Updata Capital News


CA Acquires iLumin

Deltek Acquires Wind2 Software

Global Investment Systems Acquired by Linedata

HALO Technology Holdings Acquires Tesseract

Pitney Bowes to Acquire Firstlogic

EarthLink Acquires Assets Of Aluria Software



Market Overview
A relative equilibrium of supply and demand for IT consulting skills has created positive operating trends for many IT services vendors.  Among the most consistently positive trends we have witnessed is… Read more>>


M&A Trends

The return of predictable customer demand has served the M&A market well, and the number of IT services transactions tracked by Updata shows a consistent increase in overall deal activity… Read more>>


2005 Equity Performance Review

Equity valuations among IT services companies were mixed in the past twelve months and depended on specific sub-sector performance. Among the sector indexes on the following pages, three – systems integrators, IT consultancies, and the IT outsourcers -- were almost flat at the end of the period, a metric which belies some fairly dramatic swings… Read more>>


IT Services Industry News Briefs

Read more>>


As this M&A Update is being written, it is interesting to note that it is three years since the NASDAQ hit its post-bubble low on October 9, 2002. Since then, the NASDAQ has rebounded (red line in chart top right) by 77% and stands around 2,150 at the beginning of October 2005.

During this same 3-year period, the IT services sector as measured by Updata’s IT Services Composite Index outperformed the NASDAQ handily, rising nearly 94%.

However, the IT Services Composite belies quite varied sub-sector performance metrics. In the last 12 months the best areas from an equity market perspective include the Indian offshore outsourcers, the Federal government contractors, and perhaps surprisingly, the IT staffing firms. Sub-sectors which have underperformed the NASDAQ include the IT consultancies, IT outsourcers and traditional systems integrators (see charts and further discussion below).

At the moment in the IT services market we sense an equilibrium of supply and demand that has created positive operating trends for many IT services vendors.

Table 1

Among the most consistently positive trends we have witnessed is a return to growth and profitability across all sub-sectors (Table 1). It was not long ago that our market metrics showed entire IT services sub-sectors shrinking and/or unprofitable. Today, that painful phase seems well behind us as evidenced in the table above.

According to IDC, the IT services market is set to grow at a rate of 6.9% over the next few years, reaching $772bn by 2009. Employment in the US IT services sector has grown 2.6% over the last year, higher than overall national employment growth.
According to the US Labor Department, 1.19 million Americans were working in the IT services market in September 2005, compared to 1.16 million in the same month the previous year, a 2.5% year over year increase.

In contrast, overall employment in the US last month was 1.6% higher than in September 2004. That said, market equilibrium is a very subjective concept, and it is certainly not an easy-money market.

Evidence suggests the growth rate in hours billed is likely twice as high as the revenue growth rate, with rate pressure and growing usage of offshore resources accounting for the differential.

Setting aside the high-flying Indian outsourcers which continue to grow at sharp (albeit tempering) rates, revenue growth among traditional IT services firms has been squarely planted in the single digit percentage zone for the last year. In other words, customer demand for IT services work is growing healthily and doesn’t show signs of slowing any time soon. That said, customers are getting more work and more efficiency for each dollar they spend.

Top

 

 

The return of predictable, normalized customer demand has served the M&A market well across all sub-sectors. As Table 2 illustrates, the number of IT services transactions tracked by Updata shows a consistent increase in both overall deal activity and average deal multiples paid in transactions.

Table 2

The graph below, which measures average monthly deal multiples on a revenue basis, also illustrates a steady, albeit slow, uptick in deal valuations. In this environment, M&A remains an important growth strategy for established and new IT services vendors. The number of IT services M&A transactions in the 12 months ended September 30, 2005 was more than double the number for the same period two years ago.

Table 3 below presents the top IT services transactions in the last 12 months by total enterprise value. Some observations about these transactions and the trends behind them: we’ve seen the return of some very large transactions during the period -- two of the largest deals in 2005 were over $1 billion in value whereas in 2004 not one broke the $1 billion mark. The average deal size has been trending up as well -- in the last year the average size of these top deals rose to approximately $800 million from around $600 million for the same period in 2004.

