M&A OVERVIEW: OVERALL M&A STRUGGLES, BUT SOFTWARE AND SERVICES TREAD ON
According to FactSet Mergerstat, total announced global M&A deal value across all industry groups was... read more>>
What Is Driving M&A in the Technology Sector? Growth remains the primary driver of value, and with the slowing economy organic growth as been more difficult to attain... read more>>
SECTOR ANALYSES
Internet: Internet M&A is off to a respectable start this year, with roughly the same number of deals... read more>>
IT Services: There were 99 IT services deals tracked by Updata in Q1 2008, down only... read more>>
Enterprise Application Software: The number of enterprise application software deals tracked by Updata is down 28%... read more>>
Infrastructure Software: The number of infrastructure software deals remained roughly the same in Q1 2008 compared to... read more>>
IT Security: M&A activity in the security space is off to a relatively slow start in 2008... read more>>
M&A OVERVIEW: OVERALL M&A STRUGGLES, BUT SOFTWARE AND SERVICES TREAD ON
According to FactSet Mergerstat, total announced global M&A deal value across all industry groups was $421 billion in Q1 2008, down 32% from Q4 2007 and down 25% from Q1 2007. While M&A in general has been feeling the recent pain of a struggling U.S. economy, Q1 2008 tells a different story for FactSet’s “Computer Software, Supplies & Services” industry group.1
In this group, total Q1 2008 announced global M&A deal value nearly tripled to $74 billion from $25 billion in Q1 2007, and more than doubled from $36 billion in Q4 2007. Admittedly, Microsoft’s intention to acquire Yahoo! for $41.4 billion (announced on February 1, 2008) accounted for the majority of Q1 2008 deal volume. However, even excluding Microsoft/Yahoo!, total announced global M&A deal value in Q1 2008 rose to $33 billion — an increase of 32% over $25 billion in deal volume in Q1 2007. While excluding Microsoft/Yahoo! does represent an overall decline from Q4 2007, it is a slight 8.3% decline from $36 billion in deal volume recorded in Q4 2007 (see Figure 1 and Figure 2). While disconcerting in Silicon Valley, this decline is by no means fatal to tech M&A.
Particularly noteworthy in Q1 2008 is the number of large deals; in the subsets of IT that Updata tracks, there were nine deals greater than $1 billion announced last quarter, including Microsoft/Yahoo! and Oracle/BEA Systems (see Figure 3).
Growth remains the primary driver of value, and with the slowing economy organic growth has been more difficult to attain. M&A is an integral strategy for enterprises to maintain their growth rates and this, coupled with a market decline which is creating more attractively-priced acquisition targets, is certainly driving deal activity. Additionally, the IT superpowers have continued to vie for top spots in their fields; witness the pending Microsoft/Yahoo! deal (and related activity) as one example of this (see Figure 4).
Figure 4: Top Announced Deals By Strategic Buyers In Q1 2008
Of the total number of technology deals announced in Q1 2008 tracked by Updata, 92% involved strategic buyers; from a deal value perspective, 93% of the total announced deal value was attributable to strategic buyers. Excluding the pending Yahoo! deal, 83% of total deal value in Q1 2008 came from strategic buyers.
It was widely predicted that the macroeconomic credit crunch would cause the systematic exodus of private equity buyers in the IT space, but while quieter they have certainly not disappeared (see Figure 5).
Figure 5: Top Announced Deals By Financial Buyers In Q1 2008
Updata regularly tracks five core subsets of the technology sector: Internet, IT Services, Enterprise Application Software, Infrastructure Software, and IT Security. Over the last 12 months, the stock market performance of an index of each of these sectors has surpassed that of the broader NASDAQ index (see Figure 6). Corresponding valuation metrics of the underlying public companies in these sectors are shown below (see Figure 7).
Figure 6: One Year Relative Stock Price Performance By Sector Versus NASDAQ
Figure 7: Public Company Valuation Metrics In Each Sector Covered By Updata
An in-depth look at Q1 2008 M&A activity by sector reveals:
Internet
Internet M&A is off to a respectable start this year, with roughly the same number of deals tracked by Updata in Q1 2008 as in Q4 2007.2 Some notable deals include AOL’s purchase of Bebo and Microsoft’s disputed ongoing bid for Yahoo! (see Figure 8). Stock prices in this sector were basically flat; however, they still outperformed the overall NASDAQ. Although the number of deals is down slightly from the same quarter last year, several trends indicate that 2008 will be a hot year for Internet M&A:
Online retailing is becoming the norm. We are seeing the continuous erosion of brick-and-mortar retailers — shoppers are projected to spend $288 billion online in 2008.3 Q1 2008 saw the acquisition of quite a few e-commerce companies, notably Expedia’s acquisition of CarRentals.com and Ticketmaster’s purchase of TicketsNow.
