Q4 2011 - Digital Media M&A Update and 2012 Outlook

Digital Media M&A Update - Q4 2011 and 2012 Outlook
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Q4 2011 – Global M&A Update

According to MergerMarket, global M&A for 2011 totaled $2,178.4 billion, up 2.5% from the same period in 2010 ($2,125.9 billion), making it the busiest year since 2008 (which was at $2,405.8 billion).  12,455 deals were announced in 2011, 1.3% below the number for 2010 (12,296 deals).

Activity did, however, decrease over four successive quarters, with $432 billion-worth of deals announced globally in Q4 2011, down 22.5% from Q3 2011 ($557.5 billion). Fourth quarter activity was 39% lower than in Q4 2010 (US$ 708.1bn), with the lowest quarterly total since Q3 2009 (US$ 325.4bn).

2011 was the busiest year for cross-border M&A since 2008, in spite of a gradual slowdown in M&A activity after the first half of the year. Cross-border deals (by individual countries) announced in 2011 added up to $874.4 billion and regional cross-border deals were up to $593 billion, an increase of 9.8% and 19.6% respectively since 2010, which saw $796.7 billion-worth by country and $495.7 billion-worth by region.  2011 booked cross-border deals between individual countries accounting for 41.5% of global M&A activity, the second highest proportion since 2007 when $1,564.4 billion-worth accounted for 42.8%.

According to The 451 Group, acquirers spent $219 billion by purchasing 3,690 information technology, telecommunications and Internet companies around the world in 2011—a 17% increase in spending and a 13% increase in number of deals year-over-year.

The total dollar value increase was led by multibillion-dollar strategic deals from top-tier technology companies such Hewlett Packard (HP), Google, Microsoft, SAP and Texas Instruments.  Mega deals included Microsoft’s $8.5 billion purchase of Skype, Google’s $12.5 billion successful bid for Motorola Mobility patents, Texas Instrument’s $6.5 billion acquisition of National Semiconductor, HP’s buyout of Autonomy for $11.7 billion, and SAP spending $3.65 billion to acquire human capital management software vendor SuccessFactors.

It was also noted that the Media, Information, Marketing Services and Technology sectors in the U.S. booked nearly 900 transactions in 2011 totaling $47 billion, a 9% increase over 2010.

Emerging market (BRIC) buyout activity, valued at $32.3 billion, accounted for 11.6% of global buyout activity in 2011, up from 11.5% in 2010, and the highest contribution since 2009 (19.1%).  Europe is the region that invested the most in the emerging markets in 2011, accounting for 40.2% of cross-border deal value ($80.4 billion): the UK, France, Germany and the Netherlands accounting for 21.1%, 17.6% and 9.6% (for both Germany and the Netherlands) of European-related inbound deal value respectively.

The global average deal size for Q4 2011 was $291 million, the lowest Q4 average since 2007 (at $277m).

Cash-only was the preferred structure for cross-border deals in Q4 2011, with cash-only deals accounting for approximately 94% of the value of all cross-border deals announced in Q4 2011, compared with 90% in Q3 2011.

In all, technology acquirers increased M&A spending for the second year in a row. Moreover, total deal count hit its highest level since 2006, as M&A activity across sectors and across value continues to rebound from the downturn of the 2008-2010 recession.

Multiples and Deal Premiums

The average premium (one day before) of global M&A deals for publicly listed companies in Q4 2011 increased to 33.5%, driving the annual average up to 28.5%, up from 22.2% in 2010. North American premiums averaged 35.9% in 2011, an increase from 31.6% in 2010. Meanwhile, European premiums for the year averaged 21.9%, the second highest average since 2002, only topped by 2008’s average of 22.9%. The Asia-Pacific region saw an average premium of 21 %, again the highest average premium since 2008 (24.1%).

The average EBITDA multiple across global M&A in 2011 was 12.6x, down from 14.9x in 2010 and the lowest average since 2003 (10.6x). The European average EBITDA multiple in 2011 was 12.1x, the second-lowest since 2004, and 11.5x in 2009.

The quarterly average global EBITDA multiple decreased in the last quarter of the year to 12.1x, from the previous quarter’s 15.8x, a drop driven by significant decreases in North America and Asia-Pacific, from 16.3x in Q3 to 12.8x in Q4 in North America, and from 20.4x to 10.1x in Asia-Pacific. Europe, however, showed an increase in the average EBITDA multiple on M&A deals in Q4 2011 to 15.3x, up from 14.4x in Q3 2011.

The TMT (Technology, Media & Telecoms) sector recorded the highest average EBITDA multiple – at 15.7x – in 2011, overtaking 2010’s leading sector Energy, Mining & Utilities which averaged 19.5x.

Digital media M&A

Recent announced M&A Transactions in the Digital Media sector for Q4 2011 and YTD 2012 include:

•                    RIM acquires NewBay for $100 million at approximately 5.0x LTM Revenues

•                    Yahoo acquires Interclick for $270 million at 2.0x LTM Revenues

•                    Rakuten acquires Kobo for $315 million

•                    Facebook acquires Gowalla (undisclosed)

•                    Google acquires Apture and Katango (undisclosed)

•                    Evolve Media acquires RealityTea.com, WebEcoist.com (Jan 2012)

Note: Full M&A table on Page 8

The sectors with the largest disclosed median enterprise value multiples for all of 2011 were Broadcasting with 3.8x revenue and Internet Media at 17.5x EBITDA.

