Valuation & Deal Insights

28 Pages·2012·4.43 MB·English

by  Matthew Putzulu

Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
IN THS ISSUE Transaction Highlights

Page 2
Transactions shaping the IT mergers and acquisitions space
Executive Perspective
with Tom Richards
Page 4 IT Services
Viewpoint by Marty Wolf
August 27, 2012
Page 6
IBM (NYSE:IBM) announced that it would acquire Kenexa Corp.
Value Lies in the Eye of the
(NYSE:KNXA) in a deal worth $46 per share, for a total of $1.26
Beholder
billion, representing a significant move by IBM into the Human Capital
Page 8 Management space that follows SAP’s 2011 purchase of
Five Key M&A Trends in SuccessFactors, Inc. and Oracle’s 2012 purchase of Taleo.
Cloud Computing and IaaS
September 10, 2012
Page 10
Infosys Ltd. (BSE:500209) entered into a definitive agreement to
China’s Dragon Snuffed
acquire Lodestone Management Consultants AG, which provides IT
Out by Cloud
consulting services to financial, pharmaceutical and consumer goods
Page 13 enterprises with an implied enterprise value of $349 million.
Maximizing Your Place on
the Valuation Continuum SaaS
Page 14
SaaS — How Long Can August 27, 2012
This Last? Thoma Bravo Fund IX L.P., a fund of Thoma Bravo, LLC signed a
definitive agreement to acquire Deltek Inc. (NasdaqGS:PROJ), an
Page 17
enterprise software and information solutions provider for $890
Taking the Right Steps to
million, approximately $13 per share.
Creating Value

Page 20 September 19, 2012
Notes from a Dialogue on Lenovo Group Limited (SEHK:992) has signed an agreement to
Cross-Border M&A acquire Stoneware Inc., a developer of cloud computing solutions
through web technologies for an undisclosed amount.
Page 23
!
Selected Transactions
October 4, 2012
Page 25
Cisco Systems, Inc. (NasdaqGS:CSCO) completed its acquisition of
Select martinwolf
vCider, Inc., a virtual cloud networking service for an undisclosed
Transactions
amount.
Page 26
Appendix

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
IT Supply Chain Services

September 4, 2012
Tech Data Europe GmbH, a leading PC hardware distributor, has
acquired Specialist Distribution Group (SDG) Ltd., a distributor of
technology products and solutions, for $350 million

August 9, 2012
HCL Insys Pte. Ltd., a leading provider of IT and related activities
acquired NTS Fz LLC, a distributor of IT hardware and software
solutions, for an undisclosed amount.!
______________________________
Executive Perspective:
Tom Richards
President and CEO, CDW

Editor’s Note: In an effort to provide a C-Level perspective on ongoing
trends in the IT space, and how they affect business, martinwolf interviews
an executive each quarter from a leading firm in this space. Today we
include Tom Richards, president and CEO of CDW, who provided his
thoughts on the cross-border M&A, the importance of the cloud and other
relevant topics.
MW: What do you think are the three biggest trends affecting the
IT business today?
TR: Today’s IT environment is more dynamic than ever; new
technologies and products are being introduced and rapidly deployed
into our customers’ strategies. The top three trends our customers are
engaging us on are mobility, cloud and big data because they believe
these technologies — when strategically combined — can deliver a
competitive advantage. That being said, there continues to be heavy
investment in virtualization and unified communications. Most
importantly, our customers continue to prioritize, invest and align their
IT strategies with their business strategies and CDW is privileged to
be part of that process.
MW: Talk through your cross-border M&A Strategy
TR: We believe we have 5 percent of a $200 billion market in the US
and Canada. There’s plenty of opportunity to drive growth in North
America. However, we’re always evaluating our strategy and looking
for incremental opportunities for scale. Still, our focus is on executing
our core strategy.

