest challenges are the low barriers to entry in its market—dozens of clones have sprung up—and an impending wave of competition from major players like Google and Facebook.

Zynga: The creator of popular online video games like FarmVille and MafiaWars filed IPO documents last week. The company aims to raise at least $1 billion, and as much as $2 billion.

Revenue: $597 million (2010), $235 million (2011 Q1)

Net Income (Loss): $91 million

Revenue growth: 135 percent

Valuation (est): $15 billion to $20 billion

P/E (est): >300

Competitors: Electronic Arts (NSDQ: ERTS), Activision

Challenges: Among the current crop of internet IPOs and IPO prospects, Zynga stands out for the simple reason that it is profitable, and substantially so. But Zynga shouldn’t become complacent. Ironically, Zynga’s rapid rise is illustrative of the fast-changing nature of the internet commerce. The company is on top now, but for how long?

Facebook: The world’s largest social network with over 600 million users is widely expected to public next year, and could raise $10 billion at a valuation of over $100 billion.

Revenue (est): $2 billion

Net Income (Loss) (est): $400 million

Revenue growth: Unknown

Valuation (est): $70 billion to $80 billion

P/E (est): 190

Competitors: Google

Challenges: Facebook is king of the social web. Google has thus far failed to make major inroads into the space, despite being the company best positioned to do so. It’s too early to know whether Google’s recently announced +1 service will dent Facebook.

For the complete report (free download), including valuation tables, go to:   www.techmediamergers.com

Q1 2011 - Digital Media M&A and Financing Update

M&A Deals and Values Are Rising


The number of M&A deals in the Digital Media sector for Q1 2011 is up 18% from Q4 2010. With the exception of Ebay’s announced acquisition of GSI Commerce, most deals in this last quarter were small, under $1 billion. We expect 2011 to show further improvement in transaction volume and value.


KIT Digital was very active, having made 4 acquisitions during Q1 2011. Other active strategic buyers including: Google, Groupon, Publicis, IBM, Playdom, Zynga and other leading digital media companies will likely continue to be active in M&A given their large cash positions.

The most active sectors overall within Digital Media in Q1 2011 include daily deals and shopping clubs (i.e. – Groupon), online video technology and publishing.

The daily deals and shopping clubs segment was very active in the Q1 2011 with 5 acquisitions. Transactions included ReachLocal’s acquisition of DealOn for $10 million, Archant’s acquisition of 50% of Tickles, LivingSocial’s acquisition of Let’s Bonus, and Local.com’s acquisition of iTwango.

M&A volume will likely continue to rise further as buyers’ and sellers’ expectations match up. We see 2011 staying a healthy M&A market and forecast the number of deals announced and valuations will rise further.



Venture Investment Activity Increases

There were 29 venture investments greater than $10 million in Q1 2011, worth a combined $3.2 billion. Compared to Q4 2010, investment activity, grew by 20%, while the average venture investment transaction value increased by over 150%.

During the quarter, there were four investments with transaction values above the $50 million, compared to five in the prior quarter. Among the largest investments announced during the quarter were Facebook’s $1.5 billion capital raise from Goldman Sachs, Groupon’s $950 million investment led by Andreessen Horowitz, and Angie’s List’s $54 million investment led by T. Rowe Price.

Spark Capital was the most active financial investor, leading eight investments for the quarter, while Intel Capital led seven, Sequoia Capital led six and Kleiner Perkins Caufield & Byers and Accel Partners each led five venture investments.



IPO Activity


The market responded favorably to the recent IPO’s of Demand Media, Epocrates and Cornerstone OnDemand, all of which traded up more than 30% on the first day of trading. Q4 2010 also announced five IPOs, and all but one of them traded up after the first trading day. With 10 US-based companies with IPO filings currently in registration, including LinkedIn, HomeAway and Kayak.com, as well as a healthy amount of discussion regarding potential IPOs for companies like Yandex, RenRen and Groupon, the IPO market is expected to remain active over the next few quarters.


Tech M&A Spending Up – Hits Post-Recession High


According to The 451 Group - Lifted by AT&T’s massive consolidation play, tech M&A spending in the just-closed first quarter hit a post-recession record of $84 billion – one-third more than the previous high-water mark of $62 billion set in Q2 2010. Additionally, the number of transactions in the just-completed first quarter (881) also set a new record.

