Information Technology 2010: M&A and Financing Outlook


Cascadia Capital is optimistic that the resurgence of information technology M&A and financings in late 2009 and early 2010 will continue throughout the remainder of the year. The evidence for this activity is supported by the market data and the sentiment of cautious optimism expressed by the CEOs with whom we regularly collaborate as part of our “thematic” business model.

Under our thematic approach, Cascadia’s IT Practice has identified 11 technology themes. We build an ecosystem for each theme, comprising companies, financial sponsors, and potential transaction counter-parties.

There has been a material improvement in the number of IT M&A and financings in the third and fourth quarters of 2009, offsetting, to some extent, record weaknesses earlier in the year. Second half 2009 IT M&A spending increased 50 percent from the first half, as the markets saw an increase in valuations, with higher multiples returning. More specifically, deal activity in the global technology sector grew for the third consecutive quarter in Q4 2009. Deals done in the technology sector rose by 13 percent, to 553 in the quarter, compared with 488 in Q3 2009. Total deal value also quadrupled in Q4 2009 ($35.4 billion), compared with Q4 2009 ($9.2 billion). M&A in January 2010 alone show 83 completed deals, a healthy pace if considered a run rate for the remainder of the year.

Cascadia believes that the number of IT M&A and financings will gradually ramp up throughout 2010 from the economy-induced hiatus of 2008 and the first half of 2009. Recent M&A activity by major public company “aggregators” suggests that the market is re-emerging and will pick up momentum as 2010 unfolds.

Our view is that the strategic acquirers will stimulate the majority of M&A in 2010, as private equity still lacks leverage, with growth equity funding future M&A targets. The need to acquire leading technology companies to round out software and service offerings, rather than building these technologies and services in-house, will drive M&A. Additionally, stronger balance sheets, improving credit markets and market valuations will help to narrow bid-ask spreads. All of this will combine to improve prospects for strategic deal making over the next 12 months.

Here we assess 2010 prospects for two of Cascadia’s IT Practice themes:

Governance Risk and Compliance

We believe that the Governance Risk and Compliance (GRC) market is at an inflection point as regulatory changes and increased compliance requirements are forcing companies to look for enabling software and services to help manage their businesses. We also see that the market for GRC software and service companies is fragmented and ripe for consolidation; currently, there are at least 13 privately held GRC companies that have revenues in excess of $25 million. Several of the large consolidators are focusing on the GRC space and as 2010 unfolds, we expect that several of these acquirers will move to strengthen their presence in what continues to evolve into one of the most mission-critical software categories of the next decade.

In January 2010, EMC announced that it will acquire Archer Technologies to add IT-centric GRC capabilities to EMC’s RSA Security product line and position the company against infrastructure software competitors IBM, HP, CA, McAfee, and Symantec, who have, so far, remained … Next Page »

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Michael Orbach is a managing director at Seattle-based Cascadia Capital and leads the firm's information technology practice. Follow @

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