Technology sector mergers and acquisitions comment – May 2009

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This month it feels like we have been hearing those magic words “green shoots” bandied around with an ever-growing degree of confidence. There seems to be a general sway towards a feeling of optimism in the market although it’s difficult to put your finger on exactly why it should be the case apart from the good weather.

TechMarketView’s overview of Tech stocks at the end of May 2009 showed that the FTSE UK Software & Computer Services Index is now up 37% YTD in comparison to the FTSE100 which is down 0.4%. High performing stocks in May included Computacenter (up 26%), Misys (up 20%), Aveva (up 30%) and System C Healthcare (up 32%). There was also somewhat of a recovery for the Indian systems integrators with Mastek up 76% and Tech Mahindra up 44%.

And this optimism really shows itself in the crop of deals that were announced in May, by my records by far the busiest month of the year so far for the Technology sector. As you would expect there continues to be a number of value-priced deals involving distressed assets running dangerously low on cash, but more encouragingly this month has also shown quite a number of deals completing involving strong targets at decent multiples. Overseas bidders are still swooping in for UK assets made more accessible by a cheap pound as seen in ACS’ acquisition of Anix, but UK businesses are also mopping up serious targets both at home – Carphone buying Tiscali’s UK business – and away – Micro Focus announcing two buys in the US this month. On top of that the smaller UK consolidators were back. Advanced Computer Software, System C Healthcare and Kelway all put their money where their mouths are and announced more deals.

It still feels too early to call the bottom but hopefully the growing confidence will continue to put a rocket up some of the acquirers that have been playing “wait and see” for the last 12 months and more of the delayed deals will actually start to materialise.

UK Stories

Clearwater has advised Cantono plc on the sale of its data centre business to Scottish & Southern Energy plc in a £4.85m deal. The data centre is a state-of-the-art high density facility based near Southampton and has the potential to provide more than 2,000 racks within an 80,000 sqft facility with a 15MW power supply. The deal was agreed within a 3 month timeframe and took only 2 weeks from signing heads of agreement to exchanging on the sale last week. SSE have acquired the centre as part of the development of its own telecoms business and the services it offers to public sector organisations, internet service providers and telecom operators.

US BPO specialist Affiliated Computer Services Inc (ACS) announced that it would acquire Anix Group from Xploite plc in a £31.5m transaction. Anix is the third acquisition in the managed services sector in Europe in the last 18 months for ACS. The business acquired UK operator Syan Holdings as well as German business sds business services GmbH in 2008. Xploite plc is an aggregator of IT services businesses, the Group plans to use the cash to continue to make investments in the IT services sector.

Listed French IT services operator Sword Group announced that it would sell its Scotland-based subsidiary Sword Business Technology Solutions (SBTS) to its management team backed by Close Growth Capital, Clydesdale Bank and Scottish Enterprise in a £27.8m deal. The new entity will be called the Amor Group and Sword will continue to hold a 22.75% stake in the business. The disposal allows Sword to focus more fully on its software assets which now account for 60% of group revenue.

Publicly-listed UK application modernisation specialist Micro Focus International plc this month announced two major deals in the US market. The first will see the business acquire the testing and ASQ business of Compuware for $80m and the second is the $75m acquisition of application testing company Borland. Since the deals were announced it has emerged that there may yet be another bidder in the running for the Borland deal. The other party is expected to be a financial bidder.

Carphone Warehouse ended the ongoing speculation around the UK Tiscali business by this month announcing a £236m deal for the business. The acquisition makes Carphone the UK’s largest residential broadband provider with a 25% market share and a total of 4.25 million customers. The transaction will be funded entirely from existing Group debt facilities and it is anticipated that the acquisition will enhance EPS for the year to March 2010 by around 10%. Tiscali reportedly turned down a £550m offer for the business last year.

Vin Murria’s buy-and-build vehicle Advanced Computer Software plc this month announced its second acquisition. The business will acquire listed managed services business Business Systems Group plc in a £15.5m cash and share deal. The acquisition of BSG will enable ACS to speed up the rollout of its core SaaS products as well as to provide hosting services to its Out of Hours customers. The Group’s previous acquisition was that of Adastra, the company behind the systems that manage the NHS out of hours services. Since the deal was announced ACS has also reported that the Group has raised a further £43m on the Aim market giving the business a total of £55m for further deals.

Another UK healthcare player continuing on its quest to consolidate the market this month was System C Healthcare plc. The business announced that it would acquire Bluestar UK Group Limited for a maximum consideration of £3m, £400k up front. Bluestar is the business behind the “Pathfinder” RFID system for tracking patients and equipment.

A less successful story in the healthcare sector has been that of IMS Maxims plc. This month the business announced that it would sell all trading subsidiaries to Integrated Medical for £2.4m. Integrated Medical is an entity which is 50% owned by IMS Chief Executive Brian Ennis. The business has struggled to achieve growth in its primary markets inhibited by the chaos in the National Programme, the economic situation in Ireland and the inability to raise funds on the Aim market.

Managed hosting business Iomart Group plc this month announced that it would acquire competitor RapidSwitch in a £5.25m transaction. The purchase provides Iomart with a fifth data centre for an upfront consideration of £4.3m with a further £0.95m to be paid at the end of March 2010. The new facility, based in Maidenhead, has the capacity to accommodate 600 racks. Iomart has had some cash to splash since the sale of its directory business Ufindus to BT for £20m in July last year.

UK-based IT reseller Kelway continued on its acquisition path with the announcement that it would acquire Repton, a London-based IT solutions provider for an undisclosed sum. Repton reportedly has revenues of around £40m and some 70 staff. This acquisition, along with its previous buy Panacea, means that Kelway now has revenues of around £180m and is aiming for in excess of £250m within 3 years.

Overseas Stories

Following Carphone’s announcement of the acquisition of the UK Tiscali business there was more consolidation to come in the European broadband market. German internet services provider United Internet AG announced that it would acquire Freenet AG’s broadband operations in a €123m part-cash, part-shares deal. The transaction sees United acquire around 700,000 customers. In an echo of the Tiscali deal the assets were originally anticipated to fetch around €300m.