And yet even without the landmark telecom deal, Q1 deal flow was surprisingly strong, particularly in March. Excluding AT&T’s planned purchase of T-Mobile USA, the quarterly spending total was higher than both the preceding Q4 2010 and the year-earlier Q1 2010. Most of that, however, was due to a flurry of activity in March, which saw spending at more than twice the monthly rate of the previous half-year and the highest level since last summer. (Again, that’s backing out the $39 billion that AT&T is set to spend on T-Mobile USA, a deal that was announced on March 21.)

As the gigantic telecom transaction illustrates, M&A is an inherently lumpy business. So projecting annual totals from a single quarter’s activity doesn’t necessarily make for a reliable forecast. Nonetheless, we would note that the start to 2011 puts it on track for nearly $340 billion in spending for the year. If it comes in at roughly that level, it would mark the highest annual spending total in four years and would not be too far from the level in 2005, just before tech M&A set off on a two-year record run.


U.S. Local Digital Ad Revenues to Nearly Double to $42.5B by 2015 from $21.7B in 2010

Local advertisers continue their steady migration to digital media platforms, according to BIA/Kelsey’s U.S. Local Media Annual Forecast (2010-2015). BIA/Kelsey, a research and advisory firm to companies in the local media industry, expects online/interactive advertising revenues to climb to $42.5 billion by 2015, almost double 2010’s $21.7 billion, representing a compound annual growth rate (CAGR) of 14.4 %. This growth coincides with anticipated improvement in the U.S. economy and a continued rise in overall local advertising, which the firm expects will reach $153.5 billion in 2015, up from $136.3 billion in 2010, representing a 2.1% CAGR.


As digital media — delivered to consumers through mobile, Internet or other electronic methods — continues to gain traction with local advertisers, BIA/Kelsey predicts it will represent 23.6% of all local ad spending by 2015.

“As the business climate improves and advertisers step back into the market, they are gravitating to digital options that perhaps were not as mature before the recession began,” said Tom Buono, chief executive officer, BIA/Kelsey. “Our analysis indicates that as advertisers move to online, mobile and, particularly, the variants of social media, we are fast approaching a tipping point where digital media will soon become a dominant segment of the local advertising marketplace.”

BIA/Kelsey reports among the key drivers of this year’s forecast are:


• The increased number of smartphones and tablets is already playing a role in affecting revenue shares earned by traditional media.

• Continued significant newspaper revenue erosion will drive pay walls and other creative approaches for rebuilding revenue base.

• Intense political advertising and uptick in national advertising lifted television and other media revenues in Q4 2010, increasing prospects for the forecast period.

• The interactive/online sector continues to advance and multiply with new formats such as social and mobile.

BIA/Kelsey’s U.S. Local Media Annual Forecast also notes that social forms of digital media are increasingly becoming an important component of online revenues. Consumer spending on deal-a-day offers, which the firm expects will grow to $3.9 billion by 2015, illustrates an expanding market that includes Facebook and Twitter. (Source: BIA/Kelsey)


For the complete report, with tables, go to http://www.techmediamergers.com/ where you can download free.



Generation Equity Advisors, LLC
1100 Glendon Ave, Suite 1731
Los Angeles, CA 90024
http://www.techmediamergers.com/

mergers@generationequityadvisors.com

Stefanini IT Solutions acquires CXI

(Richmond, VA and Brazil)

Brazil-based Stefanini IT Solutions (http://www.stefanini.com/) acquired Code X, Inc. ("CXI" - http://www.cxi.net/), a Richmond, Virginia based IT services firm with over 400 employees (250 in the U.S. and 150 in India) for an undisclosed sum.

Stefanini is a global company with nearly 12,000 employees in 27 countries, including in the Americas, Europe, Africa and Asia. Its clients come from several sectors, including manufacturing, telecommunications and utilities.

This is the second major purchase for the Brazilian company in about a year. In late 2010, Stefanini acquired TechTeam Global, an IT outsourcing firm based near Detroit, MI.

Adding CXI into the mix allows Stefanini to become "a new breed of outsourcer and IT service provider," Marco Stefanini, who founded the company that bares his name in 1987, said in a statement.

