INTRODUCTION: Tech Continues Slow Climb From The Bottom In Q2
In our Q1 2009 IT M&A Review, Updata Advisors predicted that Q2 would show the beginnings of a return to normalcy in tech M&A. Indeed, several events took place in the early days of Q2 that suggested this would be the case. The announcement of several large deals, such as Oracle's acquisition of Sun Microsystems for $5.6 billion, Fidelity's acquisition of Metavante Technologies for $4.4 billion and EMC's acquisition of Data Domain for $1.8 billion, suggests that buyers are slowly regaining their courage to spend. By comparison, all of Q1 saw just one transaction with an enterprise value of more than $1 billion.
Those three deals weigh heavily in the increase in deal value between Q1 and Q2. Even though fewer deals were completed in Q2 (427 compared with 448 in Q1), the IT sector as a whole saw $10.3 billion in transaction value - an increase of 146% over Q1's total of $4.1 billion, according to data from FactSet/Mergerstat.1 Other Q2 developments also point to brighter days ahead:
Tech stocks are beating the big three indexes. Tech stock prices have been trending upwards along with the rest of the stock market over the past six months, with every tech sector tracked by Updata beating the tech-heavy NASDAQ by at least 2 percentage points.2 Internet saw the biggest jump, up nearly 38% year-to-date -- more than 20 percentage points over the NASDAQ's rise. The software-as-a-service subsector has also seen big gains, with Updata's SaaS comp group up almost 51% in the last 6 months. All of the sectors, however, remain down for the past 12 months -- but the recent surge is obviously a good trend (see Figure 1). It should also be noted that the NASDAQ has bested the other two stock indexes in the first half of 2009. From January 2 to June 29 the NASDAQ was up 16.9% -- far above the S&P 500's increase of 2.6% and the Dow's 2.8% decline.
The software sector should begin to see growth. The economic crisis is still a drag on overall IT spending, which IDC says contracted for its second consecutive quarter, triggering a reduction in its overall forecast for 2009 from slight growth of 0.5% to a decline of almost 2%.3 The strongest growth in software spending will continue to be found in system infrastructure segments, according to IDC, although expectations have been lowered to growth of less than 2%. In the longer-term, IDC forecasts a return to annual IT spending growth of around 4% by 2012 in North America and about 6% globally.
IT vendors are beating their revenue and earnings expectations. As of Q2, a majority of tech companies have either met or beat street analyst consensus estimates for revenues, earnings or both. For example, EMC Corporation, a major player in the M&A market, exceeded its Q2 earnings estimates by about 10% and its revenue by almost 2%. In the software arena, most drove past estimates for both earnings and revenue, with companies like CA and Sybase easily surpassing estimates.
Figure 1 - IT Sector Stock Chart Versus NASDAQ - 1H 2009
Areas With Potential For IT M&A Transaction Activity We believe the following areas to be fertile for IT M&A activity for the remainder of the year into next:
Mobile technology. We are continuing to see the market for mobile technology thrive, driven by powerful secular trends, and believe this will be a major factor in the tech industry's growth over the next few years. Updata Advisor's transaction database shows the number of acquisitions in the mobile IT market has more than doubled in the first six months of 2009 versus the same period in 2008. Growth in mobile applications, the advent of new mobile devices, expanding bandwidth and processing power and new mobile operating systems are opening new revenue opportunities and acquisitions by larger players.
SaaS and Cloud Computing. More and more large vendors are battling for ground in software-as-a-service and cloud computing. Microsoft, IBM and other behemoths are increasingly staking their future growth on this paradigm shift, which is also opening the door for major disruption by Google and others. According to Gartner, spending in cloud computing will grow 8.5% annually on average over the next several years to $150 billion by 2013.4 Microsoft announced in July it will be launching a new version of its online suite of Office products with Office 2010, challenging the already well established Google Docs.
Financial Technology Arising From New Regulations. As governments and financial industry agencies begin imposing new rules and regulations on banks, hedge funds and other market participants, there will likely be increased activity and, consequently, demand for new technologies. Although changes and dollars have been slower to roll out than predicted, big changes are on the horizon which will require new IT investment from financial players. The technology required will come in large part from smaller, pure-play tech vendors, increasing acquisition activity.
