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IT Services, Cloud and Managed Services
M&A Update
Q4 2016 October 31, 2016
Technology and Digital Media Investment Banking + M&A Advisory
Table of Contents
M&A Market Brief .............................................................................................................................................................................................. 3
Global M&A YTD 2016 ................................................................................................................................................................................... 4
Global M&A Deal Value — Quarterly Comparison ................................................................................................................... 4
IT Services, Cloud and Managed Services M&A Drivers for 2016-2020 .................................................................. 5
Notable IT Services M&A Transactions, Q4 2016 ...................................................................................................................... 8
Publicly Traded IT Services Firms Valuation Table (as of 12/31/16) ......................................................................... 9
M&A Spotlight .................................................................................................................................................................................................... 11
Verizon Sells Data Centers to Equinix for $3.6 Billion ......................................................................................................... 11
Windstream and EarthLink to merge in $1.1 billion transaction .................................................................................. 12
United Internet buys Deutsche Telekom’s Strato for 600 mln euros ..................................................................... 13
DISCLAIMER
The information contained herein is of a general nature and is not intended to address the circumstances of any particular company,
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. We perform our own research
and also use third party research. No one should act on such information without appropriate professional advice after a thorough
examination of the particular situation. This is not an offer or recommendation to buy or sell securities nor is it a recommendation
to merge, acquire, sell or exit a specific company or entity. We do not hold any equity or debt position in any of the securities listed
herein as of the date of this report.
Sources for our research and data include: PitchBook, MergerMarket, Wall Street Journal, Company Websites, SEC Filings, Bloomberg, TechCrunch
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M&A Market Brief IT Services, Cloud and Manged Services M&A Activity surges in Q4 as compared to Q3 2016
Worldwide
• Despite a series of politicalshockwaves, global M&A activity(17,369 deals, US$ 3.2tn)managed to reach its thirdhighest deal value since 2007(US$ 3.7tn), despite valuedropping 18.1% compared to 2015(18,039 deals, US$ 4.0tn), with 670fewer deals announced. Theoutlook for 2017 remains uncertain,with Brexit negotiations, the natureof president-elect Donald Trump’spresidency, as well as the Frenchand German elections, all underquestion.
• Inbound M&A into Europereached an all-time high value in2016, with 1,280 deals worth US$410.7bn announced, up 35.6% byvalue compared to 2015 (US$302.9bn, 1,303 deals) to reach itshighest total on Mergermarketrecord (since 2001).
United States
• US M&A activity remained strongdespite concerns overgovernement anti-trust policies,the Presidental election, and apossible interest rate hike. UScontinued to be the most soughtafter location for M&A deals byboth deal value and count, with2016 activity (4,951 deals, US$1.5tn) reaching its second highestannual value on Mergermarketrecord (since 2001).
• The US captured 47.5% of theglobal market share, comparedto 10.3% for Europe and 20.3% forAsia.
• Much of 2016's US M&A was dueto soaring inbound activity, with UScompanies sold to foreign entitiesfor a record USD $450.5bn, a 1.5%rise from 2015's previous peak ofUSD $444.0bn. The influx ofoverseas cash scooping up USbusinesses, particularly fromChina, sparked national securityconcerns and the attention of theCommittee on Foreign Investmentin the US (CFIUS).
IT Services
•The software & IT services sectorled in both deal volume andvalue, with 2,252 transactionsvalued at $125.6 billion through2016.
•Strategic buyers announced 881deals in 2016, of which 171 werereported for $65.1 billion inaggregate value.
•Valuations slightly increased fordeals that were publiclyannounced.
•Buyer's interest in cloud softwareand services continues to drive ITservices M&A activity at all sizespectrums of the market.