As Stefanini and CXI join forces, CXI's president and chief operating officer Shu Dasgupta will remain in his role. Ranjit Sen, who founded CXI in 2000, will stay on the company's board and will become a senior adviser to Marco Stefanini and his company. Ranjit Sen said the timing was right to sell and that Stefanini IT Solutions Group is the right fit for his company. "It was the appropriate time. We needed (Stefanini's) muscle to grow," said Mr. Sen.

Generation Equity Advisors, LLC (http://www.generationequityadvisors.com/) was the exclusive financial advisor to Stefanini IT Solutions and CEO Ally, Inc. (http://www.ceoally.com/) was the exclusive financial advisor to CXI.

IT Services and BPO M&A Update - Feb 2011

Summary

• We are seeing a significant increase in M&A activity in the global BPO and IT services market.
• M&A grew considerably in 2010, with the total number of deals, aggregate Enterprise Value, and median deal size all up more than 50% from 2009.
•  The median revenue multiple for deals in the BPO sector ticked up to 1.6x EV/Rev (Enterprise Value-to-Revenue) and 1.2x EV/Rev for IT services deals, back to levels last seen before the economic crisis and market crash (pre-2008).
•   We believe that BPO and IT services M&A activity in 2011 and 2012 could continue its increased activity and rise above the sector’s pre-recession deal flow.
•   There is a significant and growing BPO and IT services market in addition to increased M&A activity in Latin America; we are spotting increased investments in Brazil, Argentina and Mexico.
•   There were 7 acquisitions of Managed Services companies announced in January 2011.

M&A activity in the BPO and IT services sector was strongest in the second and third quarters of 2010 with large deals like Aon’s acquisition of Hewitt Associates ($4.8 billion) and NTT’s acquisition of Dimension Data ($2.9 billion) driving up deal multiples and aggregate volume. Median deal sizes also increased over the course of the year, with the Q4 median at $53 million, more than double the Q1 median of $26 million. Median transaction value to LTM revenue multiples also moved up sharply over the year, from 0.7x in Q1 to 1.2x in Q4 for IT services firms, indicative of a strong market.

We noticed a number of companies that earned multiples much higher, including Diamond Management and Technology Consultants’ acquisition by PricewaterhouseCoopers for 1.7x LTM revenue and 14.5x LTM EBITDA; Stefanini’s acquisition of TechTeam Global for 1.26x LTM revenue (EBITDA was nil); NTT Data’s acquisition of Keane International Inc. for 1.5x LTM revenue (estimate); and iGate’s acquisition of Patni for 2.3x LTM revenue.

Strong M&A Market in the Latin American BPO and IT Services

Latin America has become an increasingly important and dynamic BPO and IT services market. Significant investments are being made, and companies based there are growing across borders into geographies like North America, as Brazil-based Stefanini IT Solutions did with its acquisition of U.S.-based TechTeam Global in late 2010. Latin America is number three overall in jobs outsourced from the U.S., its local economies are growing, and both acquirers and investors are betting on its BPO and IT services opportunity.

Indian outsourcing giant Tata has leveraged its presence in 14 countries in Latin America, with offshore centers in Brazil, Uruguay, Mexico and Chile to serve its clients with local and global IT resources. There were 14 M&A transactions involving Latin American targets in 2010, a substantial increase compared to the three Latin American targets in all of 2009. Many U.S. players, including HP, Accenture and Unisys, are increasing their presence in Brazil in particular, a growing center for BPO and IT services.

Significant M&A transactions in this area for 2010 included Apax Partners’ $950 million investment in Brazil-based TIVIT S.A., a provider of integrated services in IT infrastructure, application systems and business process outsourcing. Capgemini also made a notable entry into the Brazilian market, paying $560 million for a 55% in CPM Braxis S.A., a provider of application services, infrastructure technology services and business process outsourcing.

2011 will continue to see additional M&A activity from Latin American BPO and IT services firms.  Valuations and deal volume will be up to pre-2007 levels. As the BPO and IT services market demands more global capabilities, many firms from Europe, the U.S. and India will expand further into Latin America, both organically and by acquisition.

Large global IT Services Providers will Continue to Consolidate, Build Scale, and Gain Differentiation

Large IT services providers such as CSC and Accenture made multiple acquisitions during 2010, and acquisitions during the fourth quarter alone show these firms are diversifying their portfolios. CSC acquired ImageSolutions, a privately-held, global life sciences leader in regulatory submission management solutions and related implementation and outsourcing services, to bolster its Healthcare practice (largely the former First Consulting Group). It also acquired Vulnerability Research Labs to strengthen its cyber security offerings across an array of industries, including the public sector.

