Wipro snags Appirio for SaaS scale

Contact: Scott Denne

Wipro makes the latest and largest bid to bring SaaS expertise to its systems integration business with the $500m acquisition of Appirio. Accenture, CSC and IBM have all inked recent nine-digit deals for similar companies. None of their targets were quite as large as Appirio, which was cresting $200m in annual revenue at the time of its exit.

In terms of valuation, Appirio’s multiple occupies the lower part of the narrow band of valuations on comparable transactions. Bluewolf fetched 2.7x in its sale to IBM last March. Cloud Sherpas got the same from Accenture in September 2015. Fruition Partners came in at 2.4x when it was purchased by CSC in August 2015.

With Appirio, Wipro gets the last independent SaaS vendor with significant scale. Appirio’s size was likely a draw for Wipro, which will need to do more M&A as it stretches for an ambitious revenue target. When Abidali Neemuchwala took the helm in February, the company promised to get its revenue to $15bn by 2020. Wipro finished its most recent fiscal year with $7.7bn, up 9% from the previous year.

It will need about 18% growth per year to hit its target and has already been uncharacteristically aggressive in pursuit of that. In February, the company paid $460m for HealthPlan Services and with Appirio it has now inked two $400m+ deals in a single year. Prior to 2016, Wipro had only spent more than $100m on two transactions in the entire previous decade.

M&A isn’t the only ingredient in its drive to hit $15bn. The company has reorganized about a half dozen themes where it can find growth above and beyond the core IT infrastructure services market. One of those themes is a focus on digital design and customer experience consulting. In that respect, Appirio and Wipro are aligned. Consulting generates just roughly 5% of Wipro’s business – Appirio itself has spent the past year adding digital design capabilities.

William Blair & Company advised Appirio on its sale (as well as Bluewolf and Fruition on their exits).

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HPE unloads services biz as outsourcing consolidation gains momentum

Contact: Scott Denne Katy Ring

Hewlett Packard Enterprise (HPE) is looking to get out in front of a wave of consolidation in the IT outsourcing and services sectors by selling its services business to CSC for $6bn in stock and cash. The deal marks the latest and largest of HPE’s divestitures as the company shifts its focus toward building its software-defined infrastructure capabilities on the back of its legacy enterprise software and hardware group. In divesting its services division, the company risks losing one of its largest sales channels, although not selling the unit presents the same risk as HPE was unlikely to invest heavily in a line of business that’s outside its primary focus just to keep up with market consolidation.

CSC will hand over half of its equity (valued at $4.6bn before the announcement, although CSC stock jumped by one-third afterward) to HPE’s shareholders to acquire the services business. In addition, it will pay $1.5bn in cash to HPE and assume $2.5bn in liabilities, including pension payments and $300m in an outstanding bond taken out by EDS. The deal is structured as a Reverse Morris Trust, where HPE will spin off the target to its shareholders and sell it to CSC in a 50:50 merger, making it a tax-free sale. It values the unit at $8.5bn, or 0.4x trailing revenue – below the 0.6x that HP paid to buy EDS back in 2008.

Along with the cash and stock, CSC has agreed to maintain the level of purchases of HPE gear to service the target’s legacy customers for the next three years. This give HPE a window to maintain a major sales channel while bolstering its appeal to CSC and other major IT services providers, now that it will no longer be a competitor. HPE CEO Meg Whitman will have a seat on CSC’s board and HPE will name half of CSC’s directors.

Although the services unit has shrunk under HPE’s ownership, it had become more profitable in recent quarters. Its top line declined 2% year over year in Q1, but the total value of its contracts and the value of new accounts were both up, suggesting that declines were leveling off. In the overall IT services space, a wave of consolidation will make that increasingly tough to maintain. According to 451 Research’s M&A KnowledgeBase, $27.8bn worth of IT services and outsourcing businesses have been sold this year, already topping last year’s tally and on pace to be the highest total value of such deals since 2007. All of that despite this year being among the lowest in IT services transaction volume.

HPE may have been slow to invest in its services business as the market for traditional IT outsourcing declines and the demand for newer, business application-focused services increases – however, CSC has shown no such hesitation. CSC has inked seven acquisitions in the past 12 months, including consolidation plays such as today’s move and the $720m pickup of Xchanging, as well as deals for new talent and tech, such as its recent acquisitions of SaaS specialists Fruition Partners and Aspediens.

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Accenture tries its hand in Japan with IMJ buy

Contact: Scott Denne

Accenture reaches into Asia with the acquisition of a majority stake in digital agency IMJ, the latest in a series of deals as it builds out a digital marketing and advertising practice to cut away at the market share of the world’s largest ad agency holding companies. The target, which provides campaign strategy, design and analytics services to marketers and has 600 employees, will bring Accenture Interactive into the Japanese market.

The acquirer’s Accenture Interactive digital marketing and e-commerce services arm generates about $2bn in annual revenue and is the fastest-growing unit in its digital practice group, which itself posted 35% growth in the most recent fiscal year. Much of that rise has come via M&A – Accenture has now nabbed nine firms to boost Interactive since 2013, the year it formalized its marketing practice.

