Executive Summary In our Q2 2009 IT M&A Review, Updata Advisors predicted that growth in the IT M&A market (software, services, internet), glimmers of which appeared at the end of Q1, would continue through 2009. Indeed, the third quarter has shown the real makings of a market comeback. Five announced multi-billion dollar deals in Q3 helped contribute to yet another, albeit smaller, increase in total announced M&A Enterprise Value for the technology sectors we cover as a whole (4% rise over Q2 compared with 244% rise in Q2 over Q1 2009). The number of transactions tracked by Updata also grew 78% over Q2 to 316 transactions, a peak we have not seen since 2007. However, average deal sizes dipped for most sectors that we cover (down almost 50% total for Q3) and revenue multiples stayed generally flat, due to an abundance of smaller, lower-valued acquisitions. Forrester research notes that most of the acquisition targets in Q3 have been smaller or medium-size companies, which indicates that buyers are keenn limiting potential integration risks.1
Lingering weakness in the overall economy and a slow recovery in venture capital investing have kept deal valuations below historical averages. But the good news is that lower values have lured acquirers back into the market and large companies again view strategic acquisitions as a good use of free-flowing cash.2 We are starting to see increased bidding aggressiveness, reflecting growing market optimism, which is already driving improvement from the valuation trough. To cite one example, in September Adobe acquired Omniture for 5.1x EV/TTM revenues and 50.1x EV/EBITDA. This is notable given not only the strong multiples, but also the lack of obvious cost synergies and that the purchase was made all in cash. Clearly, Adobe is making a huge strategic bet and is confident in the prospects of future growth in Omniture's business. Not surprisingly, our sources suggest that Adobe was not the lone bidder for Omniture.
Figure 2: Deals Over $1 Billion in Transaction Value, Q3 2009
Other signs in Q3 that the market is taking a turn for the better include:
Tech stocks climbed upwards, generally beating the other market indices. Publicly traded equity securities have improved substantially since the lows of Q1. While all equity markets have experienced improvement, tech stocks in particular have done well and outperformed the market as a whole during this period. Updata's sector indices have continued to largely outperform the Big Three Indices, year-to-date as of the end of Q3 (see Figure 1 below). The Internet, Financial Technology, IT Services and Security sector indices are all at least five percentage points above the tech-heavy NASDAQ (which is beating both the S&P and DJIA by 15 and 23 percentage points, respectively), with Internet leading the pack, up 32 percentage points over the NASDAQ.
Figure 3: Updata Sector Indices vs. NASDAQ, YTD Q3 2009
IT vendors continue to meet or beat quarterly analyst projections for second straight quarter. Most big tech vendors and internet companies pleased Wall Street with their earnings announcements for Q3, a positive sign that the market is recovering. While we acknowledge that expectations had been beaten down, technology titans such as Apple, Google, IBM, Symantec and Intel all easily exceeded street analyst revenue and earnings predictions. But even smaller vendors, such as demand chain software supplier JDA Software (which beat revenue expectations by over 4%), were able to show promising numbers for Q3 and even better projections for Q4.
Venture capital investments are slowly making a comeback and internet continues to bring in big investments. Total venture investments in the U.S. were up 17% to $4.8 billion for the third quarter compared with Q2, according to data from the National Venture Capital Association.3 The software industry in particular brought in the most deals (128 investment rounds) with total investments of $622 million, although this represents about a 9% drop in both numbers. The data is starkly different, however, for Internet-specific companies, which brought in $843 million in 148 deals, representing a 42% increase in dollars and a 15% increase in investments since Q2. This contrasts considerably with the other sectors tracked, where more than half experienced decreases in investments dollars by between 14% (semiconductors) and 269% (media and entertainment).