Figure 2 - Q2 $1 Billion + Deals
Overall Market Observations Updata has observed the following trends in the overall technology M&A landscape:
More deals have been competitive. We have seen more aggressive bidding in deals this past quarter. The biggest, and probably most publicized, were the multibillion dollar battles for Sun Microsystems and Data Domain. But there were a handful of smaller competitive deals, three of which fell into the enterprise software subsector. In April, Vista Equity partners and Accel-KKR battled over the acquisition of SumTotal Systems, a provider of talent development solutions, with Vista eventually winning with a bid of $160 million. eTrials WorldWide was also in the middle of a tug-o-war between Merge Healthcare and Bioclinica. Merge became the eventual winner, paying $20 million for the provider of clinical trials software and services. LLR Partners raised its bid for contract management software and services provider I-many in June after an unsolicited bidder entered the game in June. LLR walked away the winner after paying $54 million -- a 42% premium over the original proposed transaction price. Premiums paid for publicly traded companies have also increased as public company stock prices have declined (see Figure 3).
The current recession is worse than when the tech bubble burst. In terms of total IT deal values and number of deals, we are now at levels below the 2001-02 recession. Venture capital investments in start-ups have also fallen to a level last seen more than a decade ago, down to $3.7 billion in Q2, from $7.6 billion in the same period last year, according to data from the National Venture Capital Association and PricewaterhouseCoopers.5 The software sector had the most companies funded overall (135 deals), but raised only $644 million -- half of what it raised in the second quarter last year. Internet companies, historically a hot area, raised only $524 million, down from $1.7 billion last year. The good news is that there is growing evidence we troughed sometime earlier this year.
Tech IPO Market Improving. There were no tech sector IPOs in Q1 but Q2 saw an increase in activity with 8 companies listing in the last three months (see Figure 4), compared with 8 IPOs total for all of 2008. Five of the last 9 tech IPOs were consumer focused plays, including Opentable and Changeyou.com. In addition, only four of the IPOs to list this year were private equity-backed, two of which were Bridgepoint Education (backed by Warburg Pincus) and Rosetta Stone (backed by ABS Capital Partners and Norwest Equity Partners).
Figure 3 - 1, 5 and 30-Day Technology M&A Premiums Since 2007
Figure 4 - Q2 2009 Technology IPOs
SECTOR ANALYSES
Updata has identified several areas within our tracked IT sectors that are defying the odds and buoying the tech sector. We continue to see historically active subsectors throughout the industry thrive and new pockets of growth emerging in areas such as Software-as-a-Service and mobile technology that span into every sector. The following are sub-views of each of our tracked sectors, as well as some magnified trends within each:
INFRASTRUCTURE SOFTWARE
The market for M&A transactions in infrastructure software has shown continued signs of improvement during Q2 2009. The total of 14 deals tracked by Updata in Q2 2009 represents the second consecutive increase in quarterly deal volume. The aggregate announced deal value of $3.2 billion for Q2 exceeds the aggregate value of the previous four quarters on a cumulative basis. Even after excluding the $2.1 billion announced EMC acquisition of Data Domain, the total value for Q2 2009 represents a substantial uptick from each of the previous three quarters. In addition, (thanks again in part to the EMC/Data Domain transaction) the median multiple of enterprise value to last twelve months (LTM) revenue was over 3x for the first time in more than a year. While we have some ground to cover before returning to normal market conditions, improvements in M&A deal volumes and values -- combined with a significant improvement in the market for the publicly traded securities of vendors in the sector -- provide support for a more attractive future environment for infrastructure software M&A.
Other trends worthy of note include the following:
M&A activity is evident across multiple buyer types. While many traditional buyers of infrastructure software companies had been relatively quiet in the two previous quarters, during Q2 2009 we observed activity across a number of buyer types. Large buyers such as Oracle, EMC, Cisco and CA were active. CA returns to infrastructure M&A after a long hiatus, with its acquisition of Cassatt in Q2 following its purchase of security vendor Orchestria (an Updata client ) in Q1. Smaller, more focused buyers were represented by Micro Focus with two announced transactions, including the acquisition of Compuware's application testing and automated software quality business for $80 million (an Updata transaction). Also a few private-to-private deals were completed, such as Nimsoft's acquisition of some assets of Cittio and SpringSource's acquisition of Hyperic.