Security is the key nexus to the Internet. Recent studies by Pew Research and others highlight a continuing trust-gap hobbling Internet commerce. Furthermore, Google and others have found significant ongoing malware infection risk from Internet usage. Identity theft and child protection online are also timely issues of interest to Internet buyers and investors. To that end, web-enabling security and trust technologies are hot commodities. For example, in January, PayPal/eBay announced the acquisition of Fraud Sciences to help manage online fraud.
Online media continues to replace traditional media. As media consumers continue to migrate from traditional formats to the Internet, advertising revenue is following suit. More digital media Internet deals took place than any other Internet sub-sector in Q1 2008. Moreover, the Internet sector’s (and indeed all of IT’s!) largest deals came from this space in Q1 2008. Microsoft/Yahoo! stands out most starkly at $41.4 billion. We expect acquisitions of online advertisement enablement companies such as ad networks and targeting specialists to continue.
Growing importance of gaming to Internet sector is evident. When it comes to critical IT markets, computer and online games mean business. This sector drove $19 billion in U.S. sales alone in 2007, according to the NPD Group — more than most enterprise software segments. Furthermore, games spending is growing faster and, according to PayScale.com, gaming developers enjoy a higher salary than their enterprise software counterparts. Studies on Internet traffic also suggest that online gaming will drive much of bandwidth demand growth. The upshot is that gaming will be an important wave driving IT development, venture investing, and M&A for quite a while. In Q1 2008, Electronic Arts announced their intent to acquire rival video game developer Take-Two Interactive Software for close to $2 billion.
There were 99 IT services deals tracked by Updata in Q1 2008, down only slightly from 103 in Q4 2007.4 Still, there were more deals in IT services than in any other sector tracked by Updata. That said, the stock market performance of publicly-traded IT services companies was down 2.01%, only slightly better than the overall NASDAQ and the weakest performer of any Updata IT sector. We have observed the following M&A trends in the IT services sector:
Specialist targets are getting increased attention. IT companies that have specific skill sets are in high demand. Several acquisitions in IT services in Q1 2008 involved sellers that specialized in particular applications packages such as Sage Software, SAP, Microsoft, and Oracle. While most of these deals’ valuations were undisclosed, Insight bought Cisco networking solutions specialist Calence for $125 million.
Indian outsourcers are making strategic buys. We predicted in our 2008 Information Technology M&A Outlook that offshore outsourcers would remain competitive acquirers. In a move to bolster its consulting capabilities, Satyam Computer Services acquired Bridge Strategy Group in a $35 million all-cash offer. In addition, HCL Technologies paid $40 million for Capital Stream to enhance its capabilities for clients in the commercial and retail banking industry.
Equipment manufacturers are aiming to be solutions providers. More and more we are seeing traditional product vendors enter the services space through strategic acquisitions. This quarter was no different — Dell bought managed e-mail services provider MessageOne for $155 million.
Figure 9 : Noteworthy IT Services M&A Transactions
The number of enterprise application software deals tracked by Updata is down 28% in Q1 2008 compared with Q4 2007. However, publicly-traded companies in the sector outperformed the NASDAQ and all other IT sectors that we track.5 M&A activity included recognizable names, with Microsoft buying out Fast Search & Transfer (FAST) to bolster its enterprise search efforts, and HP picking up two document management companies (see Figure 10). We note the following trends:
Vertical domain expertise continues to drive M&A. Roughly 26% of the sellers of enterprise application software companies last quarter were vertical-focused. Domain expertise is becoming more and more important and in order to entice clients who have a seemingly growing number of choices, enterprises are laying claim to smaller software players with specific industry expertise.
Enterprise content management deals are increasing. In Q4 2007, ECM deals represented about 7.5% of announced enterprise software deals tracked by Updata; in Q1 2008 they made up 21%. Larger players are really expanding into this space – in addition to HP’s two purchases, Oracle acquired Captovation, a document capture solutions provider.
Private equity firms continue to consolidate mature segments of enterprise software. Compared with Q4 2007, the enterprise application software space saw a growing number of private equity deals, which have accounted for 13% of all announced deals in the sector.
