How to Move Up the Value Chain
A Perspective for Traditional ITO and Software Companies
Marty Wolf
President
martinwolf | M&A Advisors
Table of Contents
I.
martinwolf Overview
II.
Current Competitive Landscape
III.
Road to Value Creation
a)
IT Services vs. Resellers
b)
Specialty vs. General
c)
MSP & Infrastructure
d)
SaaS Appendix
IV.
Conclusion
V.
Appendix
Strictly Private and Confidential
2
I. martinwolf Overview
Strictly Private and Confidential
3
Firm Overview
Global M&A Advisors
Vertically Focused
▪
Leading middle-market investment bank focused exclusively
on companies with IT services-based business models
▪
San Francisco Bay Area | Bangalore, India
▪
Founded in 1997
▪
Completed more than 115 middle-market IT transactions
▪
Sold six divisions of Fortune 500 companies
▪
Diverse and experienced Principals and Senior Bankers
▪
Extensive cross-border transaction expertise
▪ IT & IT Enabled
Outsourced Services
▪ IT Supply Chain
Services
▪ Business Process
Outsourcing
▪ Software
▪ Software as a
Service (SaaS)
Partners
China:
U.S.:
Strictly Private and Confidential
India:
4
Selected Cross Border Transactions
▪
Successfully closed transactions across Canada, China, France, India, Israel, South Africa, United Kingdom and
United States
Puget
Sound
has acquired a
minority stake in
PS
SG
Systems
Group
has been sold to
has acquired
has acquired
Cross-Border / China
Cross-Border / South Africa
Cross-Border / India
Cross-Border / India
has acquired
has acquired
has acquired
The South West Region of
has acquired
Cross-Border / Canada
Cross-Border / Canada
Cross-Border / UK
Cross-Border / France
5
Strictly Private and Confidential
Selected Cross Border Transactions
has acquired
has acquired
has acquired
has acquired
Cross-Border / India
Cross Border / India
Cross Border / UK
Cross Border / Canada
has acquired
has acquired
Cross-Border / Canada
Cross-Border / India
has been acquired by
Cross Border / India
has been sold to
Cross Border / France
Strictly Private and Confidential
6
MW Scoreboard
Summary
IT & IT-ENABLED OUTSOURCED SERVICES
Managed Services & Infrastructure Services
Healthcare IT
Financial IT Services
Offshore Outsourcing > $500MM
IT Outsourcing
Commercial IT Professional Services
Offshore Outsourcing < $500MM
Governmental IT Professional Services
Chinese Outsourcing
European IT & Business Services
IT Staff Augmentation
▪
Revenue
Growth %
16.4%
7.2
7.6
15.9
5.5
7.0
13.0
-2.1
28.1
-0.5
2.2
GM %
57.5%
51.2
42.1
34.6
39.0
31.8
33.6
20.5
31.8
18.1
21.8
EBITDA %
32.4%
8.5
26.3
20.6
13.3
8.6
13.8
8.5
10.3
9.2
4.0
EV/Revenue
3.66x
2.62
2.41
1.85
1.32
0.63
0.61
0.55
0.52
0.52
0.33
EV/EBITDA
11.6x
11.9
10.0
9.4
8.6
6.6
3.3
6.5
3.5
5.1
7.9
P/E
54.1x
22.0
20.9
16.0
36.4
20.5
8.1
12.6
34.2
16.0
21.9
5 Yr EPS
Growth %
21.6%
15.0
11.8
17.3
14.5
15.4
16.0
9.7
26.5
10.0
14.6
IT SUPPLY CHAIN SERVICES
IT Resellers
IT Products Distributors
IT Retailers
European IT Supply Chain
Asian IT Supply Chain
IT Direct Marketers
5.3%
1.6
-2.2
1.6
10.9
1.9
32.1%
10.9
26.2
13.4
8.6
13.7
7.5%
3.1
3.8
2.5
2.2
2.9
0.58x
0.23
0.21
0.21
0.18
0.13
22.1x
6.0
5.3
5.1
6.4
5.2
13.5x
10.3
2.2
12.0
11.4
13.6
10.0%
10.5
9.0
7.8
16.4
12.0
BUSINESS PROCESS OUTSOURCING
Business Process Outsourcing - Non-voice
Offshore Business Process Outsourcing
European Business Process Outsourcing
Business Process Outsourcing - Voice
4.4%
12.2
2.9
7.4
43.3%
35.6
23.7
31.0
19.3%
15.0
11.8
10.1
1.87x
1.76
0.64
0.55
8.6x
9.2
5.5
5.8
16.4x
15.0
15.3
15.6
10.3%
17.9
10.5
12.3
SOFTWARE
SaaS
Enterprise Applications
Business Software
Middleware, Tools Integration
IT Management Software
23.4%
11.4
5.5
2.8
3.3
70.0%
73.5
73.9
69.3
86.3
3.1%
27.1
20.4
22.9
27.8
3.80x
3.74
3.50
2.86
2.81
16.7x
10.9
14.6
11.8
7.1
41.9x
20.8
30.1
20.0
14.8
25.0%
13.1
16.0
10.0
10.8
The MW Scoreboard® tracks median multiples in every IT Solutions market niche — a critical aspect of
determining value and drawing conclusions from trends.