Key areas continue to be storage and data center virtualization and automation. We noted in Q1 that storage and data center virtualization and automation were areas of focus and we've continued to see that in the last three months. These two sub-sectors accounted for the two deals with the highest reported multiples of enterprise value to LTM revenue --EMC's acquisition of Data Domain at 7x and Cisco's acquisition of Tidal Software at 3x -- and almost half of the deal volume during the quarter. These two areas combine large, rapidly growing sources of enterprise demand with high levels of market disruption and technical innovation, which are fundamental characteristics of active technology M&A markets. We expect these two areas to continue to account for a substantial portion of the overall deal activity as economic conditions improve, as well as continue to be some of the highest valuations and highest profile transactions in this sector.
Infrastructure is a bright spot in a dim economy. According to a report released in June 2009 by IDC, global IT spending will decline by 2% during 2009 as compared to typical growth rates of 5% to 6%.3 However, during the same period IDC expects global spending on infrastructure software (including virtualization, security, systems management tools and operating systems) to grow at a rate of approximately 2%. This relatively modest growth rate is much more impressive against the backdrop of a significant contraction in broader IT spending and a global economic recession that has been deeper and lasted longer than any in the recent past. This expectation of rare growth is based upon a number of trends and characteristics unique to the infrastructure software sector that likewise lend support for strong expected M&A activity in the sector.
From an M&A perspective, the enterprise application software sector appears to still be struggling, with total transaction value down 72% for the 12 months ended 6/30/09 compared with the same time frame in 2008. But there are a number of reasons causing the declines that we expect may well turn around when the overall economy bounces back, credit capital begins to flow again, acquirers have a positive outlook about their existing prospects and/or potential targets deliver consistent growth. The median LTM revenue multiple for enterprise application transactions dropped to 1.2x from 2.9x in 2008, down more than for any other sector, except Internet. The median LTM EBITDA multiple is down more than all other sectors (including Internet), with a drop of 37% from 12.0x to 7.6x.
We still saw 51 deals come through in Q2 (compared to 60 in Q1) with total deal value of $5.3 billion, up $1.6 billion over last quarter. But, the number is less impressive if you factor out Fidelity National Information Services' mega acquisition of Metavante Technologies for $2.9 billion. The offer by Golden Gate Capital and Infor to acquire SoftBrands also made some waves last quarter, when the firms offered to purchase the company for $0.92 a share (about $41 million). Shareholders brought claims against the board of directors for possible breaches of fiduciary duty, noting that through the fall of 2008 the stock had been trading at or close to $1 (higher than the offer price). Shareholders are expected to vote on the transaction at a special shareholder meeting in August. Some other observations from the second quarter include:
Mid-sized and fledgling enterprise application vendors are more vulnerable to the downturn. The seemingly huge drops in deal value, revenue and EBITDA multiples stem from the fact that the purchase of many small and emerging enterprise software applications (either license or SaaS models) is simply not perceived as mission critical at a time when IT budgets are closely scrutinized. Application vendors are typically more vulnerable to the economic downturn than others offering vital security and infrastructure technologies or critical IT services. There were a handful of deals in Q2 with transaction values under $10 million including Syntellect's acquisition of Trio Enterprise for $7 million, Pipeline Data's purchase of PayPassage for $3.7 million and Unify's acquisition of AXS-One at an enterprise value of $7.2 million (Updata advised on this deal). In addition, many smaller vendors are being acquired because of their lack of options and need for capital to survive. These vendors are vulnerable to larger competitors, many of which offer full suites of products and not just a "point product," or suffer from flat to declining revenue because of concerns from would-be customers about viability over the long term. All of this leads to a weak bargaining position when deals are being cut.