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
MW: How does the cloud alter your go-to market strategy?
TR: It enhances our strategy to be the leading IT solutions provider in
the markets we serve. One of our core goals is to continue to expand
our solutions suite, which includes providing cloud computing
expertise and capabilities. CDW recently announced a new
partnership with salesforce.com that will diversify our cloud offerings.
Through this partnership, we are able to provide both CDW and CDW-
G customers with cost effective cloud solutions, as well as social,
mobile and open capabilities of salesforce.com's cloud technologies.
In addition, our managed services capabilities are a differentiator for
CDW. Whether it’s public, private or hybrid cloud, CDW’s size and
technical resources help companies implement and integrate cloud
solutions.
MW: Where does mobile fit into your long-term strategy?
TR: Mobility presents huge opportunities for CDW customers because
of its ability to deliver speed and responsiveness to improve their
customer experience. We know that people want to use the same
technology at work as they use at home, and IT organizations are
becoming more comfortable managing BYOD environments because
we can provide them with the critical tools to manage the network,
risk, privacy and compliance that come along with consumer-based
technologies.
But, to me, the more exciting aspects of mobile technology are
happening with business applications, especially in the areas of CRM,
warranty management and service organizations. These applications
are profoundly improving the way our customers serve their
customers by providing them with the technologies, tools and
capabilities to make it happen.
MW: What are your thoughts on Social Media (both for customer
communications and business strategies)?
TR: There are conversations happening every day that shape brands
and influence customer opinions, so we think social media plays an
important role in both. For CDW, the customer has always been at the
center of everything we do, so being able to engage with them in a
compelling way via social media has helped us not only improve how
we work as an organization, but also build a community of advocates
for the brand.
MW: Do you tweet or utilize any Social Media tools?
BE: CDW continually adopts new strategies in the social space to
engage customers, coworkers and the public. Social media has been
a great driver of our brand messages. For me personally, I still value

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
face-to-face conversations and believe one-to-one relationships are
equally important in how a customer feels about you and your
company.
MW: Do you find yourself working more or less as the digital age
progresses?
TR: Probably the same. For most people, it’s not always about if we
are working more or less but how we work that changes. Technology
certainly enables people to be more connected, which can therefore
increase productivity and overall efficiency in an organization. It
doesn’t mean you have to work 24/7.
______________________________
Viewpoint:
Winds of Change

By Marty Wolf
Founder, President
In early October, I was the keynote speaker at a conference on cross-
border M&A organized by martinwolf and three other major players in
the M&A world in India: Grant Thornton India, HSBC, and Khaitan &
Co.
The event, presented by the Bangalore Chamber of Industry and
Commerce, was remarkable not just for what was said (though as
Managing Director of our India practice group Gaurav Sharma,
explains on page 20 it provided novel insight on the Indian M&A
scene). It was also notable because it demonstrated how the focus of
our India initiative has shifted since we established our Bangalore
office early this year.
When we decided to establish a physical presence marketing India,
we expected to be primarily advising large Indian companies
interested in purchasing U.S. assets. But our focus has evolved with
the rapidly changing landscape, driven by several factors:
• The weakening rupee, which has depreciated by nearly 25
percent against the U.S. dollar since August 2010 — an all-
time high this past June — drives up domestic business
expenses and the cost of overseas acquisition.
• Slowing GDP growth in India, which has been steadily
declining since the fall of 2010 and is on the path for a 10-year
low after achieving only 5.3 percent growth in Q1 2012.

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
• The drastic decline in the number of Indian IPOs, which has
fallen from a high of 61 in 2010 to just 10 so far in 2012 (as of
September 25th).
The current situation is the opposite of what we and many other
observers had expected: the small, very technical companies with
global footprints are in India, while in many cases the private equity
investor or the strategic partner interested in buying is in the United
States.
Now, this does not mean that big companies are completely absent
from the India M&A scene — there are still large companies doing
sizeable acquisitions on a continuous basis. Regardless of size,
though, a new trend is emerging: a shift toward cloud computing.
This shift is not just limited to India. We’re experiencing it in our own
client base — 30 percent of our companies are cloud services
companies. And that doesn’t count all of the traditional Professional
Services companies that are rebranding themselves Managed
Services providers or the integrators that are now referring to
themselves as cloud providers — I’m talking about real cloud-related
services.
The growing interest in this space is a meaningful change. And it’s not
just the big guys like Oracle, IBM and SAP making big strategic
investments in niche SaaS companies — there’s a lot of activity and
consolidation going on in in the mid-market where we play. Buyers
aren’t limited to the usual suspects, either. We’ve run several auctions
in the cloud/managed-services space and the companies that have
indicated interest are often unfamiliar names.
In the coming year we also expect to see increased activity by PE
firms both in the cloud and in M&A as a whole. I read a very
interesting report recently in the Wall Street Journal about how private
equity funds generally have a very narrow window (typically five to
seven years) in which to spend their money or return it — and that
period is almost up for the funds that were initialized in the peak years
of 2007 and 2008. These funds still have $38.9 billion and $57.6
billion remaining, respectively, and I expect that a fair portion of it will
end up in the cloud.
Now, you can talk about diligence and fiduciary responsibility until you
are blue in the face, but given the choice, PE firms would rather invest
the money they have from investors (albeit at a potentially lower
return) instead of giving it back. In fact, we are already seeing very
aggressive moves by PE firms on a global scale.
On a less rosy note, it’s important to remember that even with all this
attention being given to M&A (cross-border and otherwise), getting

