Category: IT Outsourcing

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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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.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

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.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

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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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.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

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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