Table 3
Significant 2005 IT Services M&A Transactions
Date Closed
Seller
Buyer
Enterprise Value
Multiple of Revenue
Sector
29-Jul
Titan Corporation
L-3 Communications
$2,630
1.2x
Government
15-Mar
Telcordia Technologies
Providence and Warburg
$1,350
1.4x
Systems Integration
Pending
Unilog
LogicaCMG
$985
 
1.1x
Systems Integration
24-Feb
Infonet Services
BT Group
$573
 
0.9x
Infrastructure Consulting
01-Jun
PEC Solutions
Noriel Networks
$465
 
2.3x
Government
31-Mar
Sytex Group
Lockheed Martin
$462
 
1.1x
Government
07-Mar
PinkRoccade
Getronics
$442
 
0.5x
Systems Integration
02-Feb
ITNET
Serco Group
$437
 
1.2x
Infrastructure Consulting
01-Apr
Service and Systems Solutions
Northgate Information Solutions
$293
 
1.3x
Business Processing Outsourcing
Pending
Apogen Technologies
QinetiQ
$288
 
1.4x
Government
28-Jun
Finsiel
Gruppo COS
$217
 
0.2x
Systems Integration
22-Mar
Resource Consultants
Serco Group
$215
 
0.8x
Government

M&A activity by and among Federal contractors continues to be strong, even after several years of heavy consolidation. Five of the top deals in 2005 involved Federal contractors. Even more interesting perhaps is that three of the five top Federal acquirers were non-U.S. companies (Nortel, QinetiQ and Serco), and communications technology vendor Nortel is a newcomer to the Federal consulting space altogether. L-3 Communications completed the largest Federal deals in both the 2005 period (Titan for $2.6 billion) and in the 2004 period (Vertex Aerospace for $650 Million). Outside of Federal, SAIC finally completed the long-marketed sale of its Telcordia operations to financial buyers Warburg Pincus and Providence Equity for what looks like a healthy, strategic valuation multiple. Other than these deals, every other large IT services buyer in Table 3 was Europe-based, and in fact, eight of the top deals in the preceding table involved a European buyer.

Other interesting transatlantic deals involving European buyers include Getronics’ acquisition of managed security services vendor RedSiren in March, and Axon’s April acquisition of Feanix, an SAP consultancy serving the U.S. aerospace and defense sectors. The Axon/Feanix transaction is also reflective of a broad industry trend that Updata is seeing in and around SAP consultancies, where activity is quite high.

In the main, while buyers are still very disciplined in their M&A activities, there is an increasing willingness among boards and management of acquirers to assess strategic opportunities. The ticket to premium valuation territory today is a company providing highly differentiated offerings with proven value and a rock-solid backlog and pipeline. Valuation expectations of sellers and buyers are much better aligned today than they have been in the last three years.

Top

 


Equity valuations among IT services companies were mixed in the past twelve months and depended on specific sub-sector performance. Among the sector indexes on the following pages, three – systems integrators, IT consultancies, and the IT outsourcers -- were almost flat at the end of the period, a metric which belies some fairly dramatic swings during the course of the year. The best-performing index for the year was not surprisingly the Indian Offshore services sector, whose public company equity valuations rose on average 28%, followed closely by the Federal Government services firms (up 27.5%) and the IT staffing companies which rose 23.1% year-over-year.

 

Indian Offshore IT Services vs. NASDAQ Composite

Perhaps unsurprisingly, the offshore services vendors continued their dominant performance in terms of business growth, profitability, and equity return. Despite dramatic wage escalation in the Indian IT community and rampant employee turnover issues, these firms are benefiting from rising comfort among domestic enterprises with offshore outsourcing and the unchanging goal to squeeze more efficiency out of IT budgets. While the appeal of these companies from an investor’s perspective lies in their strong profit margins (average EBITDA of 24.9%) and healthy revenue growth rates (average 37%), according to Updata’s analysis EBITDA margins have dropped almost 3% from the same period in 2003 and very preliminary indications are that growth is getting harder to achieve each year. By their own success, these firms have set lofty performance benchmarks for themselves and their investors, and as a result trade at 23.1x trailing EBITDA and 5.1x trailing revenue. And despite these valuations, our sense from speaking to these firms is that they will remain on the sidelines of major transformative acquisition opportunities, preferring instead to target small, niche, vertically-aligned consultancies which drive offshore business first and foremost.