Strictly Private and Confidential
Source: Capital IQ as of 5/13/2013
7
II. Current Competitive Landscape
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8
MW IT Index ® China and India
40%
30%
20%
10%
0%
-10%
-20%
-30%
India - IT Services
China - IT Services
US - IT Services
▪ The Inaugural MW IT Index for both China and India were released over the past 12 months in
conjunction with Marty Wolf’s speaking engagements in both countries
Strictly Private and Confidential
Source: Capital IQ
9
Top 3 US, India and China IT Services Companies
Revenue ($ in millions)
120,000
103,242
100,000
80,000
60,000
49,098
40,000
28,269
8,617
15,784
20,000
7,377
11,605
6,870
0
IBM
Accenture
CSC
Tata
Revenue
Infosys
Wipro
659
1,151
Neusoft
446
381
Pactera iSoftStone
Average
▪ Chinese outsourcers are significantly smaller than their competitors in US and India
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
10
Top 3 US, India and China IT Services Companies
LTM Revenue Growth
40.00%
34.00%
35.00%
29.57%
28.80%
30.00%
25.00%
20%
20.00%
15.00%
11.73%
10.00%
0.13%
5.00%
3.60%
5.80%
0.60%
0.30%
0.00%
-5.00%
34.50%
-3.50%
-10.00%
IBM
Accenture
CSC
Tata
Infosys
LTM Rev Growth
Wipro
Neusoft
Pactera iSoftStone
Average
▪ Chinese companies have the highest growth rates – thanks to strong domestic growth
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
11
Top 3 US, India and China IT Services Companies
LTM EBITDA Margin
35.00%
26.23%
30.00%
25.00%
20.00%
11.97%
15.00%
28.90%
28.80%
10.00%
15.30%
5.00%
10.60%
21.00%
9.00%
11.60%
9.40%
11.40%
11.00%
0.00%
IBM
Accenture
CSC
Tata
Infosys
LTM EBITDA Margin
Wipro
Neusoft
Pactera iSoftStone
Average
▪ Indian companies make the most money
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
12
Top 3 US, India and China IT Services Companies
EV/Revenue
5
4.5
4
3.5
3.10x
3
2.5
4.40x
2
1.53x
1.5
1
2.80x
2.40x
1.68x
0.5
0.83x
2.10x
1.37x
0.61x
0.50x
0
IBM
Accenture
CSC
Tata
Infosys
EV/REV
Wipro
Neusoft
0.50x
Pactera iSoftStone
Average
▪ Indian companies have the highest multiples
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
13
III. Road to Value Creation
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14
a. IT Services vs. Resellers
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15
MW IT Index ® U.S Edition
140%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
SaaS
IT Services
Software
IT Supply Chain
NASDAQ
▪ IT Services valuations remain strong but trending below SaaS levels throughout the European debt
crisis
▪ Valuations of IT Supply Chain companies are down significantly over the past 24 months
Strictly Private and Confidential
Source: Capital IQ
16
Top 3 US IT Services Companies vs. Top 3 Public US IT Resellers
EV/Revenue
2.50x
2.00x
1.53x
1.50x
1.00x
0.50x
0.13x
0.00x
2.40x
1.68x
0.50x
IBM
Accenture
CSC
EV/REV
0.20x
0.10x
0.10x
PCCC
Insight
PC_mall
Average
▪ Services companies trades at higher multiples than Resellers
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
17
US Large IT Services Companies vs. Top 3 Public US IT Resellers
Dollar Amount of Revenue from Services ($ in millions)
350
100.00%
90.00%
300
Average Dollar Amount: 229.48x
250
70.00%
60.00%
200
150
80.00%
50.00%
324.90
40.00%
242.57
30.00%
100
15.00%
50
120.96
8.50%
4.63%
0
20.00%
10.00%
0.00%
PCCC
Insight
Dollar amount of revenue from services
PC_mall
