Overall IT Spending Is Dropping Off – But Services Buck The Trend

September 11, 2008

Tech Giants See Clients Lower Costs By Going Green

Independent technology market research firm Forrester Research published a report Tuesday describing the effect the troubled US economy is having on enterprise IT spending. According to Forrester, 43% of large businesses have cut their IT budgets. But despite this trend, Forrester has seen a steady demand for IT services. (They report significant percentages of IT executives actually increasing their spend on certain IT services.) An article featured in Tuesday morning’s Wall Street Journal corroborates Forrester’s findings – at least as they pertain to IT services in green technology. Large IT services providers are looking to the data center as a way to enable their customers to realize what have become front-of-mind cost savings – and make a buck or two themselves while they’re at it. In fact, the WSJ reports that IBM’s Green Data Center Services business signed $300 million in orders in Q4 2007 alone. Also mentioned in the article is Hewlett-Packard’s acquisition of EYP Mission Critical Facilities, a consulting company that specializes in strategic technology planning, design, and operations support for large-scale data centers. (Updata served as the sole financial advisor to EYP in its sale to HP.) Enterprise customers are increasingly asking their IT vendors to help them come up with cost-saving strategies. The data center is a popular starting place. Even something so simple as physically rearranging servers can have energy-saving (and by extension cost-saving) effects. As customers’ demands for energy- and cost-efficient IT solutions continue unabated, tech vendors are meeting those demands with strategic M&A. Look to the tech behemoths and others to make more acquisitions in the green technology space to bolster their energy-efficiency offerings as it is sure to only heat up in the coming months.

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Posted by Signal Hill

Technology Giants Go Shopping In A Down Market

August 1, 2008

by Don More and Lorie Roscitt

While the recent softness in technology M&A has been well documented, certain companies – which we call the Tech Titans – evidently did not get the memo. These companies (Microsoft, Google, IBM, Cisco, Oracle, and HP – all with market capitalizations in excess of $100 billion and operations that cross multiple technology sectors) have been prolific buyers during the past 12 months.

Since August 1, 2007, (which roughly coincides with the start of the current credit ‘crisis’), while the NASDAQ declined 8.7%, the Tech Titans purchased over 60 technology companies, for combined disclosed enterprise value of $30 billion. (Many deal values are undisclosed.) As a group, they paid a healthy median trailing revenue multiple of 4.8x and a trailing EBITDA multiple of 18.5x.

As shown in the chart below prepared by Updata Advisors, acquired companies operate across tech sectors highlighting that the Tech Titans are exploiting market weakness to fill out product portfolios, augment growth, and remain competitive.

Eight of the acquired companies purchased in the past year by the Tech Titans were publicly-held companies whose shareholders were paid a median 1-day premium of 28% and a median 30-day premium of 44%.

Overall, at least 50 public IT companies, representing $70 billion of market capitalization, were acquired over the past 12 months. While this marks a decline over the prior year (August 2006-July 2007), which saw $99 billion of public take-outs due to private equity activity, strategic buyer volume actually rose 35% since the market downturn (see chart below).

Tech Titan acquisitiveness, together with a big increase in public-public M&A activity, highlight ongoing strength in tech M&A and a realization that the market is getting more competitive and that the tech market is viewed by buyers as ‘cheap’ by historical standards – perhaps the sign of a nearing bottom.

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Posted by Signal Hill

Green Technology Gains Traction In The Enterprise

June 26, 2008

John MacDonald

John MacDonald

Enterprise Customers Want A Green Approach And Vendors Are Listening

According to a report published by the US Environmental Protection Agency, data centers alone consumed about 1.5% of the total energy consumption in the United States in 2006. That’s double what it was in 2001 and it’s expected to double again by 2011 costing about $7.4 billion annually.

Realizing that efficiency and sustainability yield profitability, IBM, which has recently been named the #1 green IT vendor by Computerworld, has launched several green initiatives. A year ago IBM announced Project Big Green committing $1 billion per year to develop products and services for IBM and clients to reduce data center energy consumption – to create the “green data center.” In April 2008, IBM announced a new brand of server for cloud computing called the iDataPlex that not only uses 40% less power than a traditional server, but also uses water-cooling technology reducing the need for air conditioning.

Named by Fortune as one of the 10 green giants, HP is another IT powerhouse making significant inroads toward the greening of IT. HP’s Dynamic Smart Cooling technology claims that enterprises can reduce their cooling costs in the data center by 25-40%. And last November, HP acquired EYP, a consultancy with expertise in energy-efficient data center operations, bolstering HP’s ability to deliver data center services to the enterprise with efficiency in mind. HP has also recently announced research initiatives for HP Labs that will focus exclusively on sustainability.

