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IT Services, Cloud and Managed Services M&A Update Q2 2016 July 20, 2016
IT Services, Cloud and Managed Services M&A Update Q2 2016 July 20, 2016
Table of Contents
M&A Market Brief – Page 3
Global M&A Deal Volume (Quarterly Comparison) – Page 4
IT Services Deal Volume & Deal Value– Page 5
M&A Multiples for IT Services Co, Q2 2016– Page 5
Key Trends in IT Services and Cloud Computing M&A - Page 6
Notable IT, Cloud and Managed Services M&A Transactions, Q2 2016 – Page 8
Publicly Traded IT Services Valuation Table, Q2 2016 – Page 9
M&A Spotlight: Dimension Data / Ceryx – Page 12
M&A Spotlight: Huron Consulting / ADI Strategies – Page 14
M&A Spotlight: CSC / HP – Page 15
DISCLAIMER
Solganick & Co. is an independent investment banking and M&A advisory firm focused exclusively on the global Software, IT
Services and Digital Media industry sectors. We advise buyers and sellers of companies and efficiently execute M&A transactions
that help increase shareholder value. Our professionals have advised on $20+ billion in M&A transactions to date and have current
clients and relationships globally with entrepreneurs, companies and leading private equity firms within the sectors we cover.
Sources for our research and data include: Dealogic, JEGI, Hampleton, Company Websites, SEC Filings, MergerMarket, Pitchbook
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M&A Market Brief Brexit creates uncertainty, IT Services M&A remains strong
Worldwide
• Global M&A activity during the second quarter of 2016 improved slightly over that of the first quarter. After 2015's surge of M&A activity, deals are adjusting back to a sustainable level.
• Deal value for Q2 2016 rose to $689 billion from $633 billion in Q1 2016.
• Global M&A deal value in H1 2016 was down 26.6% compared to that of H1 2015.
• Political uncertainties such as the UK's referendum on staying in the European Union (EU) and the United States election cycle have contributed to the M&A cooldown, and they will continue to do so.
• The drama surrounding the UK's referendum caused many firms to postpone deals. This was a major reason why deal value for Q2 2016 in the United Kingdom fell 50.5% compared to that of Q1 2016. We expect to see an uptick in UK deal volume in the coming months as the deals that were postponed are revisited.
• China is relaxing its regulations on bidding for acquisitions, which will allow the country to better compete with the United States and Europe.
United States
• The M&A climate in the United States is in the process of rebalancing after a record-setting year. Nonetheless, US deal activity in the second quarter remained stable.
• In Q2 2016, deal value totaled $313.2 billion, compared to $248.8 billion in Q1 2016.
• In H1 2016, United States M&A deal value totaled $563 billion, with 2,242 transactions. This represents a 31% drop in value from H1 2015.
• The uncertainty resulting from the United Kingdom's departure from the EU lead to a 27% drop in US outbound activity into the UK. Outbound activity into the UK will remain low until the outcomes of the post-exit negotiations become clearer.
• The M&A environment for the US technology industry remained robust despite the global M&A downturn. In H1 2016, technology deal value rose to $81 billion compared to $65 billion in H1 2015, with deal volume increasing 4%.
IT Services & Cloud
• Against a backdrop of uncertainty in the global economy, including the fallout from the surprising UK vote to separate from the EU,merger and acquisition activity remained strong acrossthe information technology (IT) services and cloud computing sector.
• There are fewer mega deals in Q2 2016. Deal volume in H1 2016 increased to 2,234 from 2,207 in H2 2015. Deal value in H1 2016 dropped to $159 Billion from $225 Billion in H2 2015.
• Each of the IT services industry's top ten highest value in the first half 2016 were completed by strategic acquirers. These ten acquisitions combined accounted for 46% of the industry's aggregate value YTD.
• The IT services sector saw a 13% decline in number of transactions announced in H1 2016 compared to H1 2015. But the transaction value increased dramatically in 2016 to $34.2 billion, due to the announcement of several mega deals.
• Cloud computing is still a major focus for several acquirers and will remain strong for the next 12 months.