Figure 4: Software and Internet-Specific Venture Capital Investments, Q3 2008-Q3 2009
Select Areas with Near-Term Potential for M&A Transaction Activity The largest deals this quarter have been mostly concentrated in IT Services and the Business Analytics sub-sector of Enterprise Application software. The acquisitions of ACS and Perot are among the largest of all 2009 IT M&A transactions at valuations of $6.4 billion and $3.9 billion, respectively. We believe other areas showing promise of continued M&A activity through the remainder of the year and into next year include:
Mobile Technology: We noted in our last report that mobile technology activity would continue to grow and indeed we saw that in Q3. The number of mobile-related M&A transactions in the Updata database more than doubled quarter over quarter to 19. The low average deal size of just over $18 million supports the premise we are in the early lifecycle of the industry and that strong secular demand trends suggest deal sizes and overall volumes will rise in coming quarters. Gartner research estimates that mobile phone users accessing social networks will grow to 800 million by 2012 from 180 million in 2008.4 Similarly, market research firm Informa recently predicted that the number of enterprise mobile subscribers will grow steadily over the next several years to 11.7% of total mobile subscribers and generate $92.6 billion in revenue by 2014.5These secular trends will drive future activity in mobile, which touch upon all tech sectors.
Social Networking: Internet phenomena such as Twitter and Facebook are rapidly driving more and more users to social networking sites. What was first a casual web browsing experience for friends and family to reconnect has now grown into significant opportunities for businesses to market their offerings and bring customer service to the next level. Major players, such as Salesforce.com, are utilizing the social web to connect further with customers, and corporations including Booz Allen Hamilton and Lockheed Martin are using internal social networks to boost collaboration and brainstorming efforts among employees. Twitter's recent $100 million fundraise and LinkedIn's pending acquisition of Xing highlight growing transactional activity here.
Government Services: Expanding government budgets combined with emphasis on using technology to drive better service at lower cost will generate tremendous demand for IT professional services, on-demand enablement technologies and security. This will drive increased investment in and acquisitions of vendors in these areas. Government-related deals of note in Q3 include NCI's $24 million acquisition of TRS Consulting, a technology and consulting company supporting the Intelligence community, as well as Applied Signal Technologies' $20 million acquisition of Pyxis Engineering, which specializes in systems and software engineering and other software solutions and services for the U.S. Dept of Defense and Intelligence community.
SECTOR ANALYSES Updata has indentified several areas within our tracked IT sectors that are either ripe for growth or are already making waves in the tech arena. Figure 5 shows a quick comparison of our sectors, each of which is expanded upon in detail below.
Infrastructure Software The Infrastructure Software sector began to show meaningful signs of improvement from an M&A perspective during Q3 2009. We tracked 23 deals during the quarter, which is more than any of the previous four quarters. The total announced Enterprise Value of $1.37 billion for Q3 was bolstered by only one large deal -- Software AG's acquisition of IDS Sheer, which had an EV of $586 million. Adjusting for that transaction, the total announced EV of approximately $785 million compares favorably to the average total announced EV of the previous four quarters (assuming Q2 2009 is adjusted for two large transactions that skewed the result for that quarter). Finally the median EV to Trailing Twelve Months Revenue multiple of 3.6x is also up and above the comparable metric for any of the previous four quarters.
By these measures, Infrastructure Software M&A deal volume and valuations are approaching levels typical of the market as it existed prior to the beginning of the downturn in Q3 2008. We believe that the deal activity and broader economic conditions indicate a meaningful and sustainable improvement in the M&A market. Specifically, we believe the following factors support this conclusion:
Improved capital markets conditions and strong performance of IT boost M&A. As we noted above, prices of publicly traded equity securities have improved substantially since hitting their lows in Q1 2009 (at the end of Q3, NASDAQ was up 67% from its low for the year). While all equity markets have experienced improvement, tech stocks in particular have done well and outperformed the market as a whole during this period. We have also observed several successful technology IPOs over the past several months: as of October 21, SolarWinds (SWI) was up 38.2% since its May debut while LogMeIn (LOGM) realized gains of 12.6% since July. Finally, while many areas of the economy continue to struggle, the IT sector continues to perform relatively well with certain areas experiencing strong growth and large vendors announcing financial results that exceed expectations and raising guidance for future periods. Macroeconomic conditions remain weak on many fronts and it is unclear how quickly the economy in general will recover. However, we believe the attitudes and outlooks of participants in the IT sector are better than they have been at any time over the past 18 months.
