MergerTech

Ash Sethi – Analyst, MergerTech Advisors

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 – Guest contributor

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

MergerTech Blog – Visa and Interpreters Required 

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.

Ash Sethi – Analyst, MergerTech Advisors

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.