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Global M&A Deal Value – Quarterly Comparison
Source: MergerMarket
633
758.9
566.7
446.9
464.8
614.6
461.2
420.8
593.2
801.5
688.7
1047.1
963.9
559.7
565.5
586.3
433
396.4
678.2
1280
971.2
855.7
646.4
522.9
599.6
429.9
327.6
684.9
852
1205.1
869.7
573.3
757.5
479.4
713
570.1
458.8
734.4
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Quarterly M&A activityValue of deals (US $Bn)
Q1 Q2 Q3 Q4
Total: 3,667.9
Total: 2,415.1
Total: 1,714.9
Total: 2,037.1
Total: 2,279.9
Total: 2,310.7
Total: 2,226.3
Total: 3,256.0
Total: 3,982.3
Total: 1,321.7
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IT Services Deal Volume & Deal Value ($B)– Half-Year Comparison
Source: Berkery Noyes
M&A Multiples for IT Services Co’s, Q2 2016
Source: Solganick & Co.
$117.1 $113.4 $114.9
$225.0
$159.0
2025 1958
22142207
2234
1800
1850
1900
1950
2000
2050
2100
2150
2200
2250
2300
$-
$50.0
$100.0
$150.0
$200.0
$250.0
1H2014 2H2014 1H2015 2H2015 1H2016
Deal Value Deal Volume
1.1x2.1x 1.9x
0.2x
11.2x11.9x
7.0x 6.9x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
IT Services Offshore IT Services Cloud HostingServices
Value-Added Seller
EV/LTM Rev EV/LTM EBITDA
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Key Trends in IT Services and Cloud Computing M&A
Against a backdrop of uncertainty in the global economy, including the fallout from the surprising UK vote to separate from the EU, mergers and acquisitions activity continues to remain strong across information technology services and cloud computing. IT services and value-added distribution was the second most active subsector in the technology-enabled services space. The headline deals in the second quarter of 2016 included CSC’s merger with the enterprise segment of Hawlett Packard. This merger is expected to create the largest IT services unit and bring about $1 billion of synergies post closing. Social, mobile, cloud and analytics (SMAC) continue to be the primary drivers of the growth in the information technology service sectors. The use of smartphones and social media, along with the adoption of cloud computing is creating new growth opportunities for information technology (IT) service providers. This has in turn caused corporations to reach out to industry vendors to develop new digital strategies that allow them to interact with clients within these new mediums. Thus, demand for consolidation and mergers remain strong due to the strategy focus. Internet of Things leads M&A activity in the information technology space In the first half of 2016, there were nearly two dozen merger and acquisition deals in the Internet of Things (IoT) space and related market segments such as Big Data Analytics, connectivity and wireless. IoT vendors are especially eager to acquire companies in hot vertical segments including: Automotive; Consumer Wearables; Healthcare; Industrial IoT; Manufacturing; Retail; Smart Home; and Transportation. Well targeted and executed IoT M&A will provide vendors with immediate tactical and strategic opportunities to gain market share, increase customer base, boost revenue, advance IoT goals and increase influence. A focused M&A has the added benefit of consolidating the industry and reducing the number of competitors. M&A activity specially in IoT is increasing due to the rapid rate of technology development and the need for companies to increasingly have the latest capabilities. In addition, M&A presents new streams of revenue for companies that may see their traditional sources of income contracting. The increasing purchase price for these deals is indicative of the high value IoT can potentially bring to a company.
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Valuation steady as ever despite increased volume The deal volume in first half 2016 reached 2,234, a historically high number since H1 2014. The increased transaction volume is correlated with the lower valuations in the technology space. At the same time, the IT services and cloud computing sector remains a crowded marketplace but with solid business demands. Thus, the transaction multiples remain strong with a 1.1x Enterprise Value (EV)/Revenue and 11.2x EV/EBITDA for systems integrators and IT consulting firms. For cloud and hosting services firms, we noted transaction multiples averaging 1.9x EV/Revenue and 7.0x EV/EBITDA (although we believe the EBITDA multiples are much higher as most of the transactions were private and did not report transaction data.
