TMT Blog – September 2009

Date

This month it was all about IT services with Xerox’s announcement that it would acquire Affiliated Computer Services for $6.4bn coming only just over a week after Dell announced that it would buy into services with the $3.9bn acquisition of Perot Systems.

The logic behind both transactions is pretty clear. At a time when capital spending is hugely constrained, services businesses, with their relatively high levels of recurring revenues and sticky customer relationships, are particularly attractive to hardware businesses whose sales are naturally more mercurial in an economic downturn. Both deals follow the principle of HP’s $13.9bn acquisition of EDS in 2008 and all three businesses seem to be striving towards the IBM Global Services model which has dominated the industry.

However, whilst the logic for the transactions is basically sound, the market has had mixed views on whether or not Xerox and Dell have chosen the right targets for executing their service-led strategy. Xerox’s market cap fell by around 17 per cent (or $1bn) on the news of the acquisition as analysts questioned the deal synergies given that there is so little overlap between the two businesses. And there were also question marks over the price that Dell is paying for Perot. Whilst Xerox’s 1.3x Sales and 12x EBIT seems a fairly full price in this market it pales in comparison to the 1.4x Sales and 22x EBIT that Dell is stumping up.

This continuing spate of mega-deals in the US market also throws up the question of why there are so few IT giants in the UK to fuel these kind of deals this side of the pond. News this weekend that a flotation of Sophos could be worth around $1bn was a glimmer of hope in an otherwise fairly bleak landscape. Just take a look at this weekend’s Sunday Times Top Track 250 and you’ll see that out of some of the UK’s largest private companies only four genuinely fall into the Tech category – Northgate IS, telent, 2e2 and PA Consulting. The statistics underline why Clearwater see so many of our strategic sales go cross border – around 60% at last count. With the lion’s share of the industry giants based overseas you’ve got to think global if you’re dreaming of a strategic price.

Deals completed in the UK

The Hut Group, which recently took the number one spot in The Sunday Times Tech Track 100 as the fastest growing private Technology business in the UK, has announced a multi-million pound investment in a transaction led by Clearwater. The funding will enable the business, which operates online entertainment sites www.thehut.com and www.zavvi.co.uk as well as a range of white label site for leading retailers, to continue its acquisition strategy as well as drive organic growth through enhanced customer offerings. The Hut has emerged as real success story in the eCommerce world having averaged 189 per cent growth over the last four years.

And Clearwater continued its successful record in the Technology sector this month by advising the management team of 1st – The Exchange on a £115m buy-out from parent company Vertex. The deal, backed by private equity investor LDC, sees the new investor acquire a controlling stake in the company whilst Vertex will also retain a significant share. 1st – The Exchange develops software for financial planning, client management and full back office administration to more than 1,600 financial advisers.

Public sector software specialist Civica plc announced that it had acquired In4tek, a UK provider of software and services for the health and social care sectors. Civica was taken private in deal backed by 3i at the start of last year in order to focus on growth by acquisition and this deal comes hot on the heels of the Group’s acquisition of IBS OPENRevenues after a competition commission ruling forced Capita to dispose of the business.

Financial publishing specialist Thomson Reuters announced this month that it would acquire the Abacus Enterprise range of software and business operations from Deloitte in a deal worth around £27m. Abacus provides software which helps companies to plan, comply and remit income tax and VAT. Thomson will merge the range with its tax planning, transfer pricing, provisions and workflow management operations to fill a gap in its portfolio in the UK market.

Netcall, a leading UK provider of callback, auto-messaging and contact solutions for call centres has acquired Q-Max in a £2.5m deal. Q-Max is a supplier of workforce management solutions and, as agents account for around 70% of call centre operational costs, Netcall will offer the Q-Max range as a hosted solution to its customer base in order to ensure the effective deployment of agents to improve productivity.

UK document capture specialist Kofax plc announced that it would acquire US business 170 Systems Inc, a provider of financial process automation software for a consideration of £20m. The acquisition of 170 Systems will enable Kofax to deliver a complete invoice processing solution which incorporates paper as well as electronic invoice capture and A/P workflow capabilities.

This month it was confirmed that Deutsche Telekom is in talks with France Telecom to merge the business’ respective UK mobile operations T-Mobile UK and Orange. The new JV will create the UK’s leading mobile operator with a mobile customer base of around 28 million, around 37 per cent of the UK market. The business will have pro forma revenues of £7.7bn and EBITDA of around £1.2bn. Synergies are also estimated at around £3.5bn.

The London Stock Exchange announced this month that it would acquire Sri Lankan-based business MillenniumIT in an £18.2m deal. MillenniumIT is a provider of trading software and its systems are used by ICAP, the London Metal Exchange, and a series of emerging market exchanges and depositories.

Other deals

Dell and Xerox weren’t the only US Technology corporates announcing strategic mega deals this month. Adobe Systems, best known for its ubiquitous Acrobat technology, announced that it would acquire web analytics business Omniture Inc in a $1.8bn deal. According to Adobe, the unusual deal will help it to change the way in which the world engages with information by combining content creation technology with analytics, measurement and optimisation.

The saga of the break-up of Canadian networking solutions business Nortel Networks continued this month with the announcement that Avaya would acquire the the business’ enterprise solutions business in a £540m deal. Avaya was selected as the winner bidder for the business in a complex deal which also includes the acquisition of shares of Nortel Government Solutions and Diamondware Inc.