Public market valuations have bounced back on a relative basis. Multiples of publicly traded enterprise applications companies have held up well compared to their peers in other sectors. For example, big players in the enterprise software arena (SAP, Oracle, Dassault and Microsoft) have been holding consistent P/E ratios of around 19x to 20x as of July 20. On the other hand, infrastructure software players (CA, Compuware, Dell, HP, IBM) have P/E multiples closer to 12x or 13x. Applications vendors that reach critical mass, gain scale and brand recognition and build cash war chests are better positioned to weather the storm and, in many cases, be consolidators within their sectors. These companies continue to grow and achieve maintenance, upgrade and renewal rates on par with infrastructure and security vendors. We believe that customers, like investors, are playing it safe in these times and that they are more inclined in a protracted economic downturn to buy from a larger vendor or provider of a full suite of offerings.
Historically active subsectors continue to thrive. Updata noted in Q1 that a number of subsectors were showing increased activity and we've continued to see that through the second quarter. Within enterprise applications, the most active subsectors continue to be business analytics, HCM (especially e-learning), and vertical applications, specifically for healthcare IT (7 deals in Q2) and government. Some of the bigger deals of the quarter included Voyager Learning Company's acquisition of Cambium Learning for $352 million and Intuit's purchase of PayCycle for $170 million. We also saw two time-and-attendance software solutions providers in play during Q2, Priority Time Systems and NETtime Solutions (transaction values were not disclosed).
The market for SaaS continues to grow. Big players are beginning to dip their toes into the Software-as-a-Service market. Microsoft announced it will launch Windows Azure, its cloud computing platform, in November and Opera announced its new platform, Opera Unite. There were also two SaaS deals in the second quarter. UniRisX, a provider of SaaS insurance solutions, was acquired by management and a private equity consortium in June and in April, RMI acquired 10East, a SaaS provider to the North American railroad industry (no terms were disclosed for either deal). And the third quarter has started out strong with NetSuite's acquisition of QuickArrow for $20 million (Updata advised on the transaction).
M&A transaction volume in the IT security sector remained modest in the second quarter of 2009, but, encouragingly, first-half 2009 announced deal volumes were down only 7% versus first-half 2008, according to Updata's database, to $700 million from $753 million. Our data show 20 deals in the security sector for the second quarter with a total announced enterprise value of $343 million. This is down slightly from last quarter's 23 deals and $358 million in transaction value - but actually up in transaction value compared with Q2 2008, which brought in $177 million from 16 deals. Although median reported revenue multiples for the security sector have fallen to 1.6x LTM year-to-date, the sector has held up fairly well compared to other tech sectors covered by Updata (which range from 0.8x for the internet sector to 2.1x for the financial technology sector). Further, most companies sold in Q1 and Q2 were pressured to sell - those with a choice have held back - so multiples to some extent reflect troubled exits. Also, while data is sparse, we have seen EBITDA multiples hold up at 19.1x on an LTM basis so far this year.
Here are current observations on the security sector (for more detail, see our recently published mid-year security outlook - available on Updata Advisors' Web site at www.updataadvisors.com):
The sector has bottomed and is on the mend. In the public markets, security index share prices have outperformed other IT sectors we follow, moving upwards sharply since February 2009 to the end of Q2 2009 to just 7% below mid-2008 prices. Positive share performance, together with a stabilizing M&A market, suggests that the worst is over. We believe overall security valuations and deal volumes will rise over the next several quarters and should largely return to historical levels by the second half of 2010.
The government cyber-security market is heating up. Reflecting heightened concerns over government vulnerability to online attacks and theft, analysts concur that government IT security spending will experience robust increases in coming years. Deals involving large defense contractors as acquirers, and/or government security vendors as sellers, are on the rise. Since 2008, at least a dozen such acquisitions have been announced. Buyers have included Boeing, Raytheon and SAIC. Recent transactions include the purchase of Cyveillance, a provider of online monitoring, by QinetiQ for $40 million in May with EV/Rev at 3.8x, and Boeing's purchase of eXMeritus, a secure data transfer provider (transaction details were not disclosed) on June 15.
