When cloud technology first emerged, it seemed a service platform best suited for newly-founded businesses and SME’s who either lack their own IT infrastructure or have large fixed IT costs and unutilized capacity that could be converted into smaller variable costs.  Yet Dimension Data, CA, Google, Microsoft,  IBM, Verizon, Time Warner, and HP deployed over $20 billion in 2011 on cloud acquisitions alone.

It turns out that few sectors have been keener to leverage clouds disruptive model than large IT conglomerates and BI firms, many of whom are developing their own bespoke private clouds that require greater customization, tighter integration, and more robust security protocols.  These companies have discovered it is often more economical and efficient to simply acquire cloud infrastructure rather than divert from core competencies and develop the technology in house.  What has followed is nothing short of a race to get financial weight behind rapidly growing small and mid-market companies.  Some of 2011s largest VC investments, such a $129 million Series D round in Box.net, have been in cloud content management.

Many initial skeptics of cloud computing stipulated that cloud technologies could reduce fixed costs such as equipment, personnel, maintenance, licensing, and power consumption, though they vociferously disputed just how much in often colorful editorials and speeches.  Yet they and many others did not realize that cloud services companies do not merely store data and outsource IT operations: They develop competency in being able to deliver software and services via the web regardless of the end user’s location, creating an entirely new product that can be monetized and easily managed.

With cloud acquisitions heading into 2012 with such strong momentum, cloud’s adoption curve and true disruptive potential are still taking shape. The United States Federal government, including the powerful Office of Management and Budget has made development of cloud initiatives its top priority. IT services providers have developing security protocols and acquiring IT security providers in order to obtain FISMA certification as they compete for a piece of the $20 billion in potential annual government cloud spend.

2012 looks set for an even wilder M&A ride, as the rapid evolution and adoption of cloud services will bolster existing deal flow as telecom and mobility players in particular battle for position and become more proactive in broadening their product offerings.

Arun Prakash is Vice President of Marketing at Thinkspeed, a company that provides private equity and venture capital firms with a quick, effective way to source market intelligence.

Given the billions of dollars of growth stage, buyout, and merger deals that are done in the software, IT, and technology-enabled services sectors, it’s no surprise that investment teams at venture capital firms, private equity firms, and corporate development organizations take deal evaluation and analysis quite seriously.

Investors consider a number of factors about each deal when deciding whether to invest or buy – quality of management, company growth and profitability, potential of the target market, and the strength of the business model are just a few of the many areas for analysis.  Another important area, especially in the technology sector, is to understand how a company’s products are perceived by participants in its target market.

I recently spoke with Ravi Belani, a Silicon Valley angel investor, formerly with Draper Fisher Jurvetson and Bridgewater Associates.  According to Belani, one of the key areas of due diligence is to understand how a company stacks up when it goes head-to-head against its competition.  To understand this question, most investors and M&A professionals utilize experts within their networks, which are of course limited, and customer references, which are likely biased.  Belani feels that “a scalable way still does not exist to get data-driven market intelligence.”

Guhan Swaminathan from Virgo Capital agreed, noting “Whenever we look at a deal, I speak to whoever I can in the sector but still have a lot of trouble finding unbiased and relevant opinions that are more detailed than what I can find in general industry reports.”

Of course, investors and acquirers will continue to do what it takes to ensure they are making the right decisions when they deploy capital, but there is a clear need to confidentially source market intelligence quickly and cost-effectively.

Source: Thinkspeed Blog

Ash Sethi – Analyst, MergerTech

As technology services and products become more fungible across borders, more American and European IT firms are looking towards expansion into emerging markets to drive their next phase of growth and product innovation.  While IT conglomerates have been actively operating in emerging economies for several years, mid-market players are discovering that they are well positioned to quickly establish competitive edges in mid-range products and services within Asian markets, which multinationals typically overlook.

Yet establishing a Greenfield operation in a foreign environment requires extensive investment in hiring a capable management team, added physical and regulatory overhead costs, and an operational learning curve that can depress margins for 1-3 years from inception.  A less capital intensive, precarious, and more efficient approach is to enter a new market via acquisition of an existing firm. 