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
these deals finished remains difficult for companies of all sizes. There
have been several firms in our space that, for reasons of financing,
price fit, or some other reason, have been unsuccessful. Our own
experience has been that finding the right buyer and understanding
current market trends have never been more important.
I want to close by returning to something I first brought up in the last
issue of VDI: the uncertainty of the current political situation and how
it continues to affect the M&A space. Regardless of who wins the
upcoming presidential election in the United States, whether
destabilization will improve or worsen depends on what they actually
do once in office — not what they are saying on the campaign trail.
But one thing is clear: if next year the maximum tax on long-term
capital gains increases to 25 percent (rather than the current 15
percent) and short-term capital gains are taxed at a maximum of 40
percent plus (rather than the current 15 percent), that will have
unintended negative consequences overall on capital markets. And
that will affect all of our businesses for the worse.
______________________________
Value Lies in the Eyes of the Beholder

By Yousif Abdura
Senior Analyst
One of the first questions many owners of companies ask when
deciding whether to sell is “What is my company worth?”
Valuation ranges can be established using revenue or EBITDA
multiples based on valuations of comparable public companies,
precedent transactions, and, in certain cases, discounted cash flow
analysis. These tools give general valuation ranges in which a
company can be expected to trade. However, the complete answer to
the question has more to do with what a buyer is willing to pay, which
is driven by either: a) a greater need for the asset, or b) being able to
do more with the asset than the current owner or a competing buyer.
For example, we are currently engaged as the sell-side advisor for a
number of mid-market cloud-related companies. What we are seeing
today is that these companies are far more valuable to prospective
buyers (both strategic and financial) than they are to themselves.
These companies have established solid businesses with recurring
revenue, growing client bases, systematized processes and
procedures and scalable infrastructures. They are prime acquisition
targets due to the strength of their businesses, but their valuation will
be driven primarily by what the prospective buyers believe they can

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
do by acquiring the asset. The examples below refer to instances
where prospective buyers have seen the ability to capitalize on
opportunities that would not have been feasible under current
ownership:
Accelerating Geographic Expansion / Increasing Market Share
A common theme among prospective buyers in the cloud space has
been to acquire in adjacent markets to take advantage of
consolidation of data center space and resources. These buyers are
also able to benefit from knowledge of regional markets, removing a
future competitor and establishing themselves as significant regional
players. Although cloud computing by its nature is about remote
access, in the mid-market space customers are acquired through a
traditional sales and marketing model, which is overwhelmingly local.
Selling to a Vast Customer Base
Value can be driven to high levels when a buyer is able to
immediately take a company’s cloud services to its existing
customers. In a recent example, a prospective buyer had 15,000+
customers who could be offered the cloud. Due to the scalability that
the seller had already built into its business, this would have given it
access to a potential customer base that was more than 100 times its
existing base. In an example like this, the prospective buyer can
justify paying significantly more than standard valuation
methodologies would suggest that a company is “worth.”
Enabling Business Transition
In some instances, companies are looking to provide new, higher
value and more profitable services than they currently provide. This is
particularly true for companies in adjacent spaces that have industry
knowledge and a significant customer base, but lack the in-house
ability to develop a cloud-based service offering in a reasonable
amount of time. Service providers in adjacent spaces have used M&A
to move into cloud computing services in order to gain presence in the
marketplace. For example, services providers from telecom (for
example, TDS’ acquisition of One Neck or CenturyLink’s acquisition of
Savvis), value-added resellers (for example, Best Buy’s acquisition of
mindShift) and international buyers (NTT’s acquisition of Dimension
Data) have all used M&A to build their cloud services offerings.
To capture the most value in the sale of part or all of your business, it
is helpful to know what buyers are looking for, but it is crucial to
understand each buyer’s pain points and strategic goals. The highest
valuations and the most compelling offers come from buyers that have
specific and pressing reasons to acquire a business. Based on these
axioms, a number of our cloud services companies are finding they