The median revenue multiple rose from 1.5x in 2010 to 1.9x in 2011. The median EBITDA multiple moved slightly from 10.4x in 2010 to 10.6x in 2011.

The sector with the largest increase in volume in 2011 over 2010 was Online Marketing with a 29% increase from 332 transactions in 2010 to 428 transactions in 2011.

2012 M&A Outlook

We expect M&A activity to remain steady for 2012 and possibly uptick further if the lending environment eases globally.  While Europe is in economic turmoil, the U.S. is stabilizing.  Emerging markets such as Brazil, Argentina and China are all on the upswing and in growth mode.  We expect some financial buyers (private equity) to remain on the sidelines while strategic buyers (companies) will acquire to capture growth.

Buyout firms accounted for around 16 percent of company takeovers in 2011.

Volatile equity markets slowed mounting U.S. deal activity in the third and fourth quarters, following growing deal momentum in the first two quarters of 2011.  In light of concerns over Europe and a pullback in financing, U.S. merger and acquisition activity in the second half of 2011 was driven by well-prepared dealmakers focused on executing acquisitive growth strategies and availability of businesses with strong fundamentals– a key trend expected to continue into 2012, according to PwC's Year-End U.S. M&A Outlook.

Sellers now are looking for both speed and certainty in a deal, and also pursuing various alternative options and scenarios as they proceed as a way of maximizing the asset’s value. With sellers in the driver's seat, buyers must remain poised and ready when deal negotiations continue for a prolonged timeframe. Overall, the M&A markets are on track to stabilize further and increase overall over the next few years.

As for the Facebook IPO, it is planned to go out between April and June 2012 and will raise around $10 billion at a $100 billion valuation, according to Bloomberg news sources.  Facebook’s revenue more than doubled to $4.27 billion 2011 from $2 billion in 2010, research firm EMarketer Inc. said.

M&A TABLES AVAILABLE IN FULL REPORT 

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Generation Equity Advisors, LLC is an independent investment bank and M&A advisory firm focused exclusively on the global Software, IT Services 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 $20+ billion in M&A transactions to date and have current relationships globally with technology and media companies as well as leading private equity firms.

  

Aaron Solganick

President & Managing Director

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aaron@generationequityadvisors.com

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DISCLAIMER

The information contained herein is of a general nature and is not intended to address the circumstances of any particular company, individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We perform our own research and also use third party research. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. This is not an offer or recommendation to buy or sell securities nor is it a recommendation to merge, acquire, sell or exit a specific company or entity.

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Year-End Software M&A Update and 2012 Outlook

We expect M&A activity to remain steady for 2012 and possibly uptick further if the lending environment eases globally.  While Europe is in economic turmoil, the U.S. is stabilizing.  Emerging markets such as Brazil, Argentina and China are all on the upswing and in growth mode.  We expect some financial buyers (private equity) to remain on the sidelines while strategic buyers (companies) will acquire to capture growth. Buyout firms accounted for around 16 percent of company takeovers in 2011.

Volatile equity markets slowed mounting U.S. deal activity in the third and fourth quarters, following growing deal momentum in the first two quarters of 2011.  In light of concerns over European debt and a pullback in financing, U.S. merger and acquisition activity in the second half of 2011 was driven by well-prepared dealmakers focused on executing acquisitive growth strategies and availability of businesses with strong fundamentals– a key trend expected to continue into 2012, according to PwC's Year-End U.S. M&A Outlook.

Sellers now are looking for both speed and certainty in a deal, and also pursuing various alternative options and scenarios as they proceed as a way of maximizing the asset’s value. With sellers in the driver's seat, buyers must remain poised and ready when deal negotiations continue for a prolonged timeframe. Overall, the M&A markets are on track to stabilize further and increase overall over the next few years.

A few M&A highlights for 2011:

·         The most active acquirers within the Software Industry through Q3 2011 were EMC Corporation and Google Inc. with 10 acquisitions each.

•        Vista Equity Partners was the most active financial acquirer during Q3 2011 with 5 acquisitions: Thomson Reuters Trade and Risk Management Business, Sage Healthcare Inc., CompuLaw LLC, Client Profiles, Inc. and CyberShift, Inc.

·        The largest transaction for the third quarter as well as the 1st 3 Quarters of 2011 was the acquisition of Autonomy Corporation plc by HP for $10.28 billion and represents a 10.8x revenue multiple and a 24.5x EBITDA multiple.

·        Total transaction volume in Q3 2011 for Software companies decreased by 11% over Q2 2011, from 366 to 324 transactions.

·        Total transaction value in Q3 2011 for Software companies decreased by 22% over Q2 2011, from $29.9 billion to $23.4 billion.

·         Median EBITDA multiples in Q3 2011 remained largely unchanged from the last quarter, at 13.6x.

·         Median revenue multiples in Q3 2011 remained nearly the same, at 2.3x times revenue.

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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


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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