North American and European IT Services firms committed to getting a footprint in emerging Asian markets through an M&A strategy will however face several hurdles.  First, there will be a need to learn the target geography’s business, investment, and economic climate in order to comprehend the unique dynamics of their operating market and develop a thorough sense of what is available.  Mid-market firms make for attractive buys as they can round out the product and service offerings of an acquiring company without adding a redundant portfolio.  They are doubtful however to be household names outside their own country and are not likely to share company information with competitors.

Next, American counterparts to mid-market Asian IT services firms with revenues of $20-75m and headcounts of 250-1000 employees will have a difficult time identifying potential acquisition targets because these companies typically focus on niche services and products and do not operate in the same segments as larger, more well-known and overseas competitors.  Particularly in China, India, and Korea, foreign IT conglomerates have overwhelmingly focused on high-end service sectors, leaving the faster-growing mid-range segments of the Asian IT market relatively untouched.  This limits the level of public market intelligence available on these sectors.

Lastly there is the matter of understanding how to structure an M&A transaction without being perceived as a threat by either local firms or government agencies, both whom can be very swift in pooling resources to push out foreign competitors, drive down operating margins to unattractive levels, or impose cumbersome regulatory restrictions on the acquirer such as requiring quotas of locally produced components.  Thus understanding who the tertiary, sometimes invisible players in a cross-border M&A transaction are and how to efficaciously negotiate with them is a vital prerequisite.

While these challenges may seem formidable, the rewards for successfully entering new markets are immense.  Asia is rapidly becoming a highly competitive market for IT services firms, and the path to success for foreign companies will depend on their ability to capture positions in mid-market products and services.  In order to find lucrative opportunities overseas it takes the services of an M&A advisor who knows both the business space and the investment climate.

While other tech giants like Microsoft and Google are utilizing multi-billion dollar M&A strategies to rapidly enter market segments in which they have not had traditional focus, Hewlett-Packard, the world’s largest PC maker, announced Thursday that it plans to spin off its hardware business and WebOS, a mere 16 months after spending $1.8 billion to acquire Palm.  Many are scratching their heads wondering if HP just blundered its way out of a sector that has been its bread and butter for years.

HP CEO Leo Apothaker may have taken a cue from ex-IBM head Lou Gerstner who years ago saved his company from collapse by phasing out IBM’s well-known but low margin PC business to refocus the firm onto IT services.  HP’s announcement in concert with a $10 billion cash purchase of analytics software vendor Autonomy can be read as an acknowledgement that the tablet market has rapidly matured into a choice between iOS and Android devices, and that HP would be better off long term leveraging its R&D assets to develop its software and services business where the environment is far more competitive.  So while HP is taking a painful hit in the equity markets, it may prove to be a master stroke. 

Ironically, HP announced its exit from hardware the same day Google, a renowned provider of web services, paid $12.5 billion to acquire Motorola Mobility and foray into an area it has no experience in: mass manufacturing.  While HP might have made a difficult choice to serve a long term strategic growth plan, the Motorola purchase may be a sign of a developing trend in defensive driven M&A in the tech sector.

True, with access to Motorola’s engineering process, Google can potentially create a slicker Droid phone, which alone could mount a serious offensive against Apple.  Yet Google was more likely thinking of Motorola’s patents and pre-empting a Microsoft takeover when signing the check.  Google has no obvious desire to be in hardware, yet had Microsoft got to Motorola first that could have spelled real trouble for Android.  Thus Google moved quickly, and Motorola got them to pay a 60% per share premium.  Expensive without doubt, but strengthening its patent portfolio will offer competitive protection to Google as they, Microsoft, and Apple all trade legal threats in the US and Europe.

From time to time companies need to engage in defensive moves, either by abandoning low margin or shrinking business segments or acquiring strategic partners to stave off competitors.  It certainly makes for more interesting reading when it involves eleven figure M&A transactions.

While other tech giants like Microsoft and Google are utilizing multi-billion dollar M&A strategies to rapidly enter market segments in which they have not had traditional focus, Hewlett-Packard, the world’s largest PC maker, announced Thursday that it plans to spin off its hardware business and WebOS, a mere 16 months after spending $1.8 billion to acquire Palm.  Many are scratching their heads wondering if HP just blundered its way out of a sector that has been its bread and butter for years.