Accenture made 3 acquisitions over the past three months: 1) Beijing-based Genesis Interactive Technology, a mobile outsourced product development offering business which further entrenches Accenture in China where it currently has over 4,000 employees; 2) Knowledge Rules, a Philadelphia-based consulting company that gives Accenture a foothold in implementing and integrating business solutions using Pegasystems’ BPM software; and 3) Ariba’s BPO assets, which will strengthen its sourcing and procurement services offering.

One consistent theme coming out of the most recent global economic downturn is that the largest BPO and IT services firms big keep getting bigger; they have strong balance sheets to continue that trend through 2011 and 2012. We expect to see continued increasing investments and M&A into the BPO and IT services market for the next few years.

More information and a list of recent mergers and acquisitions at:  www.generationequityadvisors.com

Generation Equity Advisors, LLC is an independent investment bank and M&A advisory firm focused exclusively on the global, IT Services, Software and Digital Media industry sectors. We advise buyers and sellers of companies and efficiently execute transactions to increase shareholder value. Our professionals have advised on $10+ billion in M&A transactions to date and have current relationships globally with technology and media companies as well as leading private equity firms.

Q4 2010 - Digital Media M&A and Financing Update

Q4 2010 - Digital Media M&A and Financings Update

by: Aaron Solganick and Chad Gardiner,
Generation Equity Advisors, LLC

M&A Remains Strong

The number of M&A deals in the Digital Media sector for 2010 is 40% up from 2009. Most deals in 2010 were small, under $1 billion--there were only six media and information deals valued over $1 billion. We expect 2011 to show further improvement in transaction volume and value.


Google continues to be very active, having made 17 acquisitions during 2010. Google, AOL, Groupon, Publicis, IBM, Playdom, Zynga and other leading media companies will likely to keep the media M&A surge going into 2011 given their large cash positions.


The most active sectors overall within Digital Media in 4Q 2010 include daily deals, social gaming, and ad targeting/analytics.


Daily deals and shopping club online media companies were some of the most active segments in the 4Q 2010 with 7 deals announced, including 4 acquisitions and 3 investments worth $1.2 billion. Transactions included Google’s (GOOG) attempted acquisition of Groupon for $6 billion, EBays’s (EBAY) purchase of brands4friends and Amazon’s (AMZN) acquisition of BuyVIP. Among notable venture investments, Groupon raised $950 million from Kleiner Perkins Caufield & Byers, DST, Fidelity and Morgan Stanley. LivingSocial raised $175 million from Amazon.com and Privalia raised $95 million from Index Ventures and General Atlantic.


Despite limited access to debt, M&A deals are not slowing down. Volume will likely continue to rise further as buyers’ and sellers’ expectations match up. We see 2011 becoming a healthy M&A market and forecast the number of deals announced and valuations will rise further.


There were 421 venture investments in 2010, worth a combined $6.1 billion. Compared to 2009, investment activity, in 2010 in the Marketing, Information and Digital Media/Commerce industries grew by 22 percent, while investment transaction value increased by 43 percent. Aside from Groupon’s year-end raise, the biggest deal this quarter was Twitter’s $200 million growth capital financing led by Kleiner Perkins Caufield & Byers.




IPO’s More Active in 2011

In all, 110 U.S. companies went public last year valued at $35 billion, according to Dealogic. And that figured was skewed by GM which accounted for nearly half the volume. Still the number of U.S. companies that went public last year was double what was seen in 2009. The number of PE firms looking to exit investments should keep the IPO market busy. Already, more than 40 PE-owned companies have filed to go public this year.

There were only 18 media companies who filed for an IPO in 2010. Hulu appears to be holding off on its IPO, while Everyday Health canceled its planned filing in November. Despite the roadblocks surrounding IPOs in the media space 2011 should be a much bigger year for IPOs. As the stock market improves, some big-name digital companies will finally go public in 2011, including: Demand Media, Glam Media, Zynga, Pandora, Groupon, Brightcove and LinkedIn.


 
For the full report, go to:  Q4 2010 - Digital Media Update
 
 
Generation Equity Advisors, LLC is an independent investment banking firm focused exclusively on the Software, IT Services and Digital Media industry sectors.
 