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Notable IT, Cloud and Managed Services M&A Transactions, Q2 2016
Date Target Acquirer Industry Target
Deal Size Implied Implied
Sub-Sector Description (USD MM)
EV/Rev EV/EBITDA
6/15/2016 Sys-Pro Daily Internet
IT Consulting
and Outsourcing
Provider of technical consulting and IT managed services. The company provides cloud hosting, data backup, data expansion, VW management and cloud migration services.
5.8
6/10/2016 ANXeBusiness OpenText
IT Consulting
and Outsourcing
Provider of cloud-based information exchange services. The company offers managed compliance, security and connectivity services.
104
6/8/2016 Atrion Networking
Carousel Industries
Other IT Services
Provider of information technology services firm specializing in security, productivity and collaboration, unified communication, networking, application and integrations and data center services.
6/7/2016 True Clarity Consulting
ERP Suites
IT Consulting
and Outsourcing
Provider of IT consulting and project management services. The company provides complete JD Edward EnterpriseOne and Word Solutions.
5/27/2016 NetBoss Technologies
Enghouse Systems
Other IT Services
Provider of network management and assurance services to network operators. The company offers an integrated platform for performance management and customer analytics
9.3
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5/26/2016
Hewlett Packard
(Enterprise Services Business)
Computer Sciences
IT Consulting
and Outsourcing
Provider of enterprise software services, including outsourcing, technology consulting, software and network maintenance services.
8.5 0.3x
5/23/2016 Xcel
Professional Services
F12.net
IT Consulting
and Outsourcing
Provider of outsourced IT support and consulting services. The company offers network design and implementation, server virtualization, managed IT and cloud services to the small and medium businesses.
Hig
hlig
hte
d D
eal
5/13/2016 Onshore Partners Contax
Systems Integrator,
IT Consulting
Provider of SAP Solutions and business technology consultancy services, the company offers Enterprise Performance Management (EPM) Services and specialized SAC, BPC Services to companies.
*Solganick & Co represented SAP systems integrator Contax, Inc. in its acquisition of Onshore Partners, Inc
Source: PitchBook
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Publicly Traded IT Services Valuation Table, Q2 2016
CONSULTING Ticker Stock Price Market Cap EV/Revenue EV/EBITDA
Advisory Board Co. ABCO 35.05 1.44B 2.45 17.15
Charles River Associates Intl CRAI 25.35 228.47M 0.67 9.03
FTI Consulting FCN 40.95 1.65B 1.13 9.74
Hackett Group HCKT 13.80 390.43M 1.59 12.79
Huron Consulting Group HURN 60.91 1.25B 2.24 9.99
Information Services Group III 3.75 132.32M 0.79 10.90
Navigant Consulting NCI 16.2 761.71M 1.14 7.99
Resources Connection RECN 14.69 536.34M 0.75 7.77
Average
1.35
10.67
SYSTEMS INTEGRATORS Ticker Stock Price Market Cap EV/Revenue EV/EBITDA
Accenture ACN 113.52 70.45B 2.08 12.40
Cap Gemini CAP.PA 75.91 12.69B 1.25 10.53
CIBER CBR 1.52 110.53M 0.19 20.54
CGI Group GIB 43.32 12.98B 1.78 10.41
Edgewater Technology EDGW 8.58 104.14M 0.88 15.75
Hackett Group HCKT 13.8 390.98M 1.59 12.79
Perficient PRFT 20.55 734.36M 1.68 13.90
Average
1.35
13.76
VAR Ticker Stock Price Market Cap EV/Revenue EV/EBITDA
CDW CDW 40.3 6.56B 0.75 10.05
ePlus PLUS 81.15 570.23M 0.55 7.14
Insight Enterprises NSIT 25.93 929.37M 0.19 6.20
Average
0.50
7.80
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OUTSOURCING Ticker Stock Price Market Cap EV/Revenue EV/EBITDA
Accenture ACN 113.52 70.43B 2.08 12.40
ATOS ATO.PA 73.37 6.06B 0.65 5.22
Computer Services Corp. CSC 49.43 6.80B 1.17 8.57
Hewlett-Packard Co. HPQ 12.73 21.06B 0.24 2.37
IBM IBM 152.35 145.42B 2.19 9.31
Unisys UIS 7.15 349.40M 0.10 2.09
Average
1.07
6.66
OFFSHORE Ticker Stock Price Market Cap EV/Revenue EV/EBITDA
Cognizant Technology Solutions CTSH 52.7 34.18M 2.46 12.30
Infosys INFY 17.91 40.68B 3.79 13.72
Syntel SYNT 44.99 3.76B 2.85 9.49
Virtusa VRTU 29.11 835.50M 1.44 13.95
Wipro WIT 12.33 30.06B 3.65 17.28
Average
2.84
13.35
Source: Solganick & Co. Analysis, PitchBook (All data provided as of June 30th, 2016)
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M&A Spotlight