It’s not alone. Many other consultants and IT services shops are buying into marketing tech and services at an increasing rate. Alongside today’s announcement from Accenture, software development and design specialist Persistent Systems bought GENWI, a maker of software to push content out to mobile apps. And at the start of the year, IBM snagged an ad agency and two digital marketing firms. Deloitte, Cognizant and Epsilon, among others, have also gotten in on the act.

As we detail in a recent report, the growing amount of data and devices along with an increased desire for integrated customer experiences are giving IT services firms an opening to sell to marketing departments, as the challenges of CMOs begin to resemble those of CIOs. The hurdle for Accenture – and many of its peers – has been the dearth of creative and design talent, which is being mostly resolved through M&A.

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IBM’s Resource-ful push into the CMO office

Contact: Scott Denne

IBM’s acquisitions of Unica and Silverpop basically bookended a series of deals earlier this decade when enterprise software vendors rushed for marketing applications to push to the CMO suite. That’s what makes today’s reach for digital ad agency Resource/Ammirati surprising: Big Blue shows that its strategy for winning the CMO is shifting toward services and away from software.

Resource/Ammirati is among the largest independent ad agencies to mix creative services with digital marketing. It will join IBM Interactive Experience, the digital marketing services unit that Big Blue created in 2014 by blending its existing digital agency with researchers from its customer experience lab. The addition of Resource/Ammirati brings additional digital marketing expertise and, more importantly, a creative ad agency that develops marketing strategies and ad campaigns across online and offline media, having developed TV campaigns for Labatt Breweries and Birchbox, built mobile apps for Sherwin-Williams and designed Procter & Gamble’s e-commerce platform.

In marketing software, IBM has a set of loosely related marketing apps and seems to have rightly recognized that being half-heartedly committed to building a full marketing stack isn’t going to win the day. In IT, where IBM’s strength lies, buyers have a standard set of needs and a standard set of hardware and applications to fill those needs. Marketing is more complex. New categories and channels of customer engagement appear all the time and the best marketers are constantly making adjustments and running tests to optimize performance. Building a software stack to keep up is challenging – services are more flexible.

IBM’s move into digital marketing and agency services lessens the competition with enterprise software firms, though it invites competition from other IT service providers as well as the incumbents in the CMO suite: large agency holding companies. For its part, the latter group has become more active in nabbing IT-related services. In just the past two days, we’ve seen a couple of ad agencies purchase mobile development shops (WPP’s acquisition of ArcTouch and St. Ives’ reach for The App Business). And let’s not forget Publicis Groupe’s $3.7bn pickup of Web development firm Sapient, among other deals with a technology flare.

While IBM has a massive services business beyond marketing, it hasn’t been a careful steward of those assets of late. Last quarter, continuing a trend from 2015, Big Blue’s services revenue declined 11%, a faster rate than its software business.

Jordan Edmiston Group advised Resource/Ammirati on its sale.

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Capgemini’s IGATE is no copy of Xerox

Contact: Scott Denne

Not content to be France’s second-largest outsourcing company, Capgemini answers Atos’ Xerox buy with the $4bn purchase of IGATE Global Solutions. From a strategic perspective, Capgemini’s deal and the recent acquisition of Xerox’s ITO business by local rival Atos are quite similar. But from a valuation perspective, they couldn’t be more different.

Both transactions aim to shore up the North American businesses of the two France-based outsourcing companies. Following today’s deal, North America will account for 30% of Capgemini’s $13.6bn anticipated pro forma revenue this year, while Atos’s acquisition (announced in December) boosts its own revenue in that region to 17%, from 6%, of its total.

The similarities end there. Capgemini’s purchase values IGATE at 3.5x trailing revenue, making it the highest multiple we’ve tracked on a $500m-plus pickup of a North American outsourcer in seven years. Atos, on the other hand, paid 0.7x trailing revenue for an asset with about the same revenue. IGATE posted a percentage point or two of additional revenue growth in each of the past few years.

Profitability is the difference in the two assets. IGATE had a $79m gain on its bottom line last year – right at the midpoint of the previous two years’ profits – and operating margins of 23%. Compare that with Xerox ITO’s 8% on a $112m loss – though it did post $46m and $31m in profits in the two previous years.

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Infosys makes first move into software, automation with Panaya buy

Contact: Scott Denne Katy Ring

Infosys ushers in its new acquisition strategy with the $200m pickup of Panaya. Never a habitual dealmaker – the IT outsourcer has averaged less than one transaction a year, rarely spending more than $50m – its past M&A efforts have focused on IT and BPO vendors. With the purchase of Panaya, Infosys is taking a different track.

Since taking the helm last fall following a series of management departures amid shrinking market share, CEO Vishal Sikka has announced that ‘big data,’ artificial intelligence and, of course, ‘innovation’ would be the hallmarks of Infosys’ growth strategy. The Panaya buy shows that he meant it. Panaya sells software for managing and automating updates to ERP systems. That has clear cost synergies with Infosys’ core business, and also presents opportunities to expand new lines of revenue.