For more info on Generation Equity Advisors, go to: Generation Equity Advisors

Q3 2010 Update - Digital Media

M&A is back in Style 

Deals in the Digital Media (Internet, Paid Content, Digital Marketing, Digital Media/Commerce, Gaming, Mobile/Internet Applications) sector for Q3 2010 slightly pulled back from Q2 2010, but were still quite active for the quarter. We tracked and noted just over 200 deals announced for Q3 2010. Valuations were up 41% from Q3 2009 where there were $10.9 billion total announced transactions for the quarter.

Q3 2010 ended with AOL announcing three acquisitions, including: TechCruch, Thing Labs and 5min on September 28.  Google continues to be very active having made eight acquisitions in search or social media and is rumored to have made a $100 million investment in leading social gamer, Zynga, during the 3Q 2010.  The most active sectors overall include social gaming, mobile technology and analytics. 

Mobile Technology was one of the most active sectors with 10 deals announced, including 4 acquisitions and 6 investments worth $108 million. Transactions included Motorola’s acquisition of 280 North for $20 million, Walt Disney’s purchase of Tapulous and WebTrends’ acquisition of Transpond. Among investments, PocketGear raised $15 million from Trident Capital, Shopkick raised $15 million from Kleiner, Perkins, Caufield & Byers and Ngmoco raised $5 million from Google Ventures.

Digital Media/eCommerce was the second most active segment. There were 53 deals announced for Q3 including 33 acquisitions and 20 investments valued at roughly $2.5 billion. Within that industry, e-commerce led the way with 19 transactions for $416 million.

In third place behind eCommerce in terms of activity was Social Media, with 13 transactions worth $231 million. Dividing the category further, there were 10 deals in the Social Games sub-segment for nearly $939 million.

Within the Digital Media/eCommerce sector, there was Hellman & Friedman’s purchase of Internet Brands for $640 million, Walt Disney’s acquisition of Playdom for $563 million, Google’s acquisitions of Slide for $228 million and Like.com for $100 million, and OpenTable’s acquisition of TopTable.com for $55 million. Among investments, Etsy raised $20 million from Index Venture Partners, BuyWithMe raised $16 million from Bain Capital Ventures, Hi5 Networks raised $14 million from Crosslink Capital, Beyond the Rack raised $12 million from Highland Capital Partner.

Despite the continued economic volatility, M&A deals are not slowing down. Volume will likely hold steady or continue to rise further as buyers’ and sellers’ expectations match up. We see 2011 becoming a healthy M&A market and forecast the number of deals announced and valuations will rise further.

IPO Market - Slow and Steady:

The number of venture-backed IPOs, however, dropped from 17 in the second quarter to 14 in the third quarter, with their total value easing from $1.27 billion in the second quarter to $1.25 billion by the end of September 2010. But the 14 IPOs in the third quarter 2010 well outpaced the 3 IPOs a year earlier — there were only 12 VC-backed IPOs in all of 2009. The $1.25 billion value of IPOs in the third quarter of 2010 also more than doubled the $572 million value of the three deals a year earlier.

More than half, 8 of the 14, IPOs involved information technology companies, with the remaining 6 divided between life science (4) and non-technology (2) companies.

Up and coming digital media IPOs include: Demand Media, Skype, Hulu, Nielsen, and Mail.ru Group (formally Digital Sky Technologies).       

The complete report can be downloaded (free) here: www.generationequityadvisors.com/files/GEA_Quarterly_Digital_Media_Update_Q3_2010_.pdf

Generation Equity Advisors, LLC

www.generationequityadvisors.com

Q3 2010 Update - Software & IT Services

Deal-Making is Back in Style

The number and value of U.S. disclosed venture capital exit deals in the third quarter of 2010 showed a mixed pattern compared to the second quarter of 2010, with more mergers and acquisitions (M&As) of VC-backed properties, but somewhat fewer initial public offerings (IPOs) of company stock.

Thomson Reuters and National Venture Capital Association compile and report these data collected by Dow-Jones VentureSource.

The third quarter of 2010 had 104 VC-backed M&A deals compared to 97 in the second quarter, and significantly more than the 69 deals in the third quarter of 2009. The 27 M&A deals that disclosed their value totaled more than $3.8 billion in the third quarter, 31% more than the previous quarter and well more than double the $1.4 billion total value of deals a year earlier.