Dimension Data announced the acquisition of IT infrastructure solutions and services firm Ceryx Inc Johannesburg, South Africa - April 04, 2016: Dimension Data, the USD 7.5 billion global information and communication technology services and solutions provider, today announced it has acquired the privately owned Ceryx Inc, a Toronto headquartered provider that offers a suite of services across the Microsoft Messaging and Collaboration Suite, including Office 365, Exchange, Sharepoint and Skype for Business for an undisclosed sum. Ceryx will reside within Dimension Data’s ITaaS Service Unit. Dimension Data will combine Ceryx’s offering with its Microsoft Services to deliver a full services portfolio that spans on-premise, private cloud and public cloud, Office 365 (O365)-or a hybrid of any-for Microsoft Exchange, Sharepoint and Skype for Business (S4B). This includes the Group’s private cloud offering called Cloud Services for Microsoft. Ceryx’s focus is on Fortune 500 clients, mainly in Canada and the United States, with recent wins in Europe. When combined with Dimension Data’s global client base which covers many industry verticals, this accelerates Dimension Data to a dominant global position in this market. Ettienne Reinecke, Dimension Data’s Group CTO said, “We’ve seen strong adoption of our private cloud offering for Exchange, Sharepoint and Skype for Business. This strategic acquisition fast tracks Dimension Data’s hybrid offering, and positions the combined entities as one of the few companies globally that can offer the full suite of different delivery models that allows organizations to provision, manage and optimize these workloads through a single management portal, irrespective of platform or location. “Dimension Data’s clients are on a journey to migrate various workloads to the cloud. In most instances, the optimal fit for them is not one underlying platform, but rather a combination - or hybrid - of platforms for Microsoft Office 365, Exchange, Sharepoint, and Skype for Business. The
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combined capabilities of Ceryx and Dimension Data’s end-user computing suite of services accelerates our time to market, and facilitates the client’s journey to the cloud,” explains Reinecke. Gus Harsfai, founder and CEO of Ceryx, “We’re thrilled to join Dimension Data and the wider NTT Group. Our combined technology offerings and approach to end-user computing strengthens our ability to support businesses across the world on private, public and hybrid technology platforms.” Deal terms were not disclosed. News link: https://www.dimensiondata.com/Global/Downloadable%20Documents/Dimension%20Data%20Expands%20its%20Cloud%20Services%20for%20Microsoft%20Acquires%20Ceryx.pdf
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Huron Consulting Group closed the acquisition of ADI Strategies Chicago, I.L. -May 2, 2016: Huron Consulting Group, a leading provider of business consulting services, closed the deal to acquire the US assets of ADI Strategies, a leading enterprise performance management, risk management, and business intelligence firm focused on implementing the Oracle enterprise application suite. Huron is also in the process of acquiring the international assets of ADI Strategies in Dubai and India. This is the first one of the two related transactions that will create one of the largest and fastest-growing Oracle application and analytics practices and allow the combined businesses to deliver the latest advisory and technology consulting services to a broader client base. San Francisco based ADI Strategies is an Oracle Platinum Partner that helps companies in diverse industries work more effectively by designing, building and implementing analytic solutions to give them a greater understanding of their information assets. “Our businesses are rapidly growing and highly complementary, and combining them will run better position Huron to support the financial, operational, and technology-related needs of our expanding global client base with a stronger, more robust team and broader solutions,” said Jay Laabs, managing director and EPM&A practice leader at Huron Consulting Group. “As our clients continue their migration towards the cloud for their mission-critical functions, we will leverage ADI Strategies’ deep Oracle expertise to offer a compressive set of solutions supported by an expanded remote delivery capability.” “I know that I speak for the entire team at ADI Strategies when I say that we are extremely excited to join Huron,” said Mario Desiderio, president, ADI Strategies. “Huron and ADI Strategies have a similar set of guiding values and a strong commitment to client service. The combination of our firms will create an organization that is uniquely positioned to capitalize on the market opportunities presented by the rapidly evolving enterprise applications, analytics and technology landscape.” After the acquisition, ADI Strategies will be included in the Huron Business Advisory segment. Terms of the deal were not disclosed. News Link: http://www.businesswire.com/news/home/20160426006773/en/Huron-Consulting-Group-Announces-Intent-Acquire-ADI