M&A Multiples Paid in Q4 2016:
EV/Revenue Range: 0.22x to 4.72x
EV/EBITDA Range: 4.07x to 52.73x
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801.5
593.2
420.9
461.2
614.6
465.0
446.8
657.0
759.4
642.5
1280.0
678.2
396.4
432.1
586.4
565.5
560.0
963.9
1039.0
752.6
852.0
684.9
327.6
492.9
599.6
523.0
645.6
856.5
957.5
875.9
734.4
458.8
570.1
713.3
479.4
757.5
571.4
868.5
1205.0
969.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Q1 Q2 Q3 Q4
Global M&A YTD 2016 Global M&A Deal Value — Quarterly Comparison
Source: MergerMarket
Source: Institute for Mergers, Acquisitions and Alliances
Total 3,667.8
Total 2,415.1
Total 1,714.9
Total 2,099.6
Total 2,279.9
Total 2,310.9
Total 2,223.8
Total 3,255.9
Total 3,960.9
Total 3,240.1
Value of deals ($USD bn)
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In the IT Services sector, there were 2,210 total M&A transactions with a value of $78 billion announced in 2016 as compared to 2,217 total M&A transactions announced with a value of $89 billion in 2015.
Source: Institute for Mergers, Acquisitions and Alliances
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IT Services, Cloud and Managed Services M&A Drivers for 2016-2020
Cloud Business
Cloud computing has evolved and matured rapidly over the past few years, which has enabled the
development of increasingly sophisticated and customizable hybrid models. Hybrid tools and
enabling technologies such as the network now allow for discrete management options and
seamless integration with on-premises infrastructure, leading to increasing opportunity for
enterprises that take advantage of these offerings.
Just four of the recent, announced or completed cloud M&A deals—Oracle buying NetSuite,
Microsoft scooping up LinkedIn, Salesforce acquiring Demandware, and Vista Equity acquiring
Marketo*–are together worth about $40 billion. It’s a large amount of money. But one implication
of this M&A activity that is not being discussed much is that it represents $40 billion in cash being
held by large investors that probably needs to find a new home soon, assuming all these deals
close.
There are nearly 30 cloud “unicorns”—companies valued at $1 billion or more—waiting in the wings
to go public, and I think we’ll see some of them stage IPOs. 2017 could be a busy year for new
issues as the Cloud Circle of Life continues.
Source: https://www.comparethecloud.net/articles/hybrid-cloud-the-future-of-infrastructure/ https://www.battery.com/powered/new-life-tech-ipos/
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Cyber Security
Following current trends in security M&A as well as the general political and social environment,
we expect cybersecurity to remain a hot space throughout 2017.
400 million malware attacks were identified last year alone, according to IDC. A mass migration of
IT services to the cloud, coupled with a huge growth of connected devices, has created a perfect
environment for security breaches. Cars are becoming increasingly connected, mobile payment
applications proliferate and continuously updated mobile applications, wearable tech and IoT all
come with security vulnerabilities.
The pureplay cybersecurity players will likely continue to seek acquisitions to retain competitive
advantage whilst tech corporates scramble to find security companies to complement their
current offerings. The large consultancies with Accenture in the forefront are also likely to keep a
keen eye on the space for potential opportunities along with Private Equity houses.
Artificial Intelligence Nearly 140 private companies working to advance artificial intelligence technologies have been acquired since 2011, with over 40 acquisitions taking place in 2016 alone. Corporate giants like Google, IBM, Yahoo, Intel, Apple and Salesforce, are competing in the race to acquire private AI companies, with Samsung emerging as a new entrant in October with its acquisition of startup Viv Labs, which is developing a Siri-like AI assistant, and GE making 2 AI acquisitions in November 2016. Anywhere there is a critical problem that involves analyzing data at scales beyond that humans can handle using current analytics tools is ripe for being transformed by machine learning.
There is a surplus of investment capital poured into a sector creating hundreds of innovative
companies. A few will grow and become standalone companies, go public and survive for a couple
of decades or more.
However, by far, most will be acquired to fill in the gaps at larger vendors who will use M&A to
acquire the AI skills and technology they lack in house.
Source: CB Insights, Hampleton Partners
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Notable IT Services M&A Transactions, Q4 2016
Deal Date Company (Seller) Name Buyer Description
Deal Size
(million, USD)
EV/ Revenue EV/ EBITDA
26-Dec-16 ASG Group Nomura Research Institute
Provider of information
technology services in Australia.
