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-
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.
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
