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.

Q2 2011 - Software M&A Update

M&A Deals and Values Are Rising

Big-ticket deals drove the aggregate value of global technology mergers and acquisitions (M&A) to US$52.1bn in the second quarter of 2011, nearly doubling the deal value from an already strong first quarter, according to Ernst & Young’s Global Technology M&A update, April – June 2011. The surge was powered by industry consolidation and by ongoing disruptive innovation in areas such as cloud computing, smart mobility, internet and mobile video, the smart grid and solar energy, the report states.

The US$52.1 billion in Q2 2011 aggregate value (of deals with disclosed values) was 92% higher than in Q2 2011 (US$27.1bn) and 69% higher than the year-earlier quarter (US$30.8bn). The average value for deals with disclosed-values rose to $194m — the highest quarterly average since the first quarter of 2000, during the dot-com boom. According to published reports, the quarter includes the 20th-largest global technology deal ever by dollar value.

Companies continued this upward trend in Q2 2011 of making multiple small acquisitions and weaving them together to address strategic business initiatives. We noted this trend, for example, among internet companies, which acquired multiple social networking companies, and among established software and SaaS companies, which bought multiple SaaS companies.

Also exemplifying this pattern were software and SaaS providers purchasing social networking companies in order to add social functions into their enterprise applications or their advertising/marketing platforms. Similarly, the rise of "deal-a-day" e-commerce companies was reflected in a series of consolidation transactions among small and regional competitors and by geographic expansion deals done by larger competitors.

Cross-border deals add to growth

Q2 2011 data also shows the growth of cross-border (CB) deals in both volume and value. CB deal volume in the quarter was 16% higher sequentially, compared with an 11% decline in in-border (IB) deals, and 32% higher than the year-earlier quarter, compared with a 19% increase for IB. At US$24bn, the aggregate value of CB deals was 46% of the aggregate value for all Q2 2011 deals (CB + IB), up from 40% in Q1 and for all of 2010. The report suggests that increasing globalization and the growing volume of “overseas” cash stockpiled by US-based companies may be behind the increase in CB deal-making as the US acquired 56% of all CB value acquired.

Overall, deal volume for the quarter increased 24% year-over-year (YOY) to 777 deals, but slightly declined 2% sequentially from 794 deals in quarter 1. Although small, it was the first sequential quarterly decline since Q1 2009.

Continued strong outlook for 2011 M&A

Given a strong first quarter start to the year and the unleashing of big-ticket deals in Q2 2011, there is increasing momentum behind global technology M&A transactions heading into the second half of the year. In addition, technology continues to influence the development of the entire global economy, as information technology evolves into an increasingly valuable component of all products and services.

Moreover, technology companies continue to stockpile cash, which gives them the flexibility to act when strategic M&A opportunities arise. In aggregate, the cash and investments held by the sector’s top 25 companies (as defined in the report) grew to $591bn by the end of Q2 2011 — an 18% YOY increase from US$499bn at the end of Q2 2010. After the first quarter M&A results, we noted the potential for a big year for technology M&A in 2011, but we were concerned over increasing divergence between buyers and sellers over valuation, geopolitical unrest, the continuing US debt ceiling and government spending debate, global debt issues and other unforeseeable possibilities. Yet all these hurdles were overcome to produce a very robust second quarter.

Moreover, technology companies have the fuel they need to increase M&A spending. In aggregate, the cash and investments held by the sector's top 25 companies (as defined in the report), which topped the half-trillion-dollar mark by the end of 2010, grew to US$544b by the end of 1Q11 — an 18% YOY increase from US$461b at the end of 1Q10.  "These truly exciting technology innovations, the growing cash stockpiles that technology companies are increasingly challenged to put to good use and the strong start to the year represented by these first quarter M&A results suggest a big year for technology M&A in 2011. Realistically, however, we must temper those pluses with concern over increasing divergence between buyers and sellers over valuation, geopolitical unrest, global debt issues and other unforeseeable possibilities. 

More info and the complete report is available (free) for download at:  www.techmediamergers.com


Source(s):  Ernst & Young, The 451 Group, Factset Mergerstat, Company Websites and News, SEC Filings, Yahoo Finance, Bloomberg, Gartner

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