Infrastructure M&A activity is marked by a diversity of buyers and sellers. M&A activity during the recent quarter was driven by a diverse group of buyers including public companies of various sizes (BMC, CA, EMC, Micro Focus, Oracle, Software AG, VMware) and private companies (Platform Computing, Orsyp). Sellers likewise were diverse and included large, mature businesses (IDS Sheer); sizeable, healthy private companies (NetQoS); and young fast growing private companies (SpringSource). We believe that a major contributing factor to low deal volumes over the past year has been a widening gap between buyers' and sellers' expectations on valuations, which resulted in many sellers staying out of the market and many buyers focusing primarily on bargain deals. We believe the breadth of participants over the past quarter indicates that the expectation gap may have narrowed as buyers broadened the types of deals they were willing to do and more willing sellers entered the market.
Strategically priced deals re-emerge. During Q3 we observed that a larger proportion of announced transactions were priced at levels reflecting strategic valuations. Examples include F-Secure's acquisition of Steek for $42 million, VMware's acquisition of SpringSource for $420 million and CA's acquisition of NetQoS for $200 million. While we continued to see consolidation type transactions priced around the 1x revenue level, the higher volume of strategic transactions drove up the median EV/TTM revenue multiple for the quarter considerably. We also note that activity in the sector continues to focus on areas of growth and disruption, such as storage, virtualization, data center automation and cloud computing. We expect deal volumes and valuations in these areas to remain healthy. There has already been one supporting data point early in the new quarter: Compuware's announced pending acquisition of Gomez, another strategic transaction (Updata Advisors advised Compuware in this transaction).
Enterprise Application Software The Enterprise Application software sector appears to have bucked the trend of higher deal volumes and lower valuations in Q3 with increases transactions as well as total enterprise value and average deal size. In the Q2 report we noted our concern about decreased M&A activity for the sector and many of the factors that we cited as hindrances have begun to strengthen (overall economy, credit capital flow and acquirers' outlooks on their own business prospects). Large buyers have been reaching out to us, saying they are looking for deals of all sizes and want to know what we can show them.
Overall, the Enterprise Application software sector is beginning to regain momentum, but we believe the market resurgence is not yet broad enough to call it a recovery. We are optimistic, however, as we believe there is plenty of acquisition capital on the sidelines. To further facilitate more M&A activity, we also expect relatively strong Q4 financial performance results for many application vendors. While the year-ago periods offer easy comparisons, many sector analysts and observers are predicting a nice budget flush in Q4 as well as the fact that CIO surveys forecast a nice uptick in demand for application software in 2010.
Mega deals boost Q3 metrics. At first glance, all of the Enterprise Application software metrics for the third quarter achieved their highest levels in the past 12 months. Deal volume was up nearly 70% quarter over quarter while total EV jumped almost 200% over Q2 numbers. The significant increases can be largely attributed to the quarter's two largest transactions: IBM's July $1.2 billion acquisition of SPSS, a predictive analytics software (PASW) provider, and Adobe's $1.8 billion acquisition of Omniture, an online business optimization software provider. These two $1 billion plus deals made up more than 90% of total enterprise value and largely contribute to the median revenue multiple jumping to 2.3x from 1.0x in Q2. It is important to note, however, that 61% of deals for the quarter (only three percentage points more than Q2) did not disclose transaction value. Even with the large swath of deal values undisclosed, the increases in deal volume are a promising sign of what is to come for the sector in the coming quarters.