Sun Microsystems is another major infrastructure IT player taking initiative to offer green products and services. Sun invests about $2 billion a year in research and development toward eco-friendly solutions. Sun boasts that the latest in its line of energy-efficient, CoolThreads blade servers outperforms those of its competitors in both memory and I/O capacity. In addition to green products, Sun offers a range of data center consulting services to assess enterprise data center conditions and to outline a plan to optimize energy usage and cooling.

Green concerns are increasingly more important to enterprise customers. According to data from Forrester Research, 50% of users surveyed said that their company takes environmental criteria into consideration during their IT procurement process. This percentage will only grow as energy prices continue to climb, the federal government enacts more stringent federal regulations, and environmental consciousness becomes more mainstream.

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Posted by Signal Hill

BMC Software To Acquire BladeLogic

March 28, 2008

Data Center Automation Emerges As Top Priority Among Big Infrastructure Players

Joel Strauch

Joel Strauch

In what had been a widely predicted response to HP’s acquisition of Opsware last summer and a highly complementary addition to its previous acquisition of RealOps, BMC Software announced last week that it would acquire BladeLogic, a data center automation software provider, for $800 million.  This deal represents another example of a large infrastructure software vendor paying a substantial multiple of trailing revenue (over 11x in this case) to stake a claim in a fast growing sector.  It is also a continuation of the ongoing consolidation that has been occurring among the “Big 4” infrastructure software vendors (IBM, HP, BMC, and CA) over the past several years.  Consolidation activity typically rotates through emerging fast-growth areas and represents a proven technique for bolstering growth, expanding customer “wallet share,” and unifying existing product offerings.

The two most active areas include both BladeLogic’s target of data center automation as well as a closely-related and also fast-growing segment of virtualization.  We expect strong levels of M&A activity to continue in these sectors as BMC, HP, and IBM continue to pursue opportunities and as CA emerges from what has been a relatively quiet year on the M&A front.  In addition, activity in these sectors will be bolstered by other software vendors seeking to carve out a meaningful piece of the Big 4’s target market.  A good example of this is Novell’s acquisition of PlateSpin.

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Posted by Signal Hill

No Summer Recess for the Active Data Center Automation Sector

August 22, 2007

Joel Strauch

Joel Strauch

High Multiples for IT Operations & Management M&A

Broader adoption of disruptive technologies in the IT Operations & Management sector continues to drive high growth opportunities for vendors and high multiples on both M&A and capital markets valuations.  In the waning weeks of July rather than winding down for the dog days of summer, vendors focused on solutions addressing the automation of the operations of data centers were quite busy.

On July 19th, BMC announced its acquisition of RealOps, a vendor of run book automation solutions.  While the value of the deal was not disclosed, analysts have estimated a transaction value in the $50 to $60 million range, comparable to the approximately $53 million Opsware paid to acquire competitor iConclude in March of this year.  Neither RealOps nor iConclude have disclosed their revenues at the time of these transactions but analyst estimates have generally been in the $5 million range which, if correct, would translate into deal multiples around 10x.

Four days later (July 23rd), HP announced its intentions to acquire Opsware at a share price that reflected a 40% premium to the most recent trade and which translates into an enterprise value of approximately $1.6 billion or roughly 15x Opsware’s revenue for the twelve months prior to the deal.

Shortly after that, on July 25th, BladeLogic a competitor to Opsware and a partner of RealOps, priced its initial public offering at $17 per share.  The value of the shares surged over 40% in the first day of trading to $24.  At that price, the implied enterprise value of BladeLogic is approximately $550 million or around 12x BladeLogic’s revenue for the twelve months prior to the IPO.

While the market has been strong for infrastructure software recently, the multiples of these three related transactions compare quite favorably to the median revenue multiple of around 4x for all infrastructure software transactions in the Updata Advisors proprietary deal database over the past 18 months.  Why are the multiples so high?  For the same reasons we have been pointing to in our most recent newsletter – growth and sector leadership.  Opsware grew revenues between fiscal 2006 (ending Jan 31) and fiscal 2007 at a rate of 66%.  BladeLogic exceeded that with a year over year revenue growth rate for the quarter prior to its IPO of 131%.  iConclude and RealOps are two of only a handful of vendors addressing an emerging area core to broader data center automation – run book automation.

As a proof that this trend didn’t end in July, during a two day span in mid-August VMware priced its highly anticipated IPO (and began trading at an enterprise value around 20x the last twelve months revenues) and Citrix announced its acquisition of XenSource (a competitor to VMware with revenues of less than $5 million) for approximately $500 million.  Growth is once again the underlying theme here.  VMware’s revenues were growing 90% annually in the quarter prior to the IPO and Citrix has claimed it expects XenSource revenue to grow to over $50 million in the next year.

Given the fact that we are still early in the adoption of broader data center automation, we do not expect the trend of high multiple transactions involving disruptive technologies enabling data center automation to end any time soon.

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Posted by Signal Hill

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