256.29 1.84x 12.96x
15-Dec-16 Strato United Internet Provider for the hosting of cloud
computing services. 632.52 4.72x 12.37x
6-Dec-16 Verizon (24 data center sites) Equinix Provider of data
center services. 3,600.00
28-Nov-16 Frontica Cognizant
Technology Solutions
Provider of business outsourcing services. 121.89 0.22x 4.07x
16-Nov-16 The Radiant Group Digitalglobe
Provider of special operations and
military intelligence services and technology.
140 1.40x
11-Nov-16 Virtual Security Research NCC Group
Provider of information security consulting services.
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7-Nov-16 EarthLink (ELNK) Windstream
Provider of internet access and related
value-added services to individual and
business customers nationwide.
1,100.00 1.11x 5.69x
31-Oct-16 Softeco Sismat Terni Energia
Provider of IT services, software
products and solutions
11.04
10-Oct-16 Lumagate Innofactor
Provider of cloud computing and
technical advisory services.
11.6 1.22x 52.73x
EV/Revenue Range: 0.22x to 4.72x EV/EBITDA Range: 4.07x to 52.73x Source: Solganick & Co. Analysis, Pitchbook
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Publicly Traded IT Services Firms Valuation Table (as of 12/31/16)
IT Consulting Ticker Stock Price Market Cap (mm) EV/ Revenue
EV/ EBITDA
CRA International CRAI $36.6 $278.32 0.79x 9.96x
FTI Consulting FCN $45.08 $1,730 1.08x 9.69x
Huron Consulting Group HURN $50.65 $955.55 1.75x 8.42x
Information Services Group III $3.64 $124..9 0.77x 10.43x
Navigant Consulting NCI $26.18 $1,170 1.45x 9.56x
Resources Global Professionals RECN $19.25 $512.73 0.86x 9.91x
The Advisory Board Company ABCO $33.25 $1,690.0 2.71x 18.72x
The Hackett Group HCKT $17.66 $485.98 1.87x 13.28x
Average 1.41x 11.2x
System Integrators Ticker Stock Price Market Cap (mm)
EV/ Revenue EV/ EBITDA
Accenture ACN $117.13 $63,020 2.03x 12x
Capgemini CAP.P
A $80.15 $12,780 1.25x 10.13x
Ciber CBR $0.63 $50.97 0.12x -2.28x
CGI Group GIB $48.03 $14,220 1.98x 11.63x
Edgewater Technology EDGW $7.50 $94.21 0.71x 12.45x
The Hackett Group HCKT $17.66 $485.98 1.87x 13.28x
Perficient PRFT $17.59 $634.57 1.36x 11.98x
Average 1.3x 9.9x
Value Added Resellers (VAR) Ticker Stock Price Market Cap (mm)
EV/ Revenue EV/ EBITDA
CDW CDW $52.09 $8,340 0.86x 11.22x
ePlus PLUS $115.2 $784.18 0.74x 10.01x
Insight Enterprises NSIT $40.44 $1,320 0.28x 8.26x
Average 0.63x 9.8x
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Outsourcing Ticker Stock Price Market Cap (mm) EV/ Revenue EV/ EBITDA
Accenture ACN $117.13 $63,020 2.03x 12x
Atos ATO.PA $100.25 $10,350 0.89x 7.02x
Computer Sciences CSC $59.42 $8,790 1.5x 11.95x
Hewlett-Packard HPQ $23.14 $38,050 0.82x 5.24x
IBM IBM $165.99 $161,450 2.38x 10.9x
Unisys UIS $14.95 $654.84 0.22x 3.19x
Average 1.2x 8.4x
Offshore Ticker Stock Price Market Cap (mm) EV/ Revenue EV/ EBITDA
Cognizant Technology Solutions CTSH $56.03 $34,560 2.29x 11.48x
Infosys INFY $14.83 $31,940 2.82x 10.19x
Syntel SYNT $19.79 $1,780 2.2x 7.76x
Virtusa VRTU $25.12 $804.79 1.08x 18.72x
Wipro WIT $9.68 $17,565 2.63x 13.15x
Average 2.2x 12.3x
Source: Solganick & Co. Analysis, Yahoo Finance
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M&A Spotlight
Verizon Sells Data Centers to Equinix for $3.6 Billion December 6, 2016 - Equinix, Inc. (Nasdaq: EQIX), the global interconnection and data center company,
announced on December 6 that it has entered into a definitive agreement to purchase a portfolio of 24 data
center sites and their operations from Verizon Communications Inc. (NYSE, Nasdaq: VZ) for $3.6 billion in an
all cash transaction. The 24 sites consist of 29 data center buildings across 15 metro areas. The addition of
these strategic facilities and customers will further strengthen Equinix's global platform by: increasing
interconnection in the U.S. and Latin America; opening three new markets in Bogotá, Culpeper and Houston;
and accelerating Equinix's penetration of the enterprise and strategic market sectors, including government
and energy.