HP CEO Leo Apothaker may have taken a cue from ex-IBM head Lou Gerstner who years ago saved his company from collapse by phasing out IBM’s well-known but low margin PC business to refocus the firm onto IT services.  HP’s announcement in concert with a $10 billion cash purchase of analytics software vendor Autonomy can be read as an acknowledgement that the tablet market has rapidly matured into a choice between iOS and Android devices, and that HP would be better off long term leveraging its R&D assets to develop its software and services business where the environment is far more competitive.  So while HP is taking a painful hit in the equity markets, it may prove to master stroke in years to come. 

Ironically, HP announced its exit from hardware the same day Google, a renowned provider of web services, paid $12.5 billion to acquire Motorola Mobility and foray into an area it has no experience in: mass manufacturing.  While HP might have made a difficult choice to serve a long term strategic growth plan, the Motorola purchase may be a sign of developing trend in defensive driven M&A in the tech sector.

True, with access to Motorola’s engineering process, Google can potentially create a slicker Droid phone, which alone could mount a serious offensive against Apple.  Yet Google was more likely thinking of Motorola’s patents and pre-empting a Microsoft takeover when signing the check.  Google has no obvious desire to be in hardware, yet had Microsoft got to Motorola first that could have spelled real trouble for Android.  Thus Google moved quickly, and Motorola got them to pay a 60% per share premium.  Expensive without doubt, but strengthening its patent portfolio will offer competitive protection to Google as they, Microsoft, and Apple all trade legal threats in the US and Europe.

From time to time companies need to engage in defensive moves, either by abandoning low margin or shrinking business segments or acquiring strategic partners to stave off competitors.  It certainly makes for more interesting reading when it involves eleven figure M&A transactions.

Ash Sethi – Analyst, MergerTech Advisors

For several years now, it seems that most news pundits and Wall Street analysts are competing to see who can be the most bearish on the US economy.  Poor unemployment data, spirited competition from emerging overseas economies, and continuous bickering in Washington over growth in the national debt contribute to a picture of markets suffering various long term crises.  These perceptions of present or future weakness in the economy can affect the choices of those looking to buy or sell a company, and not always for the better.  Parties on either side of an M&A transaction sometimes miss good purchasing or selling opportunities because they panic and think that better deal value can be realized by moving at a later date.

It is worth noting that despite these economic uncertainties technology M&A deal volume is up 32% from Q2 2010.  So why does tech have a hiring boom while automakers are reducing headcount and airlines are going bankrupt?  Inherently in the technology space are cross-market synergies which drive rapid growth and make firms attractive targets for strategic acquisition.  For example, proliferation of smart phones and tablet devices has created potent demand for services in mobile marketing, gaming, IT security, social media, telecommunications, and software spaces.  The convenience of high quality digital downloads of video media as opposed to DVDs have been a boon to providers of broadband and cloud storage services.  When one technology sector grows, others typically grow with them.  By nature, technology companies are continuously seeking to upgrade existing offerings while simultaneously working to make them obsolete by developing entirely new products.

Even non-technology oriented businesses like hotel chains and apparel makers are discovering that app development and a presence in social media spaces are now integral parts of winning marketing strategies.  Competition to acquire companies is driving up both M&A opportunities and sale prices for technology firms.  In short, technology is becoming a part of every business space, and that presents huge opportunities for M&A activity that bucks medium term macroeconomic trends.  Non-technology firms sometimes struggle with developing or contracting out technology processes, particularly those that are highly dependent on strong user experience (UX), and conclude it is better to acquire an existing team and bring them in house.

From time to time markets experience boom phases or undergo distress, but over the long term the American economy tends to be fairly stable and mean reverting.  So while politicians will continue to argue and enormous fiscal challenges lay ahead, good tech talent is and will continue to be in high demand.  Don’t pass on a good M&A opportunity when it presents itself to you.    Our analysis and data show that the technology M&A market has recovered extremely well from the low points of the recession and both the number of deals and the price at which they are getting done are providing excellent opportunities to convert work into wealth for company founders and shareholders.

Often the most interested buyers for company are not competitors, but Private Equity (PE) firms.  PE firms typically raise pools of capital and debt securities to make sizeable investments in the equity of companies, often taking controlling or significant minority stakes.  The funds partners and consultants will then apply their domain expertise to help the management of the acquired company grow and fulfill the firm’s potential.  After an average window of 3-7 years, the PE firm will receive a return and exit their investment, usually by offering the shares of the acquired firm to the general public via an IPO an M&A transaction.             