Historically active acquirers have been M.I.A, but this is temporary. In Q2, acquirers included "usual suspects" Symantec, McAfee and TrendMicro. However, half of the acquisitions were made by private companies and a fifth by government vendors. Notably absent were large IT publics that are historically acquisitive in the sector, such as Cisco and Microsoft. We believe these companies are working on transactions and will likely announce deals in the second half of the year. We also believe other large vendors will likely become increasingly active.
Emerging technology markets will boost growth over the next several years. Areas expected to stoke IT security spending growth include cloud computing, home networks and IP-enabled communications (VoIP, digital billboards). We have barely begun to see the impact of these multi-billion dollar markets on IT security spending, which will be significant as these markets develop more fully.
Protection online continues to be a major perceived problem. As consumers and businesses alike do more online, they have greater exposure to identity theft and web-based malware. Continuing high-profile breaches, such as into Twitter recently, highlight these dangers and drive demand for security portability that covers changing access points (office PC, personal laptop, public kiosk, mobile device), websites and remotely-accessible IT resources. Identity and access management vendors continue to be popular for investors. Recently, LifeLock raised $40M while BitArmor raised $3.8 million, Garlik raised $2.4 million and Ping raised $2 million.
Figure 7 -Selected Q2 IT Security Transactions
IT SERVICES
IT Services M&A saw reasonable activity in Q2, including a significant number of cross-border deals. Updata tracked 49 deals in the quarter, 10 of which were cross-border transactions spanning sectors from outsourcing to systems integration, with no one country being a dominant buyer or seller. Government-related transactions also continued to prop up valuations and deal activity. Subsectors with the most deal activity in Q2 included outsourcing (13 deals, 7 of which are financial services or processing related), consulting (12), application centric systems integration (10) and government deals (7 deals, 5 of which had private equity backing). We are also starting to see the Big Four slip back into the market (see bullet below). IDC expects the strongest growth in IT services to come from outsourcing, as businesses look to improve operating efficiencies across the enterprise.3 Implementation services, on the other hand, are expected to slow as purchases of new hardware and software suffer from tight and delayed spending.
Data for the twelve months ended June 30 suggest that broad IT services valuation multiples and transaction volumes are down. Aggregate deal enterprise value fell almost 76.5% to $352 million in Q2 2009 from $1.5 billion in Q1 2009, with the majority of Q1 2009 comprised of two deals -- Softbank IDC Solutions' $488 million acquisition by Yahoo Japan Corporation and Deloitte's $350 million acquisition of BearingPoint's public services sector. The mean enterprise value for IT Services M&A activity over the LTM dropped to $128.6 through June 30, 2009 compared with $240.3 in the same period last year, and at a more granular level, recent deal multiples contrast markedly with last year -- blended EV/Rev in Q2 2009 was 0.5x compared with 1.0x in Q2 2008. Quarter over quarter in 2009 the number of deals remained basically flat (49 in Q2 compared to 50 in Q1).
Some of our observations from the quarter include:
The big four come back to play. It is interesting to see the Big 4 are back in the market as buyers; Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG all made acquisitions, jumping back into operational consulting and systems integration, and with the last three all playing catch up to Deloitte (the only firm not to divest its consulting practice in the 2002-2003 time frame). Ernst & Young snagged EnteGreat's SAP practice, its first deal in two years (transaction value was not disclosed). PwC bought BearingPoint's Commercial Services Business for $44 million (see bullet below) while Deloitte acquired BearingPoint's public sector practice for $350 million (both deals were announced in Q1 and closed Q2). Deloitte leads the pack with 6 deals completed in the last two years as PwC was close behind with 5. E&Y and KPMG have each completed 1, both in 2009.