Revenue multiples are increasing, which may represent a change in buyer attitude. The third quarter of 2009 brought with it the highest LTM revenue multiples that we have seen since Q3 2008. As we mentioned above, the median revenue multiple for the sector jumped up to 2.3x for Q3, compared with 1.0x in Q2 and 0.5x in Q1 2009. Deals with the highest revenue multiples included Omniture (5.1x) and SPSS (2.8x), which accounted for much of multiple spike. But there were also smaller, less-notable deals that boasted high multiples, such as SAP AG's $90 million acquisition of SAF AG at an EV/TTM revenue multiple of 2.3x, and IHS Inc.'s $59 million acquisition of Environmental Support Solutions, a provider of environmental, health and safety (EHS) and crisis management software, at a multiple of 3.0x. Although there are only a few transactions with disclosed deal values, the presence of a handful of higher-than-average multiples is still a reassuring sign.
M&A activity increases for Microsoft-related software vendors. There were four Microsoft-related M&A transactions in the third quarter. Epicor acquired Spectrax, a provider of mobility solutions that extend enterprise resource planning (ERP) capabilities and business logic from software such as Microsoft Dynamics CRM and Microsoft Dynamics GP, while Brittenford Systems purchase DynLink, a value-added reseller for Microsoft Dynamics CRM and Microsoft Dynamics GP. Across the pond, Godel Technologies Europe acquired Velum Limited, a Software development specialist which provides expertise in Microsoft Office SharePoint Server 2007 (none disclosed transaction value). Microsoft itself made a play at the end of September: a $5 million acquisition of the intellectual property of To-Increase BV, a developer of solutions for industry verticals, including manufacturing, retail, construction, warehouse, and professional services.
IT Security IT Security is making a comeback. Aided by the rebound in equity markets and evidence of firming enterprise demand (according to public vendors, analysts and, anecdotally, private companies), the number of announced IT security M&A transactions tracked by Updata doubled in Q3 versus Q2 to 18, and rose 20% over the prior year quarter. In addition, the sector's median deal multiple rose to 2.8x EV/TTM revenues for the current quarter. This represents the third highest median TTM revenue multiple in Q3 among the IT sectors covered by Updata (with Internet being the highest at 3.9x EV/TTM revenues).
Figure 10: IT Security M&A Quarterly Analysis, Q3 2008-Q3 2009
Quarterly M&A dollar volume remained at levels materially lower than last year, though 5.6% ahead of Q2 at $251 million. This reflects an absence of larger deals in the sector as many candidates sit on the sidelines until valuations strengthen further. McAfee's acquisition of managed email and web security vendor MX Logic for $140 million was the largest sector deal in Q3 by a wide margin.
Notable trends in the quarter include:
Private-to-private M&A continues to be prevalent. Last quarter, 10 of the 18 sector deals tracked by Updata were consummated by private acquirers. Our discussions with private equity firms support the notion that private market deals will continue to represent a higher-than-average portion of announced deals for the foreseeable future. This reflects growing realization that, notwithstanding the importance of innovation, size increasingly matters in established security subsectors. Consequently, we have seen and will continue to see more activity by private consolidators. This is more noticeable given that public buyers in recent quarters have been less active. Private-to-private transactions last quarter included Barracuda's acquisition of Austrian network security vendor phion, and more recently Barracuda's Q4 acquisition of cloud-security enabler Purewire for a reputed EV/TTM multiple in excess of 10x (off of a small revenue base). Other transactions include Trustwave's acquisition of data leakage prevention vendor Vericept, and the merger of secure access management firms Symark and BeyondTrust (Insight Ventures had invested in both companies).
Private equity bets big on platforms. In early October, private equity firm TA Associates invested $200 million to recapitalize European consumer anti-malware vendor AVG at an estimated pre-money valuation of close to 5x revenues. (TA is also a major investor in the UK-based enterprise anti-malware vendor Sophos.) AVG is the most recent example of big investments aimed at creating major private security vendors better positioned to go public or sell at a scarcity-driven valuation. Other large vendors with significant PE backing that may file to go public soon include Barracuda (discussed above), SafeNet and Kaspersky. While security IPOs have been rare in recent years, rapid growth (organic and via acquisition) of these private monoliths is likely to result in more activity in coming quarters. One encouraging sign is Fortinet's (SMB security appliances) August IPO filing and late October pricing of 12 million shares being offered between $9 and $11 per share.