% of services/rev
▪ Resellers have limited services offerings
PCCC: including accessory/services/other
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
18
Top 3 US IT Services Companies vs. Top 3 Public US IT Resellers
LTM EBITDA Margin
18.00%
16.00%
14.00%
11.97%
12.00%
10.00%
8.00%
6.00%
4.00%
2.80%
2.00%
0.00%
9.00%
15.30%
11.60%
2.90%
3.50%
2.00%
IBM
Accenture
CSC
PCCC
Insight
PC_mall
LTM EBITDA %
Average
▪ Valuation difference contribution - Services companies offer much higher profitability
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
19
b. Specialty vs. General
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China Large IT Services vs. Specialty
EV/Revenue
8.00x
6.33x
7.00x
6.00x
5.00x
4.00x
3.00x
2.00x
0.83x
1.00x
0.00x
1.37x
0.61x
0.50x
7.60x
6.90x
4.50x
Neusoft
Pactera
iSoftStone
Hundsun
Beijing Shiji
Kingsoft
EV/REV
Average
▪ Industry specific solutions have much higher multiples
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
21
US Large IT Services vs. Specialty
EV/Revenue
6.00x
5.00x
4.18x
4.00x
3.00x
2.00x
1.53x
1.00x
0.00x
2.40x
1.68x
0.50x
5.90x
4.40x
3.40x
3.00x
IBM
Accenture
CSC
Cerner
Alliance Data
Fiserv
MedAssets
EV/REV
Average
▪ Companies with vertical specific solutions command higher valuation
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
22
c. MSP & Infrastructure Services
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Top 3 MSP & Infrastructure Services in US
EV/Revenue & Recurring Revenue Mix
9.00x
100.00%
8.00x
98.00%
7.00x
96.00%
95.00%
6.00x
5.00x
4.00x
94.00%
90.00%
7.70x
90.00%
7.30x
92.00%
90.00%
3.00x
5.10x
2.00x
88.00%
1.00x
86.00%
0.00x
84.00%
Telecity Group plc
Equinix, Inc.
EV/REV
Rackspace Hosting, Inc.
Recurring Revenue Mix
▪ Managed Services Providers(MSP) & Infrastructure companies with large predictable recurring revenue streams
command higher multiples
Rackspace: recognizes installation fee as part of monthly recurring
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
24
Top 3 MSP & Infrastructure Services in US
LTM Revenue Growth & LTM EBITDA Margin
50.00%
45.80%
42.90%
45.00%
40.00%
32.30%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
18.00%
19.50%
27.70%
Telecity Group plc
Equinix, Inc.
Rackspace Hosting, Inc.
LTM Rev Growth Margin
LTM EBITDA Margin
▪ Managed Services Providers(MSP) & Infrastructure companies’ recurring revenue streams provide for
predictable revenue growth and healthy EBITDA margin
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
25
d. SaaS
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26
SaaS Industry Landscape
Fragmented young landscape; leaders emerging and consolidating
CRM
Marketing Demand
Generation
Human Resources
Finance / Accounting
Content
Management
Enterprise Social
Media
Marketing Analytics
Retail / e-Commerce
Collaboration
Business
Intelligence
Strictly Private and Confidential
Vertical Specific
27
MW SaaS Index ®
140.00%
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
-20.00%
-40.00%
-60.00%
-80.00%
SaaS
NASDAQ
▪ SaaS Index continues to outperform NASDAQ
▪ Break-out in 2010, more volatile
Strictly Private and Confidential
Source: Capital IQ
28
SaaS in the U.S. – Leaders Among Leaders
Valuation Gap Widens Between ‘SaaSiest’ and ‘SaaSy’ Companies
May 2013
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29
SaaS in the U.S.
