There were
just under 600 M&A transactions in the IT Services sector announced for
2011, up from 443 in 2010. Q4 2011 noted
148 transactions announced, slightly down from 161 the previous quarter.
Consulting deal volume jumped 38% in
2011, with median deal size more
than doubling to $59.7 million. The
median revenue multiple for the period fell, however, weighed down by a number
of deals during Q1, including as CSK
Corporation’s acquisition by Sumitomo
(0.3x) and RWD Technologies’
acquisition by GP Strategies (0.4x).
The subsector’s largest transactions included Charterhouse Capital’s $950 million investment for 65% of Environmental Resources Management at
2.0x revenue, as well as Genpact’s
$550 million acquisition of Headstrong
for 2.5x revenue.
Systems integration deals rose
year-over-year, but median deal size dipped
to a low of $10.2 million. The median
revenue multiple stayed flat at 0.8x
and the median EBITDA multiple
slipped to 7.4x, although there were
few data points for comparison. The majority of deals in this subsector are
valued well below $100 million, a sign that consolidation of smaller innovators
by larger players continues to dominate. The largest systems integration deals
of the year included the acquisition of Value
Team S.p.A by NTT Data Corporation
for $364.5 million, as well as Ness
Technologies’ acquisition by Citi
Venture Capital for $341.8 million. Stefanini IT Group (Brazil) acquired
U.S. based Code X, Inc. (CXI) in Q1
2011 for an undisclosed amount. Generation
Equity Advisors advised on this transaction.
The number
of deals in the offshore outsourcing
sector ticked up 37% year-over-year, the median deal size of $93.5 million exploded
for the second year in a row, boosted by the $1.2 billion investment in Patni Computer by iGATE. Even excluding the Patni transaction, median deal size grew to $50
million in 2011 versus $20 million in 2010.
Government services is the only
sub-sector that reported lower deal volume. Announced deals slipped 28% while
median deal size fell 49%. These declines reflect increased scrutiny of
spending and overall uncertainty surrounding the federal budget. Multiples
remained relatively unchanged, however, and the median revenue multiple ticked slightly higher in 2011 to 1.3x while the median EBITDA multiple of 12.1x
in 2011 was boosted by deals including Paradigm’s
acquisition by CACI International
for $61 million and 29.5x EBITDA, Ares
Management’s acquisition of GTEC
for nearly $315 million and 16.4x EBITDA, SRA
International’s sale to Cerberus Capital
for 12.1x, and High Performance Technologies
sale to Dynamics Research for 12.0x
EBITDA.
IT staffing deal activity decreased
slightly in 2011, but median deal size grew more than 93% year-over-year, to
$89.0 million. The IT staffing sectors median
revenue multiple for 2011 was flat at 0.3x
and its median EBITDA multiple was higher
at 9.5x. The largest transaction in the subsector was SFN Group’s acquisition by Randstad Holdings for $760 million.
Other interesting deals in the space included the acquisition of Staffmark by Recruit in October for $295 million; Staffmark was one of the few IT staffing firms to have filed for an
IPO (estimated $125 million) earlier 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.
As for IT
Services firms, large acquirers have strong balance sheets and the ability to
make both sizable and small, tuck-in acquisitions to complement organic growth.
More diversified services firms will continue to support higher public market
valuations (e.g. Accenture, CGI, IBM) which should drive aggressive M&A
strategies in 2012.
Volatile
equity markets slowed mounting U.S. M&A 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.
Epam Systems Inc, an IT
services provider with operations in Russia, is aiming to move ahead with its
planned U.S. initial public offering in the first quarter of 2011, according to
Reuters.
Epam filed
with U.S. regulators in June to raise up to $100 million in an initial public
offering of its common stock. The company did not reveal how many shares it
planned to sell or their expected price, but said at the time it would use the
proceeds for acquisitions and general corporate purposes.
Both
Glasshouse Technologies and Fusionstorm cancelled their IPO’s for 2012.
For the full report, you can download (free) at: www.techmediamergers.com
Generation Equity Advisors, LLC
1100 Glendon Ave, Ste 1731
Los Angeles, CA 90024