Wireless and on-demand security on the rise. More than a half-dozen managed and mobile security deals have been announced in recent months, including Barracuda-PureWire (cloud security enablement), McAfee-MX Logic (enterprise managed security services), Google-reCaptcha (anti-bot service for web transactions), F-Secure-Steek (online storage and data management for carriers), GFI-HoundDog (client monitoring solutions for managed service providers) and Fluke Networks-AirMagnet (security and compliance tools for wireless LANs). We believe mobile and cloud activity will accelerate in coming quarters. Other areas of likely increasing M&A activity include GRC (IT and operations), anti-malware (market share consolidation) and security professional services (driven in significant part by government demand, such as with the recently announced acquisition of ScanSafe by Cisco for $183 million).
M&A activity in government IT security continues. We noted in our Q2 report that the government cyber-security market is heating up. That trend continued during the last quarter, which brought several government-related transactions including SAIC's acquisition of FIPS validation firm Atlan and NuMobile's purchase of Ence Network Communication, a developer of technology designed for managing network delivered government services. Discussions with public government and defense contractors suggests they will become more acquisitive in cyber-security, which will help drive ongoing activity.
Figure 11: Selected IT Security Deals, Q3 2009
IT Services IT Services deal activity increased for the second straight quarter in Q3 and, contrary to most sectors, total enterprise value and average deal value also climbed significantly higher. There were 75 IT Services deals in Q3, up 50% from the last quarter. Total enterprise value from IT Services deals comprised more than half of total announced EV for all sectors tracked by Updata.
The large jump in EV is mainly attributable to September's multi-billion dollar acquisitions of Affiliated Computer Services by Xerox (EV: $8.3b) and Perot Systems by Dell (EV: $3.7b). These two end-of-the-quarter deals contributed over 80% of total enterprise value for the sector. Factoring out these two deals, average deal size dropped to $24 million, well below the average of between $100-150 million for the last three quarters, and more in-line with our other sector observations of increased deal volume but decreased valuations.
Figure 12: IT Services M&A Quarterly Analysis, Q3 2008-Q3 2009
We believe these deals, along with Platinum Equity's acquisition of Pomeroy IT Solutions, Stream Global's acquisition of eTelecare Global Solutions and Adecco's purchase of Spring Group, are evidence of strengthening M&A interest in services businesses, particularly those with recurring revenue models. We're also seeing buyer interest from traditional and not-so-traditional organizations. Xerox was an out-of-the-box buyer, although we did forecast that ACS was a near-term target after the Perot deal was announced [See recent Updata blog posting at http://blog.updataadvisors.com/public/item/241122.]
Outsourcing remains attractive, as product-centric buyers invest in services. Nearly 35% of the IT services deals in Q3 involved outsourcing companies as a target (IT outsourcing, hosting, BPO, managed services, etc.). We expect that traditionally product-focused vendors will continue to expand their services footprints, which will help to drive M&A activity in Q4. These businesses are drawn to the product pull-through opportunities and sticky customer base associated with strong recurring revenue models. Xerox CEO, Ursula M. Burns, commented, "Xerox becomes a $22 billion global company, of which $17 billion is recurring revenue -- a significant boost to our profitable annuity stream." In addition to the very visible ACS and Perot deals, Stream Global acquired BPO provider eTelecare Global in August, and already in the fourth quarter Sykes Enterprises announced it will acquire customer management and BPO solutions provider ICT Group for $263 million.