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
are significantly more valuable to prospective buyers than they

realized.
______________________________

Five Key M&A Trends in Cloud
Computing and IaaS

By Sunil Grover
Executive Vice President
In the last edition of Valuation and Deal Insights, we defined the $100
billion+ cloud computing marketplace. We also talked about how
various vendors groups — for example, Managed Services providers,
Infrastructure as a Service (IaaS) providers, solution providers
(traditionally referred to as value-added resellers or VARs) and
technology companies — were approaching the opportunity. And we
highlighted cross-border M&A opportunities in remote infrastructure
Managed Services.
We presently have four active engagements in the cloud
computing/IaaS space. Based on this experience we see the following
five key trends driving M&A in the coming months and quarters:
1. Private equity (PE) is extremely active in recapitalizing
companies and driving subsequent acquisitions.
The value proposition of IaaS is converting customers’ capital
expenses in infrastructure to operating expenses in IaaS. PE
professionals appreciate the significance of this value proposition.
They are also attracted to the recurring revenue and deep customer
engagement inherent in these businesses. Marketplace adoption of
IaaS is growing rapidly and the marketplace is highly fragmented,
presenting numerous opportunities for growth through selective
acquisitions.
Private equity recapitalizations in the recent years included GoDaddy,
Endurance, Peak 10, Digital Fortress, Softlayer and Datapipe. These
companies and several others have all done selective follow-up
acquisitions to grow, as summarized in the table below.
2. Telcos are entering the IaaS market.
Telecom companies provide the backbone connectivity to data
centers. To move up the value chain and monetize their existing

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
customer base, several have acquired IaaS providers. Sizeable
examples include Verizon’s acquisition of Terramark, Time Warner
Cable’s acquisition of Navisite and Windstream and a telco provider
for rural locations acquiring Hosted Solutions. Similarly, TDS’s
acquisition of One Neck now allows it to offer cloud-computing
services to its customers.
3. Public companies are driving strategic transactions.
With access to public capital markets and previously established
meaningful bases, publicly traded IaaS providers are pursuing
strategic transactions that can meaningfully improve their value
proposition.
Web.com’s acquisition of Network Solutions, for example, was unique
in that at the buyer acquired a company least twice its size and, as a
result of the transaction, got General Atlantic, a very large private
equity investor, as one of its significant shareholders. Rackspace has
acquired small technology providers such as Mailgun, Anso Labs and
Cloud Kick that will make its offering to enterprise clients more robust.
Peer 1 and Equinix have both acquired overseas data center and
hosting service providers to enter into new markets and provide their
enterprise clients a global managed hosting solution.
4. Solution providers are entering the IaaS market.
Value-added resellers and technology solution providers are the first
point of contact when a mid-market customer is looking to investigate
cloud solutions. Some of these companies have acquired IaaS
capabilities. For example, Presidio acquired INX and Bluewater
Communications Group to expand its IaaS offering
Similarly, office supply retailers like Best Buy and Staples have
entered the IaaS space, with Best Buy’s acquisitions of mindSHIFT
and White Glove Technologies and Staples’s acquisition of Thrive
Networks. Additionally, Konica Minolta has acquired All Covered to
cross-sell remote infrastructure management services to its SMB
customers, and has been growing further through targeted
acquisitions
5. Hosting companies are becoming one-stop shops for mom &
pop and small businesses.
Hosting companies addressing the mom & pop/small business market
are becoming one-stop shops for all their web-marketing needs. Most
of them have been providing various SaaS applications as resellers

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Valuation & Deal Insights®

Industry Coverage: IT Services, SaaS, BPO and IT Supply Chain Services
3Q12
and some have recently started acquiring the more popular
application providers so they can generate more revenues from their
existing customer base. For example, Web.com acquired
Register.com and subsequently Network Solutions, Inc. — both
domain registrar services. GoDaddy.com similarly acquired Outright,
Inc., an accounting SaaS solution for small businesses.
In summary, M&A activity in the cloud computing / IaaS marketplace
is high. In the recent past, it has largely been driven by private equity
recapitalizations and private equity-backed platforms. Some telecom
companies have made sizable acquisitions and increasingly publicly
traded companies are acquiring strategically important assets. We
expect M&A activity in this marketplace to continue to be robust in the
near future.
For more information, see the list of cloud computing transaction
comparables in the Appendix.
___________________________

China’s Dragon Snuffed Out by
Cloud

By Hao He
Vice President
One of the main drivers of the transformation of China into a global
economic superpower over the last 30 years is this: the Chinese
government knows how to get things done.

That’s why it is significant that in China’s 12th Five-Year Plan (2011-
2015) one of the seven “national emerging industries” targeted as a
way to boost GDP growth was “next-generation IT,” and cloud
computing especially. According to the plan, cloud computing will be a
chief driver of the IT industry and the development of “e-government”
in China.
As background, China’s five-year plans lay out both social and
economic goals for the country, and over the years the Chinese
government has a pretty good track record of meeting or exceeding
many of the targets in these plans. While this has become more
challenging as the country has grown, China’s five-year plans remain
a powerful force for rapid progress in areas China’s leaders deem

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