30 Percent of the 20 SaaS Index Companies Were Acquired in 2012
Transaction Comparables – Software acquiring
SaaS ($ in millions)
Transaction
Announce Date Acquirer
Value
Multiple EV/REV
12/03/2012
SAP
$3764.4
12.00x
10/24/2011
Oracle
$1762.9
7.00x
02/08/2012
Oracle
$1921.4
5.72x
12/08/2011
IBM
$486.4
4.80x
01/16/2012
Blackbaud $326.3
3.42x
08/27/2012
IBM
$1396.8
4.1x
Mean
Median
6.94x
6.36x
As of 02/2012
▪ The valuation gap between the “SaaSy” and “SaaSiest” companies are significant
▪ More acquisitions in SaaS space as the leaders in the space continue to outpace others in revenue growth
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
30
Top 5 SaaS in US
LTM Revenue Growth
40.00%
35.00%
Average: 27.02%
30.00%
25.00%
20.00%
34.60%
31.30%
15.00%
22.30%
10.00%
24.40%
22.50%
5.00%
0.00%
salesforce
Concur
Ultimate Software
RealPage
NetSuite
▪ Revenue Growth rates are very high
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
31
Top 5 SaaS in US
EV/ LTM Revenue
20.00x
18.00x
16.00x
14.00x
12.00x
Average: 9.95x
10.00x
19.30x
8.00x
6.00x
4.00x
8.43x
9.04x
8.54x
4.44x
2.00x
0.00x
salesforce
Concur
Ultimate Software
RealPage
NetSuite
▪ SaaS companies trade at incredibly high revenue multiples
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
32
Top 5 SaaS in US
SaaS Revenue Percentage
100.00%
95.00%
90.00%
Average: 88.60%
85.00%
93.81%
80.00%
95.10%
92.00%
75.00%
81.89%
80.20%
70.00%
salesforce
Concur
Ultimate Software
RealPage
NetSuite
▪ True usage based software revenue model counts mass majority of those SaaS companies’ revenue
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
33
Top 5 SaaS in US
LTM EBITDA Margin
20.00%
Average: 6.8%
15.00%
10.00%
16.00%
13.80%
5.00%
0.00%
7.70%
2.80%
-6.30%
-5.00%
-10.00%
salesforce
Concur
Ultimate Software
RealPage
NetSuite
▪ Profitability apparently is not a factor that affects SaaS companies’ valuations
Strictly Private and Confidential
Source: Capital IQ as of 5/7/2013
34
IV. Conclusion
Strictly Private and Confidential
35
Take Away
▪
Where we are
- Compared with industry leaders in the US and India, Chinese IT giants still have
a long way to go
▪
Where to go - value creation
- Providing IT Services is more valuable than reselling other products
- Creating vertical specific solutions is more valuable than general services
- Recurring revenue is most desirable
- Creating IP, especially SaaS based IP, creates ultimate value in today’s IT
environment
▪
How to get there - move up the value chain
- Organic growth greater than markets served
- Business model transformation
- Acquisitions – domestic and cross-border
Strictly Private and Confidential
36
V. Appendix
Strictly Private and Confidential
37
China Practice Group
About martinwolf China Practice Group
▪
▪
▪
▪
Actively engaged in China in both buy-side and sell-side cross-border transactions in the IT space
Hao He, who joined the firm from HSBC, is the managing director of the China Practice
MW IT Index® (China Edition) released quarterly to our database of active readers
Frequent media commentators, with a regular industry analysis blog on Caixin Magazine website
Partnership with China International Capital Corporation Limited (CICC)
▪
▪
▪
Established in 1995 as China’s first joint venture investment bank
$256.7 billion raised in equity, $319 billion raised in debt and $226.7 billion closed in M&A
Ranked No. 1 for 13 consecutive years in M&A deal volume in China since 1997
China International Software and Information Service Fair
▪
▪
President and Founder Martin Wolf was the keynote speaker at the China
International Software and Information Service Fair in June 2012
In June 2013, Martin will be the keynote speaker for two panels - China
International Software Innovation and Venture Capital Forum and Policy
and Trend Release Conference
Strictly Private and Confidential
38
M&A Forum – Cloud Computing
Strictly Private and Confidential
39
Selected Past Transactions in Cloud Computing
has acquired
has acquired
Project Atlas
Project F35
3Q 2013
3Q 2013
December 2011
November 2012
has been acquired by
has been acquired by
has been acquired by
has been acquired by
August 2010