 

 

Government IT Services vs. NASDAQ Composite

The government-focused IT services firms have also risen very strongly -- they have outperformed the broader NASDAQ index by a full 17.5% and as a group they have risen 27.5% for the 12 months ended September 30, 2005. The administration’s proposed FY 2006 budget raises IT spending by 7.1% -- a solid jump compared with a 3.9% increase FY 2005 and 2.7% in FY 2004. Unfortunately for some Federal IT vendors, the dollars will only flow to a small, select set of agencies. Expectations are that non-defense/non-homeland security spending could slow in the coming year due to rising budget deficits, hurricane relief efforts and continued spending on fighting the war on terror. This, coupled with meaningful share price gains in 2004 and 2005, generates concern that the growth expectations built into 26x PE’s are going to be tough to meet. Nonetheless, valuations of 1.5x trailing revenue and 15.1x trailing EBITDA are impressive by any measure and will provide companies in this sector with the currency to continue meaningful acquisition strategies.

 

 

IT Staffing vs. NASDAQ Composite

The aggregate performance of the IT staffing firms has been a pleasant surprise, and it is the 3rd best-performing IT services sub-sector. Underlying this performance are a handful of increasingly dominant aggregators which the equity market is rewarding based on growth and creation of size-based customer and profit synergies. The sector grew by an average 12% during the period, although this number was pushed higher again by a few firms outperforming the others in organic and acquisition-driven growth. A few notable deals in the space include KForce’s purchase of VistaRMS in February (an Updata transaction), Crystal’s acquisition of TAC Worldwide in September, and the shareholder-rejected and now cancelled merger between Computer Horizons and Analysts International. Setting aside the few very strong performers, low growth rates and even revenue erosion are common among the peers in this group. Reduced demand, offshore competition and vendor/client disintermediation are painful industry factors. That said, every company in the sector was profitable on an EBITDA basis for the 12 months ended September 30, 2005, and average EBITDA margins of 4.0% are over a full percent higher than they were in 2003 on average. While not staggering improvement, for a highly commoditized and tough operating environment, this is good progress.

 

 

IT Outsourcers vs. NASDAQ Composite

The IT Outsourcers, with their highly visible revenue model, continue to provide the market with some predictability and stability. Gross margins and EBITDA margins barely moved off of last year’s levels holding steady at 25% and 14%, respectively. Sequential Q/Q revenue growth ticked down slightly from 5.5% last September to under 4% for the most recent quarter. EV/LTM Revenue multiples have also come down from an average of 1.3x LTM Sept 04 to 1.1x LTM Sept 05. Affiliated Computer Services (ACS) continues to be the most active buyer in the space having completed four acquisitions in the last twelve months, including the transport revenue division of Ascom, LiveBridge, Mellon HR and Superior Consultants. CGI continues on its vertically-focused acquisition strategy – MPI Professionals (financial services) and SilverOak Solutions (government) most recently.

 

 

IT Consulting vs. NASDAQ Composite

The index of IT Consultancies, seems to be bouncing back after a hitting a rough patch these last few months. High fliers such as Navigant Consulting and Sapient posted solid quarterly growth rates and maintained healthy gross margins – 42% and 44% respectively. Sapient continues to reap the benefits of leveraging a significant portion of its development to India. Sapient also closed one acquisition recently, Business Information Solutions, to help build out its BI and SAP capabilities. Also of note was Fair Isaac’s very out-of-the-box acquisition of Braun Consulting, a marketing strategy and technology consulting firm, for $32M (EV) in November 2004. Braun's proven customer management, product strategy and organizational consulting expertise enhanced Fair Isaac's marketing analytics offerings. The move also expanded Fair Isaac's client base and presence in priority growth markets, including healthcare, retail and pharmaceuticals. Other vertical acquisition plays, include IBM’s acquisition of Healthlink (healthcare) and Axon’s acquisition of Feanix (government).

 

 

IT Systems Integrators vs. NASDAQ Composite

The Systems Integrators had a rough go of it over the past six months. Gross margins continue to slide from 28% this time last year to 25% presently, although Q/Q revenue growth has improved from 9% to 15% (year/year). Essentially, there is work to be done, but pressure on billing rates is compressing profit margins. The Systems Integrators are struggling to maintain their identity as they now compete for market share with the IT Consultancies and IT Staffing firms (not to mention the offshore vendors) moving down and up market for traditional systems integration/custom development type work. Consolidation will continue among the systems integrators as they try to round out their solutions offering and differentiate themselves in the eyes of their global customers.

