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2009: An Erratic but Ultimately Positive Year for M&A in the IT Services Space According to The McFaddin|Metis Group
February 12, 2009, McLean, VA - The McFaddin|Metis Group announced today that in calendar year 2009 it noted 144 transactions in the broader information technology services sector. This represents a decrease of 26% over calendar year 2008 when there were 194 transactions. Interestingly, the year’s quarterly activity was somewhat erratic in as the markets tried to adjust and stabilize based on varying market information and dynamics. The data compiled for this study incorporates announced merger and acquisition activity and trends involving U.S.-based sellers and acquirers who provide IT staffing, consulting, solutions and outsourcing services.
The year started off quite well with 33 transactions in the first quarter. This was a significant improvement over the fourth quarter of 2008 when only 21 transactions were recorded. The usually vibrant second quarter experienced a significant slowdown in 2009 with only 17 transactions as compared to 66 in the second quarter of 2008. However, the usually busy third quarter did not disappoint with total deal activity in 2009 at 51 versus 54 for the third quarter of 2008. Signs that the M&A market had indeed achieved some recovery were evident when the fourth quarter, which is usually a little slower than the middle of the year, closed with 43 deals in 2009, more than double that recorded in the fourth quarter of 2008.
As has been the trend in recent years, a large portion of the transactional activity in 2009 took place around IT services in the government space. During 2009, we recorded 32 transactions in the government IT services space, a little over 22% of total deal flow. This sector of the IT market began its enormous consolidation in 2002 and has been a consistent source of strength in the M&A markets ever since. Of note during the year was the re-entrance into the market of private equity firm, GTCR, with the formation of Six3 Systems incorporating an experienced management team and recording two transactions during the year; Harding Security Associates and BIT Systems.
The digital agency space also recorded significant transactional activity the likes of which had not been recorded since the aftermath of the dot com bubble burst when agencies were fighting for survival. During 2009, a total of 10 transactions were recorded representing almost 7% of total deal flow. The most significant transaction was the sale by Microsoft of Razorfish to Publicis Groupe. Also quite active during the quarter was the interactive agency arm of GSI Commerce, gsi Interactive, with its acquisitions of Silverlign and Pepperjam.
Another trend during 2009 was the continuing consolidation of the Managed Services Provider (MSP) space where there were 9 transactions, or 6.25% of total deal activity. The bulk of the transactions in this area take place in the managed security and/or infrastructure services areas. Most notable was the acquisition of Verisign’s managed security business by Atlanta-based SecureWorks.
An important indicator of a positive outlook in an industry is when private equity firms are willing to put their money to work. During 2009, there was a resurgence of private equity transactional activity in the IT services space with a total of 10 transactions. Of particular note during the year was Platinum Equity Group’s acquisition of Pomeroy IT Solutions in a transaction that supported the management team over the former CEO in taking the company private.
Melanie McFaddin, President of The McFaddin|Metis Group and an active participant in the IT services M&A market for fifteen years commented, “All-in-all, and in spite of a very tenuous economic environment, I was very impressed with the strength of the IT services M&A market in 2009. Having been through the down turn in the early 2000s, I was prepared for something really ugly. This was a much softer landing.” She further stated that “she expects 2010 to be a decent year for M&A in the space. There are many buyers that are interested in furthering their growth prospects through a vibrant M&A program. What remains to be seen is if sellers can come to grips with the current valuation and structural parameters the market has to offer.”
The McFaddin|Metis Group is a 10-year old mergers and acquisitions advisory firm focused exclusively on companies whose value is derived from professional-level human capital. Clients include companies in: management consulting, digital agency, information technology staffing, consulting, and solutions, managed information technology services, information technology and human resources business process outsourcing, professional staffing, and software toolsets that augment/support these businesses.
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Melanie McFaddin
President
The McFaddin|Metis Group LLC
571/282-3617