SAP services firms are still very desired. Nearly 10% of all deals involved SAP-related firms in the third quarter and Updata gets frequent inbound calls from buyers around the world seeking SAP acquisition targets. Axon, the former public SAP consulting pure-play, closed three tuck-in deals in 2008 (which usually had a vertical bent to them) before HCL bought them late last year, and seven total since 2005. HCL is picking up where Axon left off with its $7.7 million acquisition of UCS Group's Enterprise Solutions SAP practice, which provides SAP-focused IT and business solutions for clients in the retail and wholesale industries. Similarly, NTT continues to expand its SAP capabilities globally (building off of its itelligence and Cirquent acquisitions from 2008) with the purchase of a 51% stake in Extend Technologies, an end-to-end provider of SAP consulting services. Other companies that invested in SAP capabilities in Q3 included Siemens IT Solutions and Services, which acquired Energy4U, a provider of technical support for customers in the energy sector using SAP, as well as Black & Veatch, which acquired the vertically-focused SAP consulting provider Ariston Consulting & Technologies in September. T-systems most recently acquired SAP's European external hosting business. A full list of SAP-related IT services deals in Q3 can be found in the table below:
Figure 13: SAP-Related IT Services Deals, Q3 2009
Virtualization is an emerging services sector. The third quarter included a handful of transactions revolving around virtualization. Artemis Technologies, a network infrastructure consulting firm, purchased VSD Technologies, which provides consulting for midmarket customers around virtualization, storage management, storage services, engineering services and full application support. Glasshouse Technologies made its second virtualization consulting acquisition, System Group Integration, complementing its acquisition of RapidApp in 2007. World Wide Technology also made an acquisition in virtualization, with its August purchase of Server Centric Consulting, which specializes in virtualization technology solutions. At the same time, we are witnessing a handful of venture capital investments in infrastructure consulting. Virtera, an IT virtualization consultancy, received $5 million in VC investments in early 2009 from Sigma Partners and Commonwealth Capital Ventures. Virtustream, an infrastructure services firm, announced it raised $25 million from Columbia Capital and Blue Lagoon Capital on September 1 -- the same day it acquired VirtualizeIT, a European virtualization practice, as well as Brigh Technologies, a North American provider of custom virtualization solutions.
Deal activity heats up in South America. We noted in our Q2 report that cross-border deals were on the rise and that trend continued in the third quarter with a handful of M&A transactions based in South America. These included Chile's Sonda SA acquiring Quintec SA, a Chile-based technology holding company with presence in Argentina, Brazil and Colombia in July for $43 million. Spanish consulting firm Crystalis also moved into South American with its acquisition of Sensebyte, an Argentina-based provider of solutions for SAP environments. The harvesting of Bearingpoint's assets continued in Q3 with CSC's acquisition of Bearingpoint's Brazil assets in July. Moreover, Xerox picked up about 7,700 employees in Latin America with its acquisition of ACS, which has made significant investments in Latin America in the last twelve months, acquiring e-Services Group and Grupo Multivoice, encompassing operations in Brazil, Argentina, Guatemala, Mexico, Jamaica, St. Lucia and the Dominican Republic.
Internet In Q3, the Internet sector experienced its first palpable recovery from the steep declines of the prior three quarters. Sector index share prices rose 67% YTD as of September 30 and the number of M&A transactions and deal price multiples in Q3 showed solid increases over the prior-year quarter. While median EV/TTM for acquisitions rose 178% over Q3 2008, they declined compared to Q2 (though based on limited data) highlighting there is still more wood to chop to get back to a consistent "normal." Venture investing volumes also rose to levels beating other sectors such as semiconductors and media/entertainment by wide margins. Overall, the growing sense among analysts is that the worst has past and a sustainable recovery has begun.
Figure 14: Internet M&A Quarterly Analysis, Q3 2008-Q3 2009
Other sector observations include:
Advertising starts turning upward. While online ad spending will be down in 2009, it has continued taking spend share from other forms of traditional media, according to IAB.6Last quarter represented an inflection point with positive momentum highlighting strengthening demand and rates. In particular, bellwethers Yahoo! and Google reported sequential improvements in online ad spending and per-click pricing. In mid-October, Google announced that the worst of the recession is over and that it intends to increase acquisition activity. We expect rates and online ad spend to continue strengthening alongside economic recovery.
Deal boldness is returning. Increasing confidence in the economic recovery is feeding a return to more imaginative and aggressive deal making that has been a past hallmark of the sector. Deals reflect efforts to build broader applications and services around a core, and to buy audience. Notable Q3 transactions include Intuit/Mint.com (EV/TTM 17x), Facebook/FriendFeed (EV/TTM not disclosed) and Silver Lake Partners/Skype (EV/TTM 4.5x). We expect activity levels and median deal acquisitions to continue rising in coming quarters as "first-mover advantage" and "scarcity value" become more highly valued notions again.