Not only is this Infosys’ first software acquisition, the valuation is well beyond what it’s accustomed to paying. Infosys’ management says the price tag values Panaya at 6x revenue. While they wouldn’t specify if that’s forward or trailing revenue, either of those is well past the 1-2x TTM revenue that Infosys paid in most of its prior deals (entirely services businesses).

We’ll have a more detailed report on this transaction in tomorrow’s 451 Market Insight.

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Atos’s Xerox buy is no Bull

Contact: Scott Denne

France-based outsourcer Atos reaches across the pond with the $1.1bn pickup of Xerox’s IT outsourcing (ITO) business. The purchase price values the target at 0.7x 2014 revenue, which is above Atos’ norm. The outsourcing and managed services provider has been a bargain hunter in its biggest acquisitions. In fact, you have to go all the way back to 2003 to find a deal where it paid 0.5x trailing revenue – everything disclosed since then has been below that.

For its last big buy – France-based hardware maker and outsourcing shop Bull – Atos paid $847m, or an enterprise value of 0.3x revenue. Before that it ponied up $1.1bn for Siemen’s ITO unit, valuing the target at a mere 0.2x revenue (on top of that it took cash from Siemens to cover the cost of lost contracts, delayed projects and layoffs).

All that’s not to say Atos wasn’t shopping carefully with this transaction. For one thing, Xerox’s ITO business posted revenue growth in the high single digits in each of the past three years, unlike those earlier purchases. Also, the multiple it’s paying for Xerox’s ITO unit is just a hair lower than the 0.85x median multiple on similarly sized ITO deals over the past 24 months, according to The 451 M&A KnowledgeBase. Finally and most importantly, Xerox brings Atos into the US market in a big way. Nearly all of Xerox’s ITO customers are in North America, whereas only 7% of Atos’ business comes from that region.

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Amid federal shutdown, CACI spends $820m on defense consulting firm Six3

Contact: Scott Denne

The federal shutdown and looming debt-ceiling battle isn’t slowing down CACI International’s appetite for M&A. The government contractor and frequent acquirer is paying $820m, its largest purchase, for tech-enabled security and signal intelligence services vendor Six3 Systems.

A major selling point for Six3 was its expertise in cybersecurity, which currently accounts for about one-fifth of its $437m trailing sales. Its top-line growth certainly helped as well. The company, which was backed by private equity firm GTCR, experienced a 19% compound annual growth rate over the past five years.

The transaction brings CACI new technology capabilities that significantly expand its addressable market. That, and the fact that Six3 will tack on at least 5% to its earnings next year, made CACI willing to dig deep for this one. The deal value is almost twice the $415m that CACI paid for its second-largest acquisition, the purchase of American Management Systems’ defense group in 2004, and nearly 20x the size of its median acquisition price over the past decade-plus.

Further emphasizing Six3’s value, CACI is paying more than double the valuation that the typical IT services shop receives. The deal values Six3 at 1.9x trailing sales. CACI itself currently sports an enterprise valuation of just under half-times sales. Bank of America Merrill Lynch advised CACI, while Goldman Sachs and J.P. Morgan Securities teamed up on the sell side.

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IBM looks to make more from less

Contact Scott Denne

IBM is selling its customer-care BPO services unit for $505m to SYNNEX in a deal that single-handedly erases revenue contributions brought by companies it has acquired this year. In other words, IBM is selling more revenue than it’s bought this year. (Specifically, the division that Big Blue just divested generated $1.2bn in sales.)

The divestiture, which is becoming increasingly popular throughout the tech industry, comes as IBM chases its stated goal of earning $20 per share by 2015. In addition to share buybacks and focusing on higher-margin businesses, another way it could get there is by shedding less profitable assets. The BPO services assets that SYNNEX is picking up were running on just about a 10% EBITDA margin. For comparison, the companies it has acquired this year were almost certainly promising much higher profitability potential.

That has resulted in a very lopsided deal flow at IBM. Since the start of 2012, Big Blue has sold off eight business units. In the entire decade before, the company did only 16 divestitures.

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Taking it easy

Contact: Ben Kolada

J2 Global has announced the acquisition of Backup-Connect International, another characteristic play of its usual M&A strategy. Although its recent purchases of Ziff Davis and IGN Entertainment seemed to signal that j2 would focus on larger and inherently more difficult acquisitions, we read the company as still being more of an opportunistic acquirer – taking what it can if the taking is easy.

At a high level, the acquisition of Netherlands-based Backup-Connect is yet another geographic play meant to add global depth to j2’s business continuity services. With Backup-Connect, the company has now announced four acquisitions in this sector: two in Ireland, one in the US and now one in the Netherlands.

The fact that this is j2’s first foray into the Netherlands suggests that the country hasn’t historically been a strategic focus, although it does provide a handy base for continental European operations. Also, the company’s main dealmaker didn’t have to travel far to do the deal: j2’s global head of M&A, Jeroen van der Weijden, operates out of Amsterdam.

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