Faltering businesses are selling. The very visible and ongoing breakup of BearingPoint was hard to miss over the past few months. As the bankrupt management and technology consulting firm continued operations and was actually winning large deals throughout its bankruptcy proceedings in Q1, PwC, Deloitte, CSC and Keane picked up BearingPoint assets at very attractive valuations. BearingPoint's commercial practice, public sector practice and NYC branch have been officially sold off and a deal is in the works for its Brazil operations. Deloitte scooped up the public sector practice for 0.3x revenue, PwC nabbed the commercial practice for less than 0.1x revenue, and CMA acquired the NY branch without disclosing details. Another famously faltering business, Satyam Computer Services, was sold in early April for $1.1 billion to Tech Mahindra, at a revenue multiple of 0.5x and an EBITDA multiple of 2.3x.6
Some services transactions are the result of companies divesting business lines to focus on core competencies. A number of companies offloaded non-core services units -- Updata tracked 6 such deals in the last quarter. Kroll, for example, sold its Government Services unit to Veritas Capital and noted that "the divestiture...is in line with Marsh & McLennan Companies' [parent company] stated intention to focus on core business offerings at Kroll and across the firm."7 ADP sold its retirement plan recordkeeping business to ExpertPlan in June, and Towers Perrin was busy spinning out both its SAP HCM practice to U.K.-based consultancy ROC Global and its Oracle/PeopleSoft HCM practice to CherryRoad Technologies.
Cross-border deals are on the rise. We've seen a lot of action in IT Services cross-border deals this year -- with 10 happening in the past three months alone. Examples include Sparxent, a provider of consulting and outsourcing solutions focused on the middle market, backed by vSpring Capital, which went shopping for two companies in Russia -- Arbyte and Rikkon. Exigen and Atos, both looking to expand their geographic footprint, picked up assets in China through their acquisitions of Taihoo and Shanghai Covics, respectively.
Government is still an attractive vertical. In the first quarter we noted that the government was a very important IT services customer, and we've seen that manifest in M&A activity during Q2 with 7 federal government-related deals, 5 of which had backing of private equity investors, either directly or indirectly. This is also notable because there has been very little PE activity in any other IT Services subsector.
Figure 8 - Selected IT Services Transactions Q2 2009
INTERNET
Internet sector M&A activity remains modest but picked up in Q2 2009, with 17 pure-play deals tracked by Updata, compared to 10 in Q1. Deal volume for the second quarter was still down 64% for the LTM ended June 30, 2009 compared with the same time period in 2008. Announced transaction value jumped 390% ($1.3 billion compared to $270 million in Q1) but is skewed by eBay's mega-acquisition of Korean retail e-commerce marketplace Gmarket. The majority of transaction values remain undisclosed, suggesting more small and distressed exits have been occurring as a result of the market downturn. Median revenue multiples appear to have fallen, to 0.8x LTM ended June 30, 2009 from 3.7x LTM in 2008, although the announced deal universe is limited.
Noteworthy sector trends and developments include:
Online advertising continues to take market share, signaling more potential deal activity. While analysts believe online ad spend this year will be roughly flat, it will outperform other venues, such as TV and print, which have been posting double-digit declines. Arch-rivals Microsoft and Google, having digested their pricey online ad-related deals (aQuantive, Doubleclick, etc.) and sensing stabilization in online ad pricing, are likely to spark a new round of deal-making, focusing on ad technologies that improve advertiser results and publisher monetization. Apax's recently announced Q3 tender offer for financial supersite Bankrate, at a valuation of 3.2x EV/LTM Revenues and 12x EV/LTM EBITDA, highlights improving confidence in web businesses with significant ad revenue driven components (see our recent blog on the Bankrate deal at http://blog.updataadvisors.com). Microsoft and Yahoo! also recently announced they will effectively merge their search businesses in an exclusive 10 year deal. Microsoft's new Bing search engine will provide the search opportunities on Yahoo!'s sites while Yahoo! will handle the sales force for both companies search advertisers.
Google moves to be Microsoft 2.0. Google's recent entrance into the operating system space, with web and mobile OS's -- Chrome and Android -- is the latest example of its designs on Microsoft's turf. Like Microsoft, Google also offers an Office-like application suite (in the cloud), search (where it dominates) and security (primarily via its Postini acquisition in 2007). Microsoft, on its part, seeks to close the search gap with Bing and its recently announced Yahoo! search deal. We expect ratcheted up deal-making later this year by Microsoft and Google as they seek to outmaneuver each other.