 

Top

 


PARIS, September 19, 2005 –
Unilog, a major French player in management consulting, outsourcing, and systems integration, and LogicaCMG, a major international force in IT services and wireless telecommunications have announced a merger proposal structured as a friendly takeover of Unilog by LogicaCMG. As part of the deal, a number of Unilog shareholders members of Unilog senior management, including Gérard Philippot, Chairman of the Unilog Management Board, (Directoire), Pierre Deschamps, Chairman of the Supervisory Board (Conseil de Surveillance) and Didier Herrmann, Management Board Vice-President, have entered into a share transfer agreement subject to conditions precedent for 32.3% of Unilog's share capital at a price of 73 euros per Unilog share. Once the conditions precedent have been met, LogicaCMG will file a voluntary friendly cash tender offer for all Unilog shares at a price of 73 euros per Unilog share. This would value the French group at around €931m in total. The deal would go some way toward helping LogicaCMG turn the tide at its struggling French business. LogicaCMG was created by the 2002 merger of Logica and CMG.

HAMPSHIRE, UK, August 3, 2005 - QinetiQ, a leading global defense and security company, announced today that it has signed a purchase agreement with Apogen Technologies Inc., one of the United States' leading providers of information technology to the US federal government, based in McLean, Virginia. The $288.0m (£162.7m) US acquisition, which is subject to US regulatory approval, follows its purchase of Foster-Miller Inc. and Westar Defense and Aerospace Inc. in November 2004. QinetiQ has also signed a purchase agreement with technology development company Planning Systems Inc. this week for $42.0m (£23.7m).

ROME, June 28, 2005 - Today COS.IT, the new holding company chaired by Alberto Tripi and consisting of the COS Group and Interbanca, signed the purchase contract giving it control of Finsiel, the Telecom Italia Group company. The deal provides for the acquisition of 59.6% of the Finsiel capital held by Telecom Italia, while the remaining 19.9% owned by Telecom Italia will be transferred to COS.IT by the end of the year, when Telecom Italia will exercise its rights under the Put Agreement. The new holding company COS.IT will be chaired by Alberto Tripi, while Marco Tripi and Giuseppe Cuneo will be appointed Chief Executive Officer and Vice Chairman, respectively. The integration of the COS Group activities in the telecommunications services sector and Finsiel's information technology activities will lead to the establishment of a leading ICT group in Italy.

NEW YORK, June 3, 2005--L-3 Communications (NYSE: LLL) announced today that it has signed a definitive agreement to acquire The Titan Corporation (NYSE: TTN) ("Titan") under which Titan's shareholders would receive $23.10 in cash per share of Titan common stock. The total transaction value on the completion date of the acquisition is expected to be approximately $2.65 billion, including assumed debt. Titan's Board of Directors is unanimously recommending that Titan's shareholders approve the transaction.
Headquartered in San Diego, Titan is a leading provider of comprehensive national security solutions including information and communications systems solutions and services to the Department of Defense (DoD), intelligence agencies, the Department of Homeland Security (DHS) and other United States federal government customers. Titan offers services, systems and products for Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR), enterprise information technology and homeland security programs. Titan has approximately 12,000 employees, including over 9,000 personnel with U.S. Government security clearances.
The transaction is expected to close in the second half of 2005, pending the satisfaction of certain closing conditions. The acquisition is expected to add approximately $2.7 billion of sales and $0.25 of diluted earnings per share to L-3's results of operations for the year ending December 31, 2006.

WASHINGTON, April 26, 2005 – Nortel [NYSE/TSE: NT] announced a definitive agreement that Nortel’s U.S. subsidiary, Nortel Networks Inc. (NNI), will acquire Virginia-based PEC Solutions, Inc. [NASDAQ: PECS], a leading government IT services firm, and create U.S.-based Nortel PEC Solutions to provide mission-critical solutions for U.S. federal, state and local government customers. NNI will acquire PEC for an estimated US$448 million (net of cash acquired) through a cash tender offer for all of the outstanding shares of PEC at US$15.50 per share. Nortel expects the acquisition to be earnings per share (EPS) neutral in 2005 and accretive thereafter. The acquisition of PEC is expected to provide the ‘accelerator’ for Nortel to compete more fully and completely in the government market. Nortel PEC Solutions will combine PEC’s high-end professional services and Nortel’s technology solutions to bring greater value – including a strong combined security offering – to existing partners, new partners, and customers in the U.S. government market.

SAN DIEGO and PISCATAWAY, NJ, March 15, 2005 - Science Applications International Corporation (SAIC) today announced the signing of a definitive agreement to sell its subsidiary Telcordia Technologies, Inc., a leading provider of telecommunications software and services to Providence Equity Partners (Providence) and Warburg Pincus (Warburg) for $1.35 billion in cash. Providence and Warburg are equal equity investors in the transaction. The completion of the sale is subject to customary closing conditions, including regulatory approval.