VCs are again piling into the Internet sector. The venture market may not be running at its full potential yet, but that has not slowed investment in internet-related companies, which totaled $843 million in Q3 with 148 deals, according to the NVCA. This represents a 42% increase in dollars and a 15% increase in number of deals since Q2. Notable investments include the $100 million put into social networking phenomenon Twitter at a reputed $1 billion valuation in August, highlighting increasing confidence in returning growth.
Mobile wars will intensify as a new "stack" emerges. As we have reported previously, the convergence and rapid uptake of smart mobile devices, wireless internet and cloud applications together represent among the most potent growth drivers in IT for the foreseeable future. No sector, market or vendor will remain untouched by the mobile tsunami. Points of competition that we expect to drive major investment and deal making include:
consumer-focused vendors (e.g. Apple, Amazon, Google) getting into the enterprise market via cloud services;
internet behemoths (Google, Yahoo!) wading deeper into communications and content;
traditional large enterprise vendors moving their offering online (e.g. Microsoft, IBM);
handset makers gunning to own integrated applications and content (e.g. Nokia);
carriers seeking to provide and monetize more internet services (e.g. AT&T, Verizon);
multimedia companies competing with web pure plays (e.g. News Corp.);
search and social media leaders providing more apps and e-commerce (e.g. Google, Facebook).
These parties will increasingly partner, build and buy to exploit vast opportunities arising from impending replacement of the traditional IT stack with one that is mobility and cloud-based. Notable Q3 deals evidencing these trends include AT&T's end-of-quarter acquisition of cross-platform mobile application provider Plusmo, and Research in Motion's acquisition of Torch Mobile, maker of the Iris mobile browser.
Deals are waiting in the wings. Analysts predict a raft of significant internet partnerships and acquisitions are in the works or being contemplated. Such deals in coming quarters will drive up volume and lead to follow-on activity, which should also help drive upward pressure in valuations. Speculated targets and logical consolidation candidates over the next 12 months or so include Adconion (global ad network and ad tools), ComScore (traffic data services), Digg (community news), Facebook (social media monolith), LinkedIn (social media leader for professionals), ValueClick (online advertising solutions), Yelp (consumer reviews) and eHarmony (online dating).
Figure 15: Selected Internet Transactions, Q3 2009
Financial Technology While Q3 saw a marked increase in the number of announced Financial Technology M&A transactions, the total value of announced deals and the average deal size were both down significantly. Deal volume rose to 35 transactions in Q3, up 66% over Q2 and hitting its highest point over the past four quarters (Q3 2008 brought in 26 deals in comparison). Even though Q3 results represent the third straight quarter of increasing deal volume, total enterprise value is still down 84% quarter over quarter and down almost 60% on a year over year comparison. The median valuation multiple (2.0x TTM Revenue) remains slightly below the longer term norms of 2.5x-3.0x; a trend that has persisted for much of the last six quarters.
Looking at some of the specific Q3 Fin Tech transactions, we see a number of continuing M&A themes that have been prevalent in 2009. The payments technology segment continues to see healthy deal flow as new payment services are consolidated into broader payment platforms and geographic expansion remains an objective. Regulatory compliance requirements for financial institutions continue to drive certain deals in the Fin Tech sector, even though much of the impending regulatory change remains buried in several bills working through Congress.
Perhaps the most interesting Fin Tech deals this quarter were in the consumer on-line financial segment: the acquisitions of Bankrate and Mint.com at very substantial valuation multiples, owing to their core lead-generation business models. In late July, Apax Partners announced that it was acquiring publicly traded Bankrate in a $571 million deal (3.2x EV/TTM revenues). In mid-September, Intuit announced that it was acquiring privately-held Mint.com, for $170 million, a company which is barely two years old and rumored to have revenues in the $10 million range. Notwithstanding the recent interest in on-line lead-generation businesses, we expect the bulk of Fin Tech M&A activity to be in regulatory compliance software and risk management solutions, as well as in payment processing consolidation.