September 2011
March 2011
March 2011
Strictly Private and Confidential
40
Recognized as Thought Leaders by Top Publications
A sampling of recent articles and press releases that our team has written and influenced:
Marty Wolf – Monthly Columnist | CRN
Investment in Dell Could Signal Microsoft Migration From PC Business |
Yahoo! Finance
Warburg Pincus in Talks with PE Funds to Sell Stake in WNS Global |
The Economic Times
Facebook or Yahoo: Which One Gets Back to $38 First | Business Insider
As part of an on-air CNBC
panel discussion hosted
Betting on Facebook’s Future | The Wall Street Journal
by Maria Bartiromo and
Bill Griffeth, panel
SaaS Deals Soar But Don’t Worry – It’s Not 1999 | The Middle Market
participant Marty Wolf
commented on QE 3 and
SaaS Companies Remain Takeover Targets | Forbes
the future facing
Facebook
Oracle to Buy Taleo for $1.9 Billion | The Wall Street Journal
RIM's New CEO Unlikely to Halt Market Slide | Bloomberg News
SaaS Valuations Come Back to Earth – Sorta | CNN
Strictly Private and Confidential
41
Rolta India Ltd. (BSE:500366) acquired AdvizeX Technologies
Cross-Border / Buy Side Engagement
Client Description & Strategic Objectives
Process Analysis
▪ Rolta, an India-based public IT services provider
headquartered in Mumbai, was looking to acquire a
systems integrator in North America
▪ Objectives:
▪
Expand existing IT services capabilities
▪
Strengthen footprint in North America
▪
Leverage extensive client base to cross-sell
services
▪
Utilize large number of lower-cost IT engineers in
India HQ
▪
Increase revenue and profit margin of overall
international IT services unit
84
44
9
Identified
Universe
Profiled
NDA
3
1
Meetings
Closed
Acquisition Roadmap
Results
▪ The target was originally under exclusivity with another
buyer
▪ martinwolf convinced the target company that our client
was the best owner of their asset which subsequently let
them to exit exclusivity
▪ Entered into exclusivity with our client and successfully
closed the transaction in a timely fashion
▪ Our client acquired a high quality asset that fulfilled their
acquisition mandate
▪ Ran a diligent process and played a key role in
streamlining the process
Strictly Private and Confidential
42
Rolta India Ltd. (BSE:500366): Acquisition Timeline
Cross-Border / Buy Side Engagement
» July 2005:
martinwolf first approached
Rolta for a channel consulting
project
» January 2008:
Rolta completed a platform
acquisition with TUSC, a
$45M U.S.-based Oracle ERP
services consultancy
20
INR (Billions)
» August 2007:
Rolta engaged martinwolf for
strategic buy side acquisition
» July 2008:
Rolta acquired PIOCON to
strengthen their niche Oil and
Gas offering and to add
OBIEE capabilities
18
16
14
12
10
» December 2008:
Rolta added Hyperion BI
services through acquisition
of Whitman Hart Consulting
8
» November 2012:
Rolta acquired AdvizeX
Technologies for $32M as a
part of their strategy to
expand cloud services
4
» Today:
Rolta/TUSC is a meaningful
Oracle full services provider
worldwide. By successfully
leveraging a dual shore
delivery model, it has reached
$300M+ USD annual revenue
Reference letters available upon request
6
2
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Revenue
Strictly Private and Confidential
43
Rolta India Ltd. (BSE:500366) acquired AdvizeX Technologies
Cross-Border / Buy Side Engagement
Client Feedback – Acquirer
“In the end we have been very pleased with the quality of the TUSC
Benedict Eazzetta
operation and fully recognized that we may never have found them
President International Operations, as a target, or progressed as rapidly as we did, had it not been for
Rolta India
the MWS efforts.”
Kamal K. Singh,
Founder, Chairman & CEO,
Rolta India
“We have now worked together on 4 deals and all of them have
been successful for us, for which we sincerely appreciate your
support and efforts.”
Client Feedback – Seller
Fred Traversi,
Founder& CEO,
AdvizeX Technologies
Reference letters available upon request
“Your visit to Boston changed my thinking as to the potential
synergies in working with Rolta and the opportunity to redefine the
IT channel.”
Strictly Private and Confidential
44