VIENNA, VA, March 18, 2005 – Resource Consultants, Inc. was acquired by Serco Group plc (“Serco”), one of the world’s leading service companies. Under the terms of the agreement announced in December 2004, the purchase was contingent upon a number of regulatory clearance requirements that have now been satisfied. Serco acquired RCI to gain a strong competitive position in the world’s largest service contracting market and will rely heavily on RCI’s technology capabilities and strong customer relationships with the US Federal Government. Under the terms of the acquisition, RCI will effectively become a US-platform for Serco and its existing management team will continue “as-is” as a part of a larger Serco North America organization.

LONDON, February 2, 2005 - BT today announced the completion of the acquisition of Infonet, one of the world's leading providers of global managed voice and data network services for corporate customers. All conditions to the transaction have now been met, following formal approval of Infonet's stockholders at a general meeting held on February 23. BT and Infonet announced on 8 November 2004 an agreement for BT to acquire Infonet for $2.06 per share, valuing Infonet at $965m (£510m) inclusive of Infonet's cash balance of $390m (£205m)1, or $575m (£305m) net of the cash balance. Infonet, which will be renamed BT Infonet, becomes part of BT Global Services.

BETHESDA, MD., February 18, 2005 -- Lockheed Martin Corporation [NYSE: LMT] has entered into a definitive agreement to acquire The SYTEX Group, Inc. (TSGI). TSGI, based in Doylestown, Pa., provides information technology solutions and technical support services to the U.S. Department of Defense and other federal agencies. Lockheed Martin has agreed to pay net consideration of $462 million after taking into consideration $13 million of net cash being acquired. The transaction is expected to be immediately accretive to earnings per share. The acquisition will strengthen Lockheed Martin’s capabilities in IT and technical services and expand its range of federal information technology customers. Approximately 85 percent of TSGI’s current revenue is generated from Department of Defense and intelligence community customers with the remainder predominately from other U.S. government agencies. TSGI revenue was approximately $425 million in 2004, nearly 50% above its 2003 results.

AMSTERDAM, January 31, 2005 - The two biggest Dutch ICT service companies - Getronics and PinkRoccade - are to merge. Getronics will buy the outstanding shares of PinkRoccade, listed on Euronext Amsterdam, for €338m. The management board will be chaired by Klaas Wagenaar, existing chairman and CEO of Getronics. The companies believe that the new combination will have a much stronger presence in the ICT services markets in the Benelux, the UK, Spain and Italy and on other continents, with annual revenues in excess of €3bn and a workforce of more than 29,000 operating in 30 countries. One-time savings are estimated at €35m to €45m.

MILAN, October 11, 2004 - Banksiel, the Finsiel Group (Telecom Italia IT Market BU) company specializing in IT systems for Finance, today completed a deal to acquire IAK -Advanced IT for Banking for a value of around € 3 million. This acquisition falls under Banksiel's broader strategy of consolidating its role on the finance IT market. The acquisition strengthens Banksiel's position on the loans market, which has been strongly impacted by the introduction of new IAS accounting standards and the Basle II regulations - areas in which Banksiel has already become a leader through the installation of its ISB IAS Suite Banksiel™ product at many banks and banking groups.



Recent Selected Updata
IT Professional Services Transactions

 

 

 

Top

 

 

Updata Capital is the leading advisor on mergers and acquisitions in the information technology space. Since inception in 1987, Updata has managed over 400 M&A transactions, representing an aggregate value exceeding $12 billion.

Updata is dedicated purely to M&A advisory for mid-sized and large growing technology organizations. Our strength in IT M&A is built on our extensive transaction experience coupled with our senior technology operating backgrounds.

www.updata.com

IT Services Team

Ira Cohen: icohen@updata.com
Rich Erickson: rerickson@updata.com
Michael Parent: mparent@updata.com
John Macdonald
: jmacdonald@updata.com
Gretchen Guandolo: gguandolo@updata.com
Matt Fiore: mfiore@updata.com

 

© Reproduction of this information without express written permission is prohibited.

 

Updata Capital, Inc. Disclaimer:

The information and opinions in this report were prepared by Updata Capital, 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.

 

 

Visit our website: http://www.updatacapital.com/uci/index.htm