Most (82 of the 104) M&A deals involved information technology companies, with the other 22 split between life science (14) and non-technology (8) companies.

The number of venture-backed IPOs, however, dropped from 17 in the second quarter to 14 in the third quarter, with their total value easing from $1.27 billion in the second quarter to $1.25 billion by the end of September 2010. But the 14 IPOs in the third quarter 2010 well outpaced the 3 IPOs a year earlier — there were only 12 VC-backed IPOs in all of 2009. The $1.25 billion value of IPOs in the third quarter of 2010 also more than doubled the $572 million value of the three deals a year earlier.

More than half, 8 of the 14, IPOs involved information technology companies, with the remaining 6 divided between life science (4) and non-technology (2) companies.

Overall, deal-making is back in style in Silicon Valley and other Technology-driven regions. Fueled by powerful trends in mobile devices, digital media and cloud computing, tech companies are acting on the urge to merge — a sign, let’s hope, of an improving economy.

"The exit markets have seen steady activity this year and solid gains over 2009's dismal numbers," said Jessica Canning, global research director for Dow Jones VentureSource.

The average merger and acquisition deal was worth $27 million, up 23% from the year-ago period.

Private markets deal activity is benefiting from acquisitions by traditional corporate acquirers as well as venture-backed companies such as Facebook and LinkedIn which are making strategic acquisitions.

SAP's pending $5.8 billion purchase of Sybase, IBM’s pending acquisition of Cogent and Hewlett-Packard's pending $1.2 billion takeover of Palm are some of the latest headliners.

For the shrinking venture capital industry, the surge in M&A is providing a welcome return on investments at a time when the recovery in initial public stock offerings (IPOs) remains spotty.

A mix of three factors has made M&A a more vital force in Technology-driven companies - regulatory changes, growing corporate clout and evolving technologies.

Most private companies pondering IPO’s today require more time and revenues approaching $100 million. Given such hurdles, the M&A option becomes more attractive for startup founders, executives and venture investors.

Many promising startups wind up on the shopping list of corporate giants. Cisco Systems, Oracle, HP and Google — as well as non-valley giants Microsoft, IBM and EMC — are known for their acquisition strategies. The nation's 10 largest tech companies collectively have approximately $200 billion in cash on hand.

IPO valuations are also on the rise, with IPO activity increasing five-fold from the same time last year.  The actual IPO valuations have increased by about 60%, with nine IPOs raising $723 million over the whole of the quarter, compared to the IPOs of the same quarter in 2009, which raised $572 million.  The largest IPO of this most recent quarter was the Monrovia, Calif.-based company Green Dot Corp, a provider of prepaid financial services, which raised $164 million.

The year seems to be doing well on the whole, though it still remains far below the stellar explosions of 2007.  So far this year, venture capitalists have sold $17.74 billion worth of companies, up 75% from last year’s total at this time.

Note of Caution for Public Companies Planning an M&A Exit – Shareholder’s are filing lawsuits against Board’s of Publicly Traded Companies for Not Shopping for Multiple Bids in M&A Transactions

Recent legal rulings and cases involving Board members fiduciary duties and shareholders demanding a public company shop around for the best buyer and highest bid is becoming more and more important if you are a CEO, CFO or Board Member of a publicly traded company. 

For public companies who decide to sell to another buyer who approaches them without running a formal M&A process, there is a very high probability the shareholders will sue the company and its executives for a breach of fiduciary duty (for not shopping the company) and seeking out the best possible sale of the company (and highest price). 

The latest wave of shareholder lawsuits include the recent Diamond Management and Technology Consultants (DTPI) sale to PwC, the sale of Internet Brands (INET) to Hellman & Friedman (a PE firm), Abraxis Biosciences (ABII) sale to Celgene Corp., Netezza Corp’s (NZ) sale to IBM, ArcSight’s sale to HP and Sybase’s sale to SAP.

In the latest case of DTPI, the plaintiff alleges that the offer undervalues Diamond Management & Technology Consultants, because while Diamond, like the rest of the market, experienced a stock price decline in late 2008 and early 2009, it has rebounded nicely thanks to record financial results. Indeed, in recent months its stock price has traded over 419% above its 2009 lows. Additionally the plaintiff claims, among other things, that defendants abused their power as directors and officer and agreed to the terms in merger agreement, like a $9 million termination fee, a no shop/no talk clause, recurring unlimited matching rights, and voting agreements, that are designed to ensure the sale of Diamond Management & Technology Consultants to one buyer, and one buyer only - PricewaterhouseCoopers LLP - on terms preferential to PricewaterhouseCoopers.

