Trade and PE outgun markets for IT services firms

Dato

Private equity and trade deals are offering UK IT services businesses better valuations than is available on the public markets, according to the latest TMT report from mid-market specialist Clearwater Corporate Finance.

Between June 2011 and June 2012, the average transaction value for deals in the IT sector was 7.9x EBITDA. Among the most significant deals were the acquisition of Adapt Group by Lyceum Capital at 8.3x EBITDA and RJD Partners’ buyout of Intrinsic Technology (8.6x EBITDA).

By contrast, many publicly listed IT firms are trading at much lower valuations, with Computacenter and Phoenix IT Group languishing at 3-4x their forecast EBITDAs.

Private equity buyers and private equity-backed trade buyers accounted for half of the deals in the UK market during the period. Overseas trade players also made up a significant proportion of deals, with nearly 20% of all transactions.

Some of the most talked-about transactions during the period were cloud-related buys with private investors, such as the acquisition of cloud service specialist OpSource by Dimension Data Holdings and Cloud Direct by Gove Group.

At the same time, public markets remained volatile, with very few successful UK listings in the June 2011 to June 2012 period.

Global growth of M&A within the sector has been supported by the evolution of cloud technologies and the consumerisation of IT services following the increasing popularity of tablets and smartphones.

In total the IT services sector saw just under 600 deals in 2011, up from 443 in 2010 and just 293 in 2009. However, acquisitive UK IT service players are noticing an increase in competition from overseas competitors.

This has triggered overseas entrants including the £1.7bn acquisition of UK services giant Logica by Canadian firm CGI Group. Web hosting services provider NetBenefit was also bought by US-based Peer 1 Network Enterprises in a transaction that valued the business at around 10x forecast EBITDA in June 2012.

Earlier this year, Clearwater advised Dutch-based technical services provider Imtech on its cross-border acquisition of UK automated control and real-time IT solutions business Capula.

Carl Houghton, partner and technology specialist at Clearwater Corporate Finance, said: “The trends we have highlighted look set to continue in 2012 and beyond as the macro drivers such as a fragmented market, the switch to cloud computing and the weight of private equity money looking to invest in the sector all remain.

“Overseas corporates are beginning to notice the tremendous business models that are being created in the UK market, which is accelerating M&A activity across the sector.

“IT services companies can deliver huge financial benefits to their clients. Investors and owners should be thinking about how they capitalise on this over the next couple of years. The industry is preparing for wholesale change, and investors are geared up to change with it.

Read the report here.