Deal Focus: IBM To Acquire Green Hat

January 4, 2012

IBM is back to its usual acquisitive pace, with the announcement it plans to acquire application testing software maker Green Hat. The purchase marks IBM’s first acquisition of 2012 and sixth acquisition since October. Privately-held Green Hat makes technology that allows developers to test their product in the cloud, rather than setting up an actual testing lab of hardware and software. Terms of the acquisition were not disclosed.

We wrote about the shift of application testing to the cloud last summer and noted IDC expects global testing services spend to grow to more than $19 billion by 2015 — so it is no surprise that IBM is taking advantage of the market’s growth opportunities. Green Hat’s software creates a virtual environment for software testing that simulates a wide range of IT infrastructure elements, without the constraints of hardware or software services. Green Hat will join IBM’s Rational Software business, and will offer users greater efficiencies when combined with its Rational Solution for Collaborative Lifecycle Management. It will also be offered through IBM Global Business Services’ Application Management Services (AMS).

The typical benefits of a cloud solution apply here — by using Green Hat’s solutions, a virtual test environment can be set up in a matter of minutes versus the weeks it generally takes for traditional set ups, and for a fraction of the cost. The acquisition extends IBM’s offerings for business agility and software quality, ultimately changing the way enterprises manage software development cost, test cycle time and risk.

While IBM’s acquisition pace petered off at the end of 2010 and beginning of 2011 (ironically, a particularly active period for the M&A market), the company managed to eek out eight acquisitions for all of 2011, totaling approximately $2.4 billion. It paid healthy sums and multiples for a number of these companies including DemandTec ($438.5 million; 5.0x revenue); Q1 Labs ($575.0 million; 8.8x revenue) and i2 Inc. ($500 milion; 5.9x revenue). Chances are IBM will resume its regular appetite for acquisitions in 2012: the company has said it plans to spend $20 billion on acquisitions by 2015.


SIEM In The Spotlight as Q1 and NitroSecurity Are Acquired

October 5, 2011

The IT Security sector hit the spotlight this week as IBM and Intel’s McAfee almost simultaneously announced major security information and event management (SIEM) sector acquisitions. IBM is buying privately-held Q1 Labs based in Waltham, Massachusetts while Intel’s McAfee announced it would acquire NitroSecurity based in Portsmouth, New Hampshire. Although purchase prices have not been reported, unconfirmed estimates suggest that Q1 was generating $60 million of TTM revenues. Based on prior platform security deal multiples, this would imply a purchase price of between $300 million to $500 million. Nitro, with estimated revenues of $40 million, likely commanded a deal value of $120 million to $200 million. Last year, HP bought public SIEM player ArcSight for $1.5 billion, a 7.7x multiple.

SIEM is important to IT infrastructure vendors as it analyzes internal/external security and compliance threats to larger organizations. SIEM’s ability to aggregate event data reduces complexity and adds context. It can be implemented onsite as software or be run as a managed service. Although the technology is ever evolving, the sector is long-established. Several years ago there was a spike in acquisitions of earlier-generation vendors, including Consul by IBM [a Signal Hill client], e-Security by Novell and Network Intelligence by EMC. Other publics with SIEM offerings include CA (eTrust), Check Point (Eventia), Cisco (Mars) and Symantec (Information Manager).

Both NitroSecurity and Q1 Labs enable enterprises to analyze security logs from multiple sources, such as firewalls, anti-virus defenses and IDS/IPS systems, in order to spot incoming security attacks. These acquisitions are part of the “big data” trend the market has witnessed since at least the beginning of the year. Companies have been rushing to acquire data analytics firms, including HP, which just acquired Autonomy for $10.9 billion and 11.7x revenue, and IBM, which recently acquired two other analytics-focused companies: Algorithmics for $378 million and i2 for an undisclosed amount rumored to be in the range of $500 million.

Q1 Labs received more than $31 million in funding from investors including New Brunswick Investment Management Corporation, Polaris Venture Partners, Menlo Ventures, BDC Venture Capital and Globespan Capital Partners. NitroSecurity also raised more than $31 million from investors including New Spring Capital, Brookline Venture Partners and First Analysis Corporation.

CA, Juniper, Oracle and SAP are among big IT vendors that have been rumored to be seeking SIEM targets. A handful of promising independents remain. Although the offerings vary, as a group these include AlertLogic, eiQ Networks, LogLogic, Sensage and Splunk.

Studies suggest GRC (Governance, Risk and Compliance) is at least as important a SIEM demand driver as security. Consequently, we believe there will be increasing acquisition activity of GRC vendors that can tie into SIEM. EMC’s acquisition of Archer in January 2010, which is being integrated with EMC’s SIEM product enVision, is an example of this already occurring.