The full report can be downloaded (free) here:  http://www.generationequityadvisors.com/files/GEA_Quarterly_Update_Q3_2010_.pdf

Generation Equity Advisors (GEA) is an independent investment banking firm focused on the technology and digital media sectors exclusively. Our professionals have completed over $10 billion in transactions and are highly experienced in M&A, corporate finance and capital markets.

Our focus is on the Technology  and Digital Media  industry sectors - specifically on the Software, IT Services, Digital Media and Internet industry sectors in the U.S. and globally.  Globally, we have CEO and CFO level contacts into large corporations, private companies and private equity firms. We have 

completed multiple M&A assignments for international / cross-border expansion.

More info on GEA:  http://www.generationequityadvisors.com

H1 / Q2 2010 - Technology M&A Update

M&A Update

by, Aaron Solganick, Generation Equity Advisors LLC

After a recession-induced pause, the tech industry is back and M&A deals, including number and value, are rising overall in the U.S.  However, the numbers are mixed quarter-by-quarter around the world and a cautionary M&A environment is still in place.  The M&A environment is still very fragile and you see it in a slight Q2 2010 slowdown in global M&A activity.

Tech M&A is fueling growth globally, however.

A year ago, it was difficult to sell your company during such a distressed economy. According to a report by PricewaterhouseCoopers' Technology Transaction Services, “Most companies shelved their M&A activities and concentrated on restructuring operations and conserving cash."

Today, we are seeing the beginning stages of an M&A “feeding frenzy.” 

Global M&A

Announced global M&A (all industries) totaled US$976 billion so far in H1 2010 (YTD), on par with H1 2009 (US$977 billion). Q2 activity totaled US$454 billion, down 10% from Q2 2009 and down 13% from the previous quarter. US targets accounted for 35% of global activity in the year to date, ahead of Europe (US$227 billion, 23%) and Asia Pacific (US$186 billion, 19%).

U.S. M&A

Announced M&A targeting the US reached US$339 billion in the year to date, down 5% from H1 2009 (US$358 billion). Q2 activity totaled US$171 billion, up 2% from Q1 but down 15% from Q2 2009 (US$202 billion).

Europe M&A

According to CorpFin, Europe saw a 17.5% decrease in European M&A and Equity Capital Market transactions announced during Q2 2010 with only 2,375 deals compared to 2,879 transactions in Q1 2010.

EUR148.7 billion worth of transactions were announced in Europe in Q2 2010, down by 16.1per cent on Q1 2010.

The UK saw a 15.5 per cent decrease in the number of UK mergers and acquisitions and equity capital market transactions announced during Q2 2010 compared to Q1 2010, data from Experian shows.

GBP46.2 billion worth of transactions were announced in the UK in Q2 2010, down by 8.7 per cent on Q1 2010.

According to Thompson Reuters Q2 2010 M&A Review, European targeted M&A announced in Q2 2010 totaled US$122 billion, up 16% from the previous quarter (US$105 billion) and up 7% from Q2 2009 (US$114 billion). Year to date activity reached US$227 billion, down 23% from H1 2009 (US$295 billion). This could mark the worst start of the last 10 years in Europe.

Asia Pac. M&A Down

Announced M&A targeting the Asia Pacific region reached US$89 billion so far in Q2 , down 9% from the previous quarter (US$97 billion) and down 32% from Q2 2009 (US$130 billion). Year to date activity totaled US$186 billion, down 1.1% from H1 2009 (US$188 billion).

Buyside Financial Sponsor M&A on the Up

Global private equity backed M&A totaled US$40 billion in Q2 2010, up 33% from the previous quarter and up 125% from Q2 2009 (US$18 billion). Year to date activity reached US$70bn, up 102% from H1 2009 (US$35 billion).

Cross Border M&A (EMEA/U.S.)

Acquisitions abroad grew for the 5th consecutive quarter to reach US$197.5 billion in Q2, up 10% from the previous quarter. Year to date activity totaled US$376 billion, up 69% from H1 2009 (US$223 billion). Cross border M&A accounts for 39% of deals announced in 2010.