Many PE firms were caught badly off-guard during the subprime crisis as client withdrawals and frozen credit markets severely impaired their ability to support highly leveraged portfolios.  The technology M&A space hit an eight year low in 2009, as a log-jam of distressed investments obstructed most PE firms from entering into new deals.  Now, PE buyers are back in the game as bank recapitalization has made debt financing for acquisitions more feasible and increasingly attractive assets are being brought to market.  

Though the credit crisis has ameliorated considerably from its height in 2008, PE firms have recognized that the supply of cheap credit is likely to be under some constraint in the short and medium term.  Investors in buyout funds are in no mood to again get caught without a chair should the credit music stop, thus traditional structures that sought to maximize leverage are no longer the most attractive candidates.  Now less reliant on scoring through financial engineering, PE firms are instead moving towards investing in sectors where there is significant potential for value creation through managerial and operational improvements.  Historically speaking, funds that have deployed capital while exiting a recession have realized strong returns for investors. 

In seeking opportunities to optimize mix across portfolios, technology companies both in the mid-market and large-cap space have emerged as appealing targets.  Technology firms developing products which upgrade the operational performance of commercial processes as well as enhance the quality of entertainment services have exponential potential for rapid growth, and not surprisingly PE firms are bullish on the long term demand environment.  PE buyers are consequentially showing an increasing presence as co-sponsors in high value technology company acquisitions, as well as in cross-border transactions.   Check out our latest MergerTech Intelligence Report for an example of one such deal.

Despite all the historical examples and hockey stick analogies, knowing the right time to sell your business is tough.

Although selling too early may not get you the absolute best deal, selling too late can permanently destroy value in your business.  Remember that the value of your company isn’t based on what you did today, it’s what you can do tomorrow.  If your company begins to demonstrate that it is reaching the limit of what it can do, the valuation will suffer.  It is important to continuously invest into your business to maintain a strong pipeline even when planning to sell.  Your business will achieve a higher valuation by fulfilling the strategic needs of the buyer whether it is a geographic expansion or a new line of products and services.  Attractive companies for M&A are growing businesses that can demonstrate a value not present in their buyer’s operations.

When you sell your business, it is likely that the buyer will want you to have a stake in the continued development of the combined business for the next few years.  In addition to compensation for participating in the transition process, part of your earnout could be based on your company hitting certain revenue or earnings milestones after it is acquired and in that case it makes even more sense to sell when you have confidence that the business has growth potential in the next year or two.

Ultimately, selling your business shouldn’t just be about cashing out; it’s a way to strategically reduce and diversify your personal financial risk.  Small to medium sized companies have a significant amount of business risk associated with economic and market conditions that are beyond the control or influence of most individuals; these same businesses also have a significant amount of the owner’s net worth tied up in the business.  As we have seen in recent years, market turbulence of any variety (from financially distressed European governments to Wall Street selling sub-prime derivatives) will have undesirable effects to your bottom line.

Many business owners choose to wait on selling their business only to find that the market has passed them by.  Some believed that squeezing out one more year’s worth of growth would drive a higher purchase price.  Others sought to mimic the success they read about in newspapers and media.  In truth, your financial statements are only a small piece of the valuation formula and most business owners who were fortunate enough to warrant media attention were in the right place at the right time.

To put it simply, timing is the most critical aspect of selling your business – not only in the lifecycle of your company, but also the state of the market.  Even in today’s economic climate, technology M&A is strong as buyers are seeking to acquire companies to build their financial health as well as reduce their business risk by diversifying their product offerings and client base.  Chances are that your company has a narrow window of opportunity for M&A before it stops growing and begins to demonstrate itself as a low growth potential business.   In addition, by waiting too long you risk that the best buyers for your business acquire one or more of your competitors and either don’t have the strategic need or cash to buy your business when you are ready to sell.

Since your valuation is dependent on the health of your business and the value it adds to a buyer, devote your energy towards building your business rather than focusing on the concept of “maximizing your valuation.”  Chasing an abstract idea of value will likely motivate you into missing your window of opportunity and ultimately exiting for less.

San Ramon-based investment bank delivers innovative approach to technology M&A

SAN RAMON, Calif.–(BUSINESS WIRE)–MergerTech (www.mergertech.com), a global mergers and acquisitions advisory firm focused on helping small and medium-sized technology firms realize the value of their business, announces a record number of deals closed in the past six months.