The number of infrastructure software deals tracked by Updata remained roughly the same in Q1 2008 compared to Q4 2007. Some notable deals include Oracle’s purchase of BEA Systems for $7.2 billion and the purchase of MySQL AB by Sun Microsystems (see Figure 11).6 Public company stock performance was much better than the NASDAQ. We have seen the following developments in M&A in the infrastructure software sector:
Big 4 leaders continue to acquire to maintain market share. Although HP has been quiet in the infrastructure M&A space in Q1 2008, and CA has barely done anything in M&A for more than a year, we are seeing major players such as IBM and BMC Software make strategic acquisitions, with BMC picking up BladeLogic in a widely-publicized deal for approximately $800 million, and IBM buying several infrastructure players for undisclosed amounts.
Data center automation drives M&A activity. As data center management gets increasingly complex, data center automation vendors are hot targets to infrastructure software buyers. BMC’s BladeLogic purchase is a perfect example of this phenomenon, as is EMC’s acquisition of IT service management (ITSM) vendor Infra Corporation.
Virtualization gains traction in enterprises. We are seeing more and more infrastructure software mainstays such as Microsoft, Sun Microsystems, and VMware pick up virtualization vendors. These transactions add value to the acquirers as their business customers can lower overall costs of IT operations through virtualization.
M&A activity in the security space is off to a relatively slow start in 2008; there were only 12 deals tracked by Updata in the first quarter compared with 19 deals in Q1 2007.7 Although security stock prices have outperformed others across IT security software in Q1 2008, there were only 12 deals tracked by Updata in the first quarter compared with 19 deals in Q1 2007. Still, some vendors repeated their buying activity in security, with Microsoft and L-1 Identity solutions each picking up two security players (see Figure 12). In addition to a decline in number of deals, we have noticed several M&A trends occurring in security so far this year:
Cross-border transaction volume has increased. Although overall deals are down, cross-border deals are up, comprising 25% of the security deals that occurred in Q1 2008. Philippines-based IPVG Corp has purchased U.S.-based Prolexic Technologies, a managed security service provider of distributed denial of service (DDoS) mitigation solutions. Additionally, we’re seeing more U.S.-based companies shopping abroad despite the weakened dollar at home, such as L-1 Identity Solutions’ acquisition of the Canadian enterprise access control solutions provider Bioscrypt.
Compliance is a major deal driver. As security continues to evolve toward a proactive, compliance-driven corporate strategy, we are seeing increased investment in and acquisition of compliance themes. Examples of compliance-driven M&A deals that occurred last quarter include Perimeter eSecurity’s purchase of e-mail archiving outsourcer Seccas, and TrustWave’s acquisition of Creduware.
Identity management remains active. Identity management solution providers represented one quarter of the targets in all the security deals tracked by Updata in Q1 2008. Two of those purchases were made by IT powerhouses IBM and Microsoft, the latter of which has acquired two security companies inside of one month.
Figure 12: Noteworthy IT Security M&A Transactions
1“Computer Software, Supplies & Services” is the industry classification of FactSet Research Systems (Mergerstat). 2Updata defines the Internet sector to include search, digital media, e-commerce, online advertising, infrastructure, and applications. 3Lehman Brothers, August 2007. 4Updata defines the IT services sector to include IT outsourcing, business process outsourcing (BPO), offshore outsourcing, IT consulting, systems integration, IT staffing, network and systems infrastructure services, and government IT consulting and integration. 5Updata defines the enterprise application software sector to include enterprise resource planning (ERP); customer relationship management (CRM); human capital management (HCM); product lifecycle management (PLM); supply chain management (SCM); business analytics (or business intelligence); governance, risk, and compliance (GRC); search and retrieval; and enterprise content management (ECM). 6Updata defines the infrastructure software sector to include network and systems management, IT asset management, storage management, systems software, networking software, application development tools, enterprise application integration, application infrastructure, and business process management. 7Updata defines the IT security sector to include identity and access management, traffic security, content security, vulnerability, and managed security service providers.
Updata Advisors, Inc. Disclaimer
The information and opinions in this report were prepared by Updata
Advisors, Inc. ("Updata"). The information herein is believed by Updata to be reliable and has been obtained from and based upon public sources believed to be reliable, but Updata makes no representation as to the accuracy or completeness of such information. Updata may provide, may have provided or may seek to provide M&A advisory services to one or more companies mentioned herein. In addition, employees of Updata may have purchased or may purchase securities in one or more companies mentioned in this report. Opinions, estimates and analyses in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Updata and are subject to change without notice. Updata has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, estimate, forecast or analysis set forth herein, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.
Data cited herein is sourced from Updata’s database and derived from publicly available sources – additional information is available on request.