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CSC Announces Merger with Enterprise Services Segment of Hewlett Packard Enterprise to create Global IT Services Leader Tysons, V.A. - May 24, 2016: CSC (NYSE: CSC) today announced that its Board of Directors has unanimously approved a plan to merge the company with the Enterprise Services segment of Hewlett Packard Enterprise (HPE). The strategic combination of the two complementary businesses will create one of the world’s largest pure-play IT services companies, uniquely positioned to lead clients on their digital transformations. The new company is expected to have annual revenues of $26 billion and more than 5,000 clients in 70 countries. Following the transaction, CSC and HPE shareholders each will own approximately 50 percent of the new company’s shares. The combination of CSC and HPE’s Enterprise Services segment will create a new company with substantial scale to serve clients more efficiently and effectively worldwide. By combining, both companies can more rapidly accelerate their already-improved financial and operational performance. For clients, the new company will offer enhanced global access to world-class, next-generation offerings – combined with deep industry experience in key industry sectors. “Our proposed merger with HPE Enterprise Services is a logical next step in CSC’s transformation,” the current chairman, president and CEO of CSC, Mike Lawrie said. “As a more powerful and versatile global technology services business, the new company will be well positioned to innovate, compete and serve clients in a rapidly changing marketplace. We are excited by the great potential this merger brings to our people, clients, partners and investors, and by the opportunity to strengthen our relationship and collaboration with HPE.” The transaction between CSC and HPE is expected to deliver approximately $8.5 billion to HPE’s shareholders on an after-tax basis. This includes an equity stake in the newly combined company valued at more than $4.5 billion, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of debt and other liabilities related to the HPE Enterprise Services segment. The merger of the two businesses is expected to produce first-year synergies of approximately $1 billion post-close, with a run rate of $1.5 billion by the end of year one. There is an opportunity for additional synergies in subsequent years. News Link: http://www.csc.com/investor_relations/press_releases/137152-csc_announces_merger_with_enterprise_services_segment_of_hewlett_packard_enterprise_to_create_global_it_services_leader
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About Solganick
Solganick & Co., Inc. is an independent investment banking and M&A advisory firm focused exclusively on the global Software, IT Services and Digital Media industry sectors. We advise buyers and sellers of companies and efficiently execute M&A transactions that help increase shareholder value. Our professionals have advised on $20+ billion in M&A transactions to date and have current clients and relationships globally with entrepreneurs, companies and leading private equity firms within the sectors we cover. Please contact us for information regarding this report or to inquire about an M&A transaction.
Solganick & Co., Inc. 515 S. Flower St. Ste 500 Los Angeles, CA 90071 +1 (310) 684-3130 www.solganickco.com Aaron Solganick, CEO Alex Khoras, Director of Business Development [email protected] [email protected] Rachael Fang, Associate Michael Okayo, Associate [email protected] [email protected] Zach Chen, Analyst David Gunther, Analyst [email protected] [email protected] Philip Huh, Analyst Elaine Song, Analyst [email protected] [email protected] Follow Us on Twitter: @Solganickco