Deal Focus: IBM Acquires Algorithmics

September 7, 2011

IBM made another play in the analytics sector last week when it announced that it was acquiring Algorithmics. IBM paid $387 million and 2.4x revenue for the risk analytics company, which will expand IBM’s offerings for the financial services industry. Algorithmics’ software and services are expected to be complementary to the risk compliance technologies IBM acquired from OpenPages last year and combined, will provide clients with an array of business analytics software solutions.

Over the past few years, IBM has been on a tear acquiring analytics firms that help organizations manage and monitor internal functions to improve performance and reduce risk.

Algorithmics focuses on providing governance, risk and compliance (GRC) solutions for the financial sector. Its software, content and advisory services are used by banks, investment and insurance businesses to help assess risk, address regulatory requirements and make more insightful business decisions that optimize risk exposure including liquidity, credit, operational and insurance risk.

Acquisition activity in the financial risk analytics market has been high due to increased regulations in the financial industry triggered by the global financial crisis. There were 18 risk analytics acquisitions in 2010, two of which were multi-billion dollar deals – CyberSource/Visa ($1.8 billion) and RiskMetrics Group/MSCI ($1.5 billion). Year-to-date in 2011, there have been five announced risk analytics deals, including IBM’s recent announcement.

GRC companies of all stripes are hot acquisition targets due to the desire of large vendors to sell more strategically. GRC is a board level concern, which is driving companies to invest in these technologies. Among GRC deals, Signal Hill announced today the acquisition of GRC software provider Approva by Infor. Approva provides clients with tools to quickly identify inconsistencies or broken processes in financial and other entreprise applications and address them right away.


Deal Focus: Cerberus Buys U.S.-based Unit of 3i Infotech

May 17, 2011

3i Infotech, a global information technology company, announced yesterday it agreed to sell its U.S.-based global billing and payments unit to an affiliate of private equity firm Cerberus Capital Management. Cerberus is paying $137 million for the unit which includes Regulus Group and J&B Software — two companies 3i Infotech acquired less than three years ago.

In April 2008, 3i Infotech acquired Regulus for $80 million (with $20 million earn-out); just a few months earlier it had snapped up J&B Software for $25.25 million in October 2007. Both acquisitions were part of a strategic acquisition push to strengthen its position in the payment processing industry. At the time, Regulus was the largest independent remittance provider as well as one of the top providers of bill processing services in the U.S. J&B provides software products and services related to remittance processing in the USA and had revenues of around $25 million when it was acquired in 2007. After the acquisitions, the companies were integrated to form the global billing & payments unit of 3i Infotech.

Interestingly, ICICI Group (a partial owner of 3i Infotech) was recently rumored to be in talks with IBM to sell its 20% stake in 3i Infotech, valuing the company around $240-$300 million (its current market cap is about $212 million). Today’s announced unit spin-off could be the firm cleaning up its portfolio before a larger investment in the entire company takes place. 3i currently offers solutions and services on IBM pSeries, xSeries and IBM Total Storage servers, so a strategy investment on IBM’s part would not be farfetched.

Revenues at 3i Infotech also more than doubled over the past three years, partly boosted by the acquisitions. This is certainly a lure for investors, and as 3i says, a testament to their M&A strategy.  According to 3i CEO V. Srinivasan, the divestment of the billing and payments unit reduces the leverage and strengthens the balance sheet of the company, as well as enables it to go back to its roots as a significant IT products and services player.


Healthcare IT Market Remains Strong, Poised To Accelerate Further

March 29, 2011

The Healthcare IT (HCIT) market remains active as private equity investors are finding opportunities and strategic M&A continues apace, particularly as mobile and speech recognition technologies drive activity in HCIT. HCIT M&A activity for the first few months of 2011 is on par with 2010, but we expect to see an increase in activity across all aspects of the healthcare market as the year plays out.

The real star of 2011 has been the IPO market: there have been nine healthcare-related IPOs so far during Q1 2011 – the most market share compared to any other sector of the IPO market in Q1. Within HCIT, Epocrates (EPOC), an ad-supported mobile drug reference app for healthcare professionals, raised $86 million when its 5.4 million share offering priced at $16, above the expected range of $13 to $15.

According to data released in a recent report by In-Stat, the healthcare industry in the U.S. will spend more than $4.5 billion on wireless data by 2014. As we noted in our October Healthcare IT M&A Report [PDF], in early 2010, a hospital district in Visalia, California, ordered 100 iPads to provide staff with access to rudimentary applications like e-mail, as well as X-ray images, EKG results and patient monitoring programs around its five sites. With the release of the improved iPad 2, connectivity in the healthcare sector is expected to grow even further, as the new product’s A5 dual-core processor dramatically ramps up the performance and speed while improved graphics stand to benefit medical images. Other technology, such as MobiUS, a mobile ultrasound imaging system that uses a smartphone and Internet cloud services, are pushing the boundaries of where technology in the medical world can go.