“2010 was an extremely exciting year for MergerTech that focused on significant investments in our brand, infrastructure, people, and relationships with buyers, which allowed us to deliver fantastic results for our clients as evidenced by our most recent deals”

MergerTech uses its senior technology bankers, deep domain expertise in the technology space, and relationships with over 1,200 global buyers and sellers to deliver three key values to their clients: transaction execution speed, best terms and value, and greatest certainty of deal closure.

“2010 was an extremely exciting year for MergerTech that focused on significant investments in our brand, infrastructure, people, and relationships with buyers, which allowed us to deliver fantastic results for our clients as evidenced by our most recent deals,” said Nitin Khanna, Chief Executive Officer of MergerTech. “We remain singularly focused on facilitating mergers and acquisitions in the technology market – particularly helping underserved small-to-medium-sized businesses convert their work into wealth.”

“Positive economic factors such as tax cuts, an increase in cash, and built-up demand for these types of companies also contributed to MergerTech clients having a better 2010 than 2009 or 2008. We saw dramatically higher valuations and better deal structures in Q1 2011, as compared to Q1 2010,” continues Khanna. “We expect this trend to continue throughout the year.”

Some of MergerTech’s recently announced key transactions are:

MergerTech facilitated the acquisition of Network Infrastructure Corporation (NIC), a Phoenix, Arizona-based Cisco Gold Partner, by international IT and communications solutions integrator Logicalis Group. NIC provides network consulting and IT services to the K-12 education, state and local government, gaming, and hospitality markets across the Southwestern United States. NIC’s proven model for delivering wireless, security, and video services will provide a platform for Logicalis to expand on those capabilities on a national level. The Logicalis Group is a division of Datatec Limited, a $4 billion revenue business listed on the Johannesburg and London AIM Stock Exchanges.

MergerTech facilitated the acquisition of Logos Communications Systems, Inc. by Black Box Corporation (NASDAQ:BBOX). Logos, a privately held company headquartered in Westlake, Ohio, is a silver-certified Cisco partner with advanced specializations in unified communications, wireless LAN, routing and switching, and security. Black Box is a leading technical services company dedicated to designing, building and maintaining today’s complicated data and voice infrastructure systems. Black Box services more than 175,000 clients in 141 countries with 195 offices throughout the world.

The following transactions have closed recently and have yet to be announced by the parties. We include them here to show continued momentum in the small and medium technology space both for MergerTech and the M&A market in general.

The first was the acquisition of a managed services provider by a large, regional IT professional services firm. This acquisition provides the buyer with new capabilities to serve its existing client base and extends its market coverage into an adjacent region.

The second was a cross-border transaction between a US-based technology solutions provider and a public company in Asia seeking to expand its footprint in North America. The buyer was a preferred partner for IT services to Fortune 500 companies worldwide and the seller has delivered customized technology solutions to its clients for more than 20 years.

In the third transaction, a provider of instructor-led training solutions for leading application platforms delivered to mid-sized commercial clients was acquired by a firm providing professional services to Financial Services, Insurance, Telecom, HealthCare, Retail, and Public Sector organizations.

MergerTech’s advice to clients is that at a minimum they should have an in-depth discussion with an M&A advisor and obtain a professional valuation for their firm before finalizing their strategic plan for 2011 and beyond. We welcome such discussions with all small and medium technology companies at www.mergertech.com or cowens@mergertech.com.

For the latest insight into the M&A climate for small-to-medium sized technology companies, please visit the MergerTech blog: www.mergertech.com/category/blog/.

About MergerTech – Converting Work Into Wealth

MergerTech is a specialty investment banking firm focused solely on small-to-medium-sized technology and technology-enabled services companies. It helps management teams and investors realize the value of their companies through its deep domain expertise and global knowledge of buyers. The company aims for industry-leading targets of an average of 120 days for a transaction cycle with a goal of achieving an 80% close rate. These results are driven by fast, knowledge-driven buyer-seller matches, a deep understanding of the best terms and value, and an efficient and nimble deal management process. MergerTech leaders have experience in all aspects of technology investment banking, including mergers and acquisitions, capital raises for growth or recapitalization, and a spectrum of advisory services. For more information, go to www.mergertech.com.