The acquisition of these assets will enable Equinix customers to further respond to a key market trend that
is enabling their evolution from traditional businesses to "digital businesses" -- the need to globally
interconnect with people, locations, cloud services and data. Additionally, customers will have the
opportunity to operate on an expanded global platform to process, store and distribute larger volumes of
latency sensitive data and applications at the digital edge, closer to end-users and local markets.
The acquired portfolio includes approximately 900 customers, with a significant number of enterprise
customers new to Equinix's platform, and it adds approximately 2.4 million gross square feet. It will bring
Equinix's total global footprint to 175 data centers in 43 markets and approximately 17 million gross square
feet across the Americas, Europe and Asia-Pacific markets.
Source: http://www.equinix.com/newsroom/press-releases/pr/123510/equinix-to-acquire-portfolio-of-24-data-center-sites-
from-verizon-in-3-6-billion-deal/
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Windstream and EarthLink to merge in $1.1 billion transaction Nov. 07, 2016 – Windstream Holdings, Inc. (Nasdaq: WIN) (“Windstream”) and EarthLink Holdings Corp.
(Nasdaq: ELNK) (“EarthLink”) announced that their boards of directors have unanimously approved a
definitive merger agreement under which Windstream and EarthLink will merge in an all-stock transaction
valued at approximately $1.1 billion, including debt.
The combined company will have increased scale and scope giving it the ability to leverage best practices
across a broader platform, and offer customers expanded products, services and enhanced enterprise
solutions. The combination will result in an extensive national footprint spanning approximately 145,000
fiber route miles and provide advanced network connectivity, managed services, voice, internet and other
value-added services. Customers will also benefit from combining Windstream’s scale in the Enterprise
segment and EarthLink’s successful launch of SD-WAN.
“The combination with EarthLink further advances Windstream’s strategy by creating a stronger, more
competitive business to serve our customers while increasing free cash flow and reducing leverage,” said
Tony Thomas, president and chief executive officer at Windstream. “With this transaction, we are combining
two highly complementary organizations with closely aligned operating strategies and business unit
structures. We look forward to working with the talented EarthLink team to create significant benefits and
drive value for all of our stakeholders.”
Sources: http://news.windstream.com/article_display.cfm?article_id=1770
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United Internet buys Deutsche Telekom’s Strato for 600 mln euros Dec. 15, 2016 – German internet service provider United Internet has agreed to buy web hosting business
Strato from Deutsche Telekom for around 600 million euros ($629 million) in cash, as the sector continues
to consolidate. The acquisition will add more than 2 million customer contracts and almost 130 million euros
in annual sales to United Internet's business.
"The acquisition of Strato will enable us to expand our leading market position in the European hosting and
cloud application business and drive the consolidation of a market which is currently still strongly
fragmented," United Internet Chief Executive Ralph Dommermuth said.
Sources: http://www.reuters.com/article/deutsche-telekom-ma-united-internet-idUSL5N1EA1DK
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About Solganick & Co.
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.
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