The  highly publicized supercomputer “Watson” is also getting its share of attention in the HCIT world as well. In February, Nuance Communications and IBM announced a research agreement to explore, develop and commercialize the advanced analytics capabilities of IBM’s Watson (of Jeopardy fame) in the healthcare industry.  The research and technology initiative will combine IBM’s deep question answering (QA), natural language processing, and machine learning capabilities with Nuance’s speech recognition and clinical language understanding (CLU) solutions for the diagnosis and treatment of patients.

The pace of IT M&A in 2011 is already exceeding that of the last few years and HCIT continues to prove that it has the right combination of innovation and necessity to expand significantly. Healthcare will be an important aspect of IT M&A heading into the future and we expect to see big developments emerge from the sector throughout the next few years.

HCIT M&A Transactions, 2011
HCIT M&A 2011
(click image to enlarge)

HCIT Private Equity Investments, 2011
HCIT Private Equity Investments 2011

(click image to enlarge)


In Hot Ad Market, Traditional Firms Make Buys

June 28, 2010

The Internet and mobile advertising analytics markets are on fire lately with one acquisition after another and venture capital funds continuing to pour in. We wrote in January that this sector of the market was ripe for growth. As the sector continues to blossom, many strategic combinations are beginning to occur — initially we witnessed these acquisitions and mergers between competing ad and analytic firms. However, over the past month, companies outside the traditional ad market, such as IBM and GSI Commerce, began buying up advertising and analytic properties to take advantage of the explosive growth and must-have technology.

On the M&A front, IBM agreed to acquire Coremetrics, a provider of web analytics software, while blogging software and services provider Six Apart acquired NaturalPath Media, an online advertising and media network. Earlier in June, Hearst agreed to pay $325 million for iCrossing, a search engine marketing firm, and GSI Commerce paid an estimated $40 million for FetchBack, an advertising startup specializing in retargeting.

There is no slow down of advertising and analytical start-ups bringing in venture capital cash either. Over the past few weeks VCs have poured more than $70 million into these companies including Marin Software, a provider of paid search management applications for advertisers and agencies; Brand.net, an online display and video advertising platform; and Apptera, a voice and visual mobile advertising network.

Recent statistics on the growth of Internet and mobile advertising are no doubt fueling the fire. Mobile marketing and advertising combined is expected to grow at 40% CAGR over the next five years. Although total online advertising is expected to reach $25 billion for the U.S. in 2010, estimates show only $3.8 billion will be spent on the U.S. mobile web (up from $2.6 billion in 2009). The growth year over year, as well as the large disparity between mobile spending and traditional online ad spend, provides plenty of hope for the sector that funds will be begin to be funneled more and more into the mobile space. The growth on the hardware end of the sector, with the advent of the iPad and increasingly computer-like smart phones, make this is a pretty wise bet. The adoption rate has been truly rapid, which is surprising even optimistic analyst outlooks from a year or two ago.

The explosive growth of the Internet and mobile advertising and analytics space shows no sign of slowing and we expect growth to continue in the space well into 2011. As the economy slowly continues to climb back in recovery, companies will again begin investing in advertising and these start-ups and ad firms will be well positioned to take advantage of what could be hearty revenue streams.


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.


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.


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.


IBM to Acquire Consul

December 8, 2006
Enables Integrated Security Management, User Activity Monitoring Across Entire IT Infrastructure

IBM has entered into an agreement to acquire Consul risk management, Inc., a privately-held software company headquartered in Delft, Netherlands with a principal office in Herndon, Virginia. Consul will become part of IBM’s Tivoli software unit.  Consul’s security administration capabilities for the mainframe and user activity monitoring, audit and reporting across platforms, complement IBM’s existing portfolio of security management solutions.

Security is a primary concern of IT administrators facing threats from sources outside and within the enterprise and challenged to comply with government and industry regulatory requirements.  As indicated in Updata Capital’s most recent IT Security M&A Update, the need for security compliance is driving acquisitions of pure-play security companies by both strategic and financial buyers.  Record M&A activity is accelerating security’s incorporation into storage, network management and other infrastructure areas with announced deal volume in 2006 year-to-date exceeding $5.7 billion (according to Updata’s deal database), an increase of 30 percent voer 2005 volume.

Updata Capital initiated the transaction, acted as financial advisor and assisted in the negotiations for Consul in its acquisition by IBM.


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