Withdrawn M&A Hits $143 billion

With Prudential’s withdrawal of its US$35.5 billion bid for AIA, global withdrawn M&A activity for year-to-date reached US$143 billion up 29% from the same period last year.

Tech M&A

According to The 451 Group, spending on tech M&A in the second quarter surged to the highest quarterly rate since the credit crisis erupted, driven by a return of some of the largest technology buyers. Overall, deal makers announced 773 transactions, with a total value of $62bn. The Q2 total, which represented a doubling of spending from the first three months of the year, topped the previous record in the ‘new normal’ environment by slightly more than 10%.

IPO Activity (U.S.)

IPO activity through the first six months of 2010 approached pre-recession levels of five and six years ago, with total new filings in the U.S. rising to 128 so far in 2010 from 15 during the same period of 2009, and priced IPOs rising to 62 from 14 in 2009. Within the technology sector, priced offerings rose correspondingly to 20 in 1H 2010 compared to six in 1H 2009,

What’s driving current M&A activity?

Acquisitions "really matter to us," Google Chief Financial Officer Patrick Pichette said in an earnings call in April.

The rise in activity reflects a return to normal after a bruising recession all but killed the appetite of tech companies to make deals. Low interest rates have helped drive up tech shares, fueling the M&A frenzy.

Both companies and private equity firms are currently sitting on piles of cash. In fact companies are sitting on the highest percentage of cash since the 1960’s. Because companies have cut costs and reduced inventories even as profits have recovered, cash balances have climbed to $1.84 trillion, according to data from the Federal Reserve.

The top 10 technology companies currently have approximately $250 billion in cash. Cisco has nearly $40 billion in cash reserves; Microsoft, $37 billion; and Apple, $23 billion. They understand that if they don't put the money to use on deals, shareholders will start lobbying for dividends.

U.S. based Private equity firms are sitting on an estimated $500 billion in cash.  Those PE firms with dry powder are bidding aggressively, in the United States, Europe and Asia.  One of the biggest and costliest deals so far this year (as of May 4, 2010) was the acquisition of a stake in the Interactive Data Corporation, a financial market data company, by two private equity firms, Silver Lake and Warburg Pincus, according to Capital IQ, which tracks the industry. A third, unidentified private equity partner dropped out because the price was too high.

The two buyout shops paid $3.4 billion, or $33.86 in cash for each share of I.D.C. — a premium of nearly 33 percent to the going price in the stock market. Technology companies often command high valuations.

What Buyers Want

Companies that cut back over the past few years now are feeling they need to catch up and acquire technology. Buyers are paying more for small, innovative companies in high-growth areas with long-term potential, according to a report by Ernst & Young.

Fueling M&A action is an uptick in initial public stock offerings and VC investments in tech firms. This year is shaping up as the best for tech IPOs since 2007, when there were 59. Already, a dozen venture-backed tech IPOs have been filed — and venture capitalists such as Geoff Yang, a partner at Redpoint Ventures, expect more than 50.  When VC’s open up their checkbook after a bad economy, that is when small companies emerge and become big, like an Apple or Google.

There seems to be an upcoming feeding frenzy in effect.  After you’ve been starving for a long time, you’re really anxious to eat.

One booming sector to note is in cloud computing. IBM predicts the cloud computing market will mushroom to $126 billion by 2012 from $47 billion in 2008.

Recent Notable Tech M&A Deals

On May 12, 2010 - SAP paid $5.8 billion to acquire database maker Sybase in one of the biggest tech deals of the year. A recent flurry of M&A wheeling-and-dealing included IBM, which acquired Cast Iron Systems to bolster its standing Internet-based computing. And then in June, IBM acquired private software vender Coremetrics to add web analytics capabilities. Apple acquired Siri, maker of a voice-recognition application, and Intrinsity, a chip designer. Hewlett-Packard snapped up Palm for $1.2 billion. Salesforce.com acquired Jigsaw, maker of a Web-based business address book, for $142 million.  And Google acquired Picnik, On2 Technologies and Aardvark in the past few months to "build on (Google's) existing focus areas and to bring new talent and new technology."

For full report, download (free) here: http://www.generationequityadvisors.com/

Sources:  Thompson Reuters, The 451 Group, CorpFin, Generation Equity Advisors Research and others.