Cash rich titans will increase M&A activity. Strong balance sheets and public pronouncements, combined with historically low target valuations, suggest large tech vendors will increase M&A volumes in the second half of 2009. These potentially include: - Nokia, Palm, Blackberry and Apple for smart/mobile device share, - News Corp., Disney, Sony and Viacom as they seek to increase online media holdings, - NY Times, Gannett, Hearst and Tribune as they build web presence, - AT&T, Viacom and Comcast as they deliver games on-demand and move into other cloud offerings, - Amazon and eBay as the consumer commerce markets continue to consolidate (i.e., Amazon's announced Q3 acquisition of shoe-retailer Zappos.com), - Apple, Cisco and consumer electronics giants as they move into increasingly sophisticated IP-based consumer device and home networking markets.
Social network market rapidly developing. Social media continues rapidly evolving. A study by social media analytics firm Sysomos shows that almost 73% of Twitter members joined during the first 5 months of 2009.8 For Facebook, in the last quarter alone unique visitor traffic rose 17% to 122.5 million and page visits rose 18% to 1.9 million, according to web analytics site Compete.com. On July 7, iStrategyLabs reported a 513.7% rise in users age 55 and older on Facebook. Digital Sky Technologies also recently said it will pay $14.77 a share for Facebook common stock, valuing the social network at roughly $6.5 billion, according to news reports.9 As social media expands and evolves, more companies are also trying to unlock potential in the enterprise. Lockheed Martin recently announced plans to release a proprietary social media tool to facilitate interaction between employees to create and share secure content using blogs and wikis.
The collaboration wave is coming. eBay may spin off Skype in an IPO in 2010, or possibly sell the business. Microsoft's MSN Gaming Zone supports massive multi-parallel play with voice communication among players. Cisco is planning to evolve WebEx into an even more powerful virtual global-interaction platform for business. These are examples of a huge emerging opportunity centered around rich collaboration that lies at the nexus of VoIP, social networking, and mobile computing. This theme will drive increasing venture investing and M&A activity in 2009, 2010 and beyond.
Home networking continues to spread. The home-based IT sector has been hot. In late Q1, Cisco acquired Pure Digital Technologies to enter the consumer smart-device market. Cisco will likely continue making acquisitions to make itself integral to the next generation of entertainment and communication experiences.10 Apple's AppleTV, while not yet enjoying the popularity of other Apple devices, has the potential to make traditional cable or satellite services less prevalent by streaming video and television directly from computers. The same is true with televisions that include Bluetooth, such as a new line recently announced by LG Electronics, which enable consumers to use cell phones as remote controls, connect wireless headsets to the TV, and stream music from an iPod or other MP3 player to their television or speakers.11 Other functional mash-ups will undoubtedly follow.
Figure 9 - Selected Q2 2009 Internet Transactions
DATA TABLES
Table 1 - M&A Quarterly Analysis For Deals Tracked By Updata - Overall
Table 2 - Q2 2009 M&A Quarterly Analysis For Deals Tracked By Updata - By Sector
CONCLUSION
The second quarter of 2009 appears to be a step in the right direction for technology M&A and the economy as a whole. In Q1 we predicted that Q2 would lead us toward normalcy (or at least the new normal), and although deal and investment volumes and valuations are still down, the economic recovery is beginning to make some headway. Many of the largest tech companies remain flush with cash and after a promising quarter will be more motivated to go deal hunting.
Already in the first weeks of Q3 we are seeing some promising signs across tech sectors. The first three weeks of the quarter boast a handful of large deals such as Symphony Technology Group's acquisition of MSC.Software Corporation for $360 million, Software AG's $706 million deal for Atlan and Amazon's big planned purchase of online shoe retailer Zappos.com for $847 million. We have also seen private equity firm Apax Partners jump into the market with plans to acquire Bankrate, Inc. for $571 million at high multiples. This is an encouraging sign of a return to greater PE activity, which fell off a cliff late last year and early in 2009. Other large deals are rumored in the works.
We continue to see the NASDAQ trend upwards and earnings season has revealed good news as some of the big names have hit and even beat (muted) projections. Even the embattled investment banks have shown profits.
On the whole, we believe Q3 will see an uptick in consolidation as companies become more comfortable opening their wallets to take advantage of the many still-discounted assets available across the sector.
