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 on the sidelines in GRC M&A. The Archer deal is the latest in a GRC consolidation wave that started with the acquisitions of Paisley Consulting, Cura, Axentis, and Brabeion over the past twelve months. Archer is one of the several pure-plays remaining in the GRC sector, and we believe its acquisition will have transformational implications for the industry.
Compliance content players such as Wolters Kluwer, Thomson Reuters, and Moody’s have been aggressive acquirers on the business side of GRC as well.
In IT-GRC, there has not been a meaningful transaction that involved an enterprise software acquirer since the acquisitions of Virsa and Logical Apps by SAP and Oracle, in 2006 and 2007, respectively. EMC is once again leading the market in a sector that is characterized by huge market demand. We expect the larger enterprise software incumbents to follow suit as the pool of viable GRC platform targets continues to shrink.
Web Content Management and Marketing Automation
During the past 12 months, the Web Content Management (WCM) and Online Marketing sectors have experienced dynamic changes with M&A transactions involving Autonomy acquiring Interwoven, Adobe acquiring Omniture, and OpenText acquiring Vignette. These have paved the way for further consolidation and investment.
In January 2010, SDLTridion acquired Fredhopper to target retailers with online marketing capabilities; in February 2010, WCM and .NET player DotNetNuke announced a new round of financing; EMC announced an equity investment in FatWire for WCM; and OpenText returned to the M&A market to acquire Nstein.
Cascadia Capital has tracked approximately 85 M&A transactions in Enterprise Content Management (ECM), WCM, and Marketing Automation software spaces since the beginning of 2006. The principal take away from the data is this: M&A volumes and transaction multiples continue to increase over time—a clear indication that this theme is maturing rapidly and that larger strategic acquirers are prioritizing these software and service vendors higher up their M&A roadmaps. This was true even in 2008 and 2009, when software M&A volumes in general were down by more than 20 percent and despite this, there were 34 transactions in this theme.
In specific transactions, we are seeing premium multiples being paid for pure play vendors that demonstrate greater than 30 percent annual growth rates or whose technology is viewed as highly strategic to the acquirer. We are also seeing premiums being paid for businesses with at least 50 percent on-demand or hosted revenue. Discounts are being placed on companies that continue to generate a bulk of the revenue base in services, which is a major problem for the portion of the marketing market that is closer to the creative side than to the technology side.
The data is also a testament to the rate at which major technology bellwethers are moving into the space via acquisition: Acxiom, Alterian, Adobe, AOL, Autonomy, Convergys, Google, Interwoven, Microsoft, Omniture, Open Text, Oracle, Salesforce.com, SAS, and Yahoo! have all made acquisitions, in the last three years, and in the case of Interwoven and Omniture, were acquired themselves.
We believe that the accelerating convergence of WCM, Online Marketing Strategies, and Web Analytics technologies will continue to drive deal activity in 2010, as the broader M&A market continues to thaw, pure play vendors achieve scale, and the number of strategic acquirers from ECM, Marketing, and Data Analytics sectors recognize that they cannot compete effectively with their existing offerings, and are attracted by the growth of the independent vendors and their ability to deliver complementary solutions and customer-bases.
Additionally, growth equity investors are attracted by the high-growth and profitability of the leading players and the likelihood that WCM and Marketing Automation players will facilitate strong growth and convergence of online marketing, Web analytics and customer relationship management.
As the first quarter of 2010 comes to a close, we expect that IT M&A and financing activity will accelerate throughout 2010.