CGI growing globally with acquisition of Logica

Contact: Ben Kolada

Consolidation in the IT services segment took a leap forward today, as Canadian systems integrator CGI Group announced that it would pay £1.7bn (about $2.7bn), or £2bn when including net debt, for British counterpart Logica. We’ve already written about IT services deals happening on a smaller scale in the US, but this transaction takes the cake as being the largest cross-border deal since NTT bought Dimension Data in July 2010 for $3.2bn.

Specific to CGI, this is its largest acquisition on record, and comes almost two years to the day after it announced its previous high-priced transaction, the nearly billion-dollar purchase of systems integrator Stanley Inc. The Stanley buy itself was a geographic play, meant to expand CGI’s footprint in the US. The rationale for today’s reach for Logica is no different.

CGI is buying Logica as a pure geographic move meant to diversify its revenue globally. Currently, CGI’s revenue is split about half and half between the US and Canada, with only 6% coming from Europe. Logica, on the other hand, generates almost no revenue from North American operations. Its revenue mix is heavily slanted toward Western Europe, with its top three markets by country being France, the UK and Sweden. If and when the deal closes, the combined company will have a presence in 43 countries. The transaction will also more than double CGI’s revenue, creating the sixth-largest IT services provider worldwide.

Diversification is so key to CGI’s strategy that it is tapping nearly every possible outlet to pay for its larger rival. CGI will issue 46.7 million subscription receipts (exchangeable into new Class A shares), secure a £1.25bn term loan from CIBC, National Bank of Canada and Toronto-Dominion Bank, and draw down £405m from its existing credit facility.

Although dilutive, CGI’s shareholders so far approve of the acquisition. Shares of the Canadian company, which trade on the NYSE, were up 12% at midday. Although the deal would seem to undervalue Logica by one metric, its shareholders have reason enough to approve of the acquisition. While the transaction values Logica at about half times sales (the two most recent billion-dollar-plus IT services acquisitions, both announced last year, were done for 1x sales), CGI’s offer represents a heady 60% premium to Logica’s closing share price on May 30, and a 50% premium over the average closing share price for the prior month. Bank of America Merrill Lynch advised Logica on the deal.

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All Covered covering the US

Contact: Ben Kolada, Thejeswi Venkatesh

IT services shop All Covered has been on a steady M&A tear over the past year. Since its sale to Japanese consumer electronics giant Konica Minolta, announced in January 2011, All Covered has acquired nine complementary vendors throughout the United States. It’s expected to continue acquiring, but could see increased competition for its desired targets if M&A interest in this sector continues to rise.

All Covered is now the US expansion platform for Konica Minolta’s Business Services division. With funding from Konica Minolta (which has earmarked $500m for its Business Services group), the company has bought several IT services shops primarily for geographic expansion. Its dealmaking has expanded All Covered, which is based in Redwood City, California, into nine different states. So far, it’s taken a buckshot approach, casting a wide range rather than focusing on single market penetration. No two of its acquisitions have been in the same state.

However, its rapid M&A pace may slow if the IT systems integrator and professional services sector continues to attract interested acquirers, and if bidding competition increases as a result. M&A interest in this sector has risen dramatically since the bottom of the recession. According to The 451 M&A KnowledgeBase, deal volume in this sector last year nearly eclipsed the previous record set in 2006. (We’d note that while the majority of acquisitions are of systems integrators and IT professional services shops, purchases of email marketing and website design firms in particular are on the rise.)

Meanwhile, consolidation among IT services firms isn’t the only strategy playing out. Acquirers from all corners of the IT industry, as well as some non-tech shops, have made plays in this sector.

Acquisitions of IT services vendors

Year Deal volume
2011 633
2010 581
2009 478
2008 421
2007 577
2006 652

Source: The 451 M&A KnowledgeBase

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Equinix increasing inorganic growth, nabs ancotel

Contact: Ben Kolada, Thejeswi Venkatesh

In its latest geographic consolidation move, colocation giant Equinix announced on Wednesday the acquisition of Frankfurt-based ancotel. Although previously an atypical acquirer, the ancotel buy is Equinix’s second purchase this month, following the pickup of certain assets from Hong Kong-based Asia Tone for $230m. Equinix recently said its dealmaking isn’t done yet. At the Deutsche Bank Securities Media & Telecommunications Conference in February, the company said it plans to place more emphasis on M&A.

Equinix didn’t disclose the price of the acquisition, but did say the valuation is in line with its projected 2012 adjusted EBITDA trading multiple. With a current enterprise value of $9.7bn, Equinix itself is valued at 11 times this year’s projected adjusted EBITDA. Assuming ancotel’s cost structure is similar to Equinix’s, we’d loosely estimate the deal value at $100-110m. Ancotel generated $21.4m in revenue in 2011, with a three-year CAGR north of 20%. The transaction adds a datacenter with 2,100 meters of capacity, 400 network customers, 200 new networks and 6,000 cross connects. Ancotel also has a presence in both London and Hong Kong.

In a departure from its usual practice of making just one acquisition per year, Equinix recently indicated that it intends to use more M&A to fuel growth. The company already dominates the American colocation market, so future M&A activity will likely continue to be overseas. Equinix has a lofty goal of being in 50 markets in the long term, with immediate priorities being India and China. The company has also expressed interest in growing its presence in South Korea and Australia.

Equinix