Payment processing models continue to consolidate. More than half of all the Fin Tech transactions in Q3 were payment-related, demonstrating continued consolidation interest in the sector. We noted in our Q1 report that fewer funding options for mobile and alternative payment technology companies were leading to more acquisitions by large, well-capitalized strategic buyers and we have continued to see this activity. Transactions in Q3 included Bottomline Technologies' $17 million acquisition of Bank of America's Paymode business, which facilitates the electronic exchange of payments and invoices between organizations and suppliers, and Kofax's $38.7 million purchase of 170 Systems, a provider of software solutions that automate and optimize intercompany financial processes. First Data also made a play in the sub-sector, expanding its geographic reach with the acquisition of CashAxcess, a South African ATM deployment company (deal value was not disclosed).
Aggressive valuations in financial "lead-gen". Two of the largest deals for Fin Tech in Q3 involved lead-generation financial websites at above average multiples. The Intuit/Mint.com transaction was valued at 17x while Apax Partner's $571 million acquisition of Bankrate, a network of websites which help consumers make informed decisions about their personal finance matters, was also a robust 3.2x EV/TTM revenue (particularly in light of the recent revenue softness at Bankrate). The Mint.com acquisition is a highly strategic deal for Intuit since it provides a significant expansion into a younger, more Internet-centric customer base (Mint.com had amassed almost 1.5 million users in its short 2-year operating history). Both of these Web sites generate a material amount of their revenue by directing their users to certain financial products and services of participating institutions (i.e., mortgage loans, credit cards, etc.). Both also have large data stores of consumer information about the consumption habits of their users, data that could be sold to third parties subject to privacy laws. These unique business models provide a basis for what appear to be fairly rich valuations. As with many new online business models, it remains to be seen if other similar businesses will garner such valuation enthusiasm or if these deals represent a rare moment in time.
The market is still awaiting the Tsunami of New Regulation. As the various financial regulatory bills work their way through Congress, demand for new solutions and thereby, the firms that provide compliance technology, remain somewhat in check. Once the extent of re-regulation is better understood, we expect to see a pick up in Fin Tech software M&A deals as large vendors seek to fill out product gaps to address their customer needs. Currently, M&A activity persists in the areas of bank fraud and anti-money laundering software and services. During Q3, Actimize paid $73.5 million for Fortent, a provider of analytics based Anti-Money Laundering and financial crime prevention software solutions. We also watched as Reval, a provider of a Web-based platform that supports derivative risk management, buoyed its compliance efforts with its acquisition of FXpress, which provides software for the management of cash, exposures, derivatives and hedge accounting for FASB and IAS compliance. The whole regulatory compliance software and services segment should see a material increase in deal volume in 2010.
CONCLUSION The third quarter has no doubt shown signs of an increasingly improving economy and a strengthening M&A market for IT software and services. The past quarter seems as though it has come light years from the weaknesses in Q4 2008 and Q1 2009 as deal volumes have nearly doubled and total enterprise value has almost tripled. If Q3 earnings results are any signs, public companies are beginning to find more cash available on their balance sheets to make the leap into more strategic acquisitions.
The beginning of the fourth quarter is already showing promise as well. On October 19, the NASDAQ composite hit its highest point (2176.3) since the beginning of the year. Updata has already tracked 48 deals announced with over $4.2 billion in total EV as of October 26, including two deals valued over $1 billion (Emerson's acquisition of IT operations management provider Avocent and Adecco Group's acquisition of IT staffing provider MPS Group).
With M&A and the equity markets continuing at the pace they are, we should continue to see improvements in Q4 and may soon be able to leave thoughts of recessionary times behind us.
References:
1. Krauss, Daniel. "M&A Activity In The Current Downturn Reshapes The Software And Services Markets." Forrester Research, October 13, 2009.
