2008-10-01 23:15:19 - Okay, so we are facing a bit of doom and gloom these days. Wall Street is crashing and the US Congress failed to pass the $700 Billion financial bailout legislation this week (week of Sept 29, 2008). In Europe and the U.S., the freeze in global credit markets deepened even as European stock investors remained hopeful that the U.S. Congress would pass a revised financial bailout package. The LIBOR rate on overnight loans between banks surged to an all-time high of 6.88%, up from 2.57% the day before, as banks have virtually stopped lending to each other.


Where do we go from here?
Now What?
How does it effect global technology M&A?

Current Technology M&A Environment


Okay, so we are facing a bit of doom and gloom these days. Wall Street is crashing and the US Congress failed to pass the $700 Billion financial bailout legislation this week (week of Sept 29, 2008). In Europe and the U.S., the freeze in global credit markets deepened even as European stock investors remained

hopeful that the U.S. Congress would pass a revised financial bailout package. The LIBOR rate on overnight loans between banks surged to an all-time high of 6.88%, up from 2.57% the day before, as banks have virtually stopped lending to each other.


Where do we go from here?
Now What?
How does it effect technology M&A?


From a macro-level view, the technology industry is still alive and kicking, although slowing (in some ways).

Forrester Research cut its 2009 U.S. technology spending growth forecast to 6.1 percent from 9.4 percent, the research group said on Tuesday, but raised its 2008 growth forecast to 5.4 percent from 3.4 percent.

The economic slowdown Forrester expected in the first half of this year is now expected in the second half of 2008 or the first half of next year. "(This) means that total U.S. IT (information technology) spending for 2008 will be more robust than we first predicted, but that an expected recovery in 2009 will be postponed," Forrester said in a statement.

According to Capital IQ, deal flow in the technology sector has approached $119.32 billion and 3,666 for YTD 2008, versus $205.54 billion and 3,846 for the same period last year.

Capital IQ also reported that multiples, including Total Enterprise Value (TEV) to Revenue averaged 1.28x and the TEV to EBITDA averaged 8.47x for the trailing-twelve months ending Sept 30, 2008. As for the latest period (Q3 2008) the average technology deal equaled a TEV / Revenue of 1.23x and a TEV / EBITDA of 7.77x, a slight drop overall.



'IPOs Hit a 30-Year Low'


In Silicon Valley, investors believe technology firms will survive the economic meltdown, but they're concerned about the lack of IPOs. There were zero IPO's completed by venture backed companies in the second quarter of 2008. It's the first time since 1978 that the industry posted a goose egg, and it represents a huge drop from the 25 companies that went public during the same period in 2007. The latest data have the National Venture Capital Association warning of a "capital markets crisis." NVCA president Mark Heesen is also concerned that the total value of merger and acquisition deals, another key outlet for VC-backed companies, was 40 percent less in the second quarter than in the same period in 2007.

Not that everyone didn't see it coming, but guess what? The third quarter stank for venture capitalists seeking to reap the rewards of their investments. In fact, it was the worst period in five years for VC exits. So says new data from Dow Jones VentureSource.

According to the stats, VC-backed companies generated $4.57 billion in liquidity for their backers via initial public offerings or M&A. That's a 66% drop from the year-earlier period. There were 66 acquisitions worth $4.4 billion; the lone IPO was the $153 million debut of Rackspace Hosting Inc. That said, the median time until a VC-backed company gets bought has stretched to 6.1 years, while the price fetched has nearly been halved compared to last year. Ouch.

At its recent meeting in Silicon Valley, the National Venture Capital Association announced it will organize task forces of financial experts to come up with solutions for reviving the IPO market and present the ideas to the new White House Administration after the first of the year.

Meanwhile, we attended the recent annual Oracle OpenWorld conference and learned that Oracle president Charles Phillips suggested that over the next five years, the level of acquisition activity could be similar to what Oracle has accomplished in the past 44 months, which amounts to several Billion dollars in M&A spending. "We have access to innovation around the world because of our balance sheet and acquisition strategy." In a sense, he said, Oracle "is the IPO market for the software industry." Oracle builds on its enterprise software solution which includes databases (where its an industry behemoth), middleware and applications.


IT Services M&A Summary for Q3 2008

The IT Services industry sector remained active for Q3 2008 with a tilt towards Europe and India claiming the bulk of the number of acquisitions (and buyers).

Most recent IT Services M&A transactions announced in Q3 2008 include:

September 30, 2008 - India-based IT services company HCL Technologies has made a counter bid for UK-based SAP consultancy Axon Group for approximately 441.1m pounds ($810.8m), in response to Infosys' offer of $753.1m. HCL said the acquisition would complement its application and infrastructure management capabilities, as well as expand its customer base. In August, Infosys Technologies made a cash offer of 407.1m pounds ($753.1m) for Axon to expand its consulting practice. HCL's counter offer is at an 8.3% premium over Infosys's offer. Axon employs approximately 2,000 people and serves customers across the UK, North America, and Asia, and reported net profit of 20.2m pounds ($37.4m) on revenue of 204.5m pounds ($378.3m) for fiscal 2007.

September 24, 2008 - US-based systems integrator Ciber has agreed to acquire India-based IT services provider Iteamic for an undisclosed sum to expand its Indian operations. Iteamic, with approximately 200 employees, manages projects off-shored by US companies and expects its fiscal 2009 revenue to be between $7m and $8m. The acquisition, to be closed in 30 days, is expected to expand Ciber's capabilities to handle off-shored projects from the US and Europe.

September 23, 2008 - US-based private equity firm Providence Equity Partners and Manila-based conglomerate Ayala have announced the acquisition of Philippines-based outsourced services vendor eTelecare Global Solutions for $290m. Under the deal, Ayala's BPO investment affiliate LiveIt which already holds 22% in eTelecare, will acquire up to 100% of its outstanding common shares. eTelecare provides BPO services for voice-based and non-voice-based customer care from delivery centers in the Philippines, North America, and Latin America. It currently has a headcount of 10,000 with 2,000 based in Arizona.

September 22, 2008 - India-based IT services provider HCL Technologies has announced plans to spend as much as $2bn to acquire companies in the US or Europe by 2011. The company has identified a three-fold acquisition strategy: intellectual property acquisition, geographic acquisition, and transformation acquisition, in its aim to be among the top three global vendors by 2011. The company is looking for acquisitions of $100m or less to acquire intellectual property for the company. It is also planning acquisitions in Japan and Germany to expand its geographic reach. It recently announced plans to acquire three to four captive BPOs in the Asia-Pacific region, specializing in banking and financial services. The company has close to $600m in cash reserves.

September 17, 2008 - Spanish IT services provider Telvent has acquired US-based DTN Holding Company for $445m to strengthen its position in the business information services sector. The transaction is expected to close in the fourth quarter. Telvent said DTN provides information services to the agriculture, energy, and environment industries and expects revenue of $180m for fiscal 2008. Telvent will gain access to DTN's library of proprietary content and solutions, and a real-time data delivery platform. DTN's management team will continue to run the company.

September 16, 2008 - Netherlands-based IT services provider Ordina has acquired Belgian SAP specialist E-Chain Management for an undisclosed sum. Ordina said E-Chain has been providing SAP-based business automation services since 2001, and generated revenue of approximately 13.6m euros ($19.4m) in 2007. Bart Embrechts, director of E-Chain Management, said: "Joining Ordina will allow us to capture a larger slice of the Benelux market. What makes our joining forces especially interesting is Ordina's specialization in application outsourcing. From now on, we can offer a comprehensive service range, including wider technological expertise and solutions development." It is the latest of several acquisitions by Ordina in its bid to dominate the Belgian ICT market by 2010. Since 2005, it has acquired numerous SAP and ICT specialists including Infra Design, Solidium, Vertis, Magentis, IBAS Group, EVO-Soft, Be Value, Bergson, Wisdom, and Iterum Services. Last year, it also acquired Belgian ITG Consulting Group and YoungWood IT Group. In addition, the company divested its Technical Automation and ApplicationNet units to focus on its core business of consulting, IT, and outsourcing.

September 10, 2008 - IT services vendor iGate plans to spin-off its Mastech IT staffing services and consulting services arm into an independent company. The said September 16 is the proposed date for the spin-off. After the spin-off Mastech will be a separate listed company with revenue of approximately $100m. All the shareholders of iGate will get Mastech shares by the end of September. The company has declared a dividend of one Mastech common stock for every 15 shares of iGate common stock. The company delisted its Indian subsidiary iGate Global Solutions last year. The company's staffing business is handled by Mastech and RPOworldwide.

September 9, 2008 - Indian IT Services firm Satyam is planning to make bigger acquisitions instead of smaller niche ones, according to a report in the Economic Times. The company has acquired six firms over the last three years, all in the sub-$50m price range, including the April 2005 purchase of US-based Citi Soft, a specialist consulting firm focusing on investment management for $38.7m, and its acquisition last year of UK-based consulting firm Nitor Global Solutions for $5.5m. Satyam CFO V Srinivas said the company is evaluating at least half a dozen acquisition targets at any point of time. "We are mainly looking companies in the US and Europe that are engaged in infrastructure managed services, engineering services, BPO, and consulting segments," he said. The slowdown in the US economy and low valuations of US-based firms could result in some targets becoming cheaper for acquisition by Indian companies. Satyam's cash reserves stood at INR 7,703 crores ($1.73bn) as of June 30, 2008.

September 1, 2008 - Indian IT services provider Tech Mahindra has acquired a 17.3% stake in systems integrator Servista as part of a strategic partnership to enable it to continue its European expansion.

August 29, 2008 - UK-based support services provider Serco Group has agreed to acquire US-based SI International, a provider of information services and network applications to the federal government. Serco will pay $423m and will assume debt of approximately $87.3m. SI International has 4,500 employees. Clients include the US Air Force, Army, Department of Defense, and 15 federal civilian agencies. The company said 99% of second-quarter revenue came from federal government contracts. It will be integrated with Serco's North American unit in Virginia. The combined entity will be headed by the unit's chairman and chief executive Ed Casey, and will have 11,500 employees and revenue of approximately $1.3bn. Serco said it expects the combined entity to provide annualized cost savings in excess of $10m from the end of the second full year of ownership. This acquisition is expected to be accretive to Serco's adjusted earnings in the first full year of ownership.

August 20, 2008 - India-based IT services vendor ITC Infotech has expanded its footprint in the US with the acquisition of Pyxis Solutions through its US-based wholly owned unit ITC Infotech (USA). Financial terms of the deal were not disclosed but ITC Infotech said Pyxis will become a wholly owned unit of the company. Pyxis Solutions, which was founded in 2000, provides IT services for quality assurance, testing and automation focusing on STP/T+1, knowledge management, and outsourcing. Its customers include Merrill Lynch, Banker's Trust, Deutsche Bank, Citibank, Chase Manhattan Bank, AIG, Prudential Insurance, Double Click, and Sony.

August 7, 2008 - GFI Solutions, the Canadian subsidiary of French IT services vendor GFI Informatique, has acquired Bell Business Solutions, a subsidiary of Bell Canada. Bell Business Solutions provides business IT services for the municipal sector, and health, manufacturing, distribution, and printing industries across Canada. The company reported annual revenue of CAD 40m ($38m) and has 350 employees. After the acquisition is completed, it will operate under the name GFI Business Solutions. Bell Canada is selling off non-core businesses to streamline its operations to become a private company by the end of the year. Earlier this week it sold its defense, security, and aerospace unit to pilot trainer CAE for CAD 26m ($25m). Gilles Letourneau, president and chief executive at GFI Solutions, said: "In addition to consolidating our presence across Canada in the business solutions market, we anticipate significant potential for cross-selling our consulting services in the various target sectors."

August 6, 2008 - Aegis BPO, a part of Essar Group, has agreed to acquire Philippines-based back-office outsourcing provider PeopleSupport for $250m. PeopleSupport will be merged with Essar Services and will be renamed Aegis PeopleSupport. It will have an employee base of 29,000 across the Philippines, India, the US, and Costa Rica. PeopleSupport reported $150m revenue for the last financial year. It is the 11th acquisition by Aegis BPO in the last four years. It recently acquired the call center facility of AOL in Bangalore for $30m. The company has nine centers and generates 67% of its revenues from the US. The acquisition of PeopleSupport will add 15 new clients in the travel and transportation sector. Aparup Sengupta, chief executive and managing director at Aegis BPO, said: "The addition of PeopleSupport's high-performance operations in the Philippines and Costa Rica will enable Aegis BPO to become a leader."

July 29, 2008 - France-based IT services provider Capgemini has agreed to acquire the application services business of Getronics PinkRoccade, GPR, for 255m euros ($400.9m). GPR's Business Application Services BV division offers services including application development, maintenance, and management. It generates 40% of revenue from the Dutch public sector.



Sources used in this publication include:

Factset Mergerstat
Thomson-Reuters
Datamonitor ComputerWire
DigitalMedia Wire
Capital IQ
Overture Equity Advisors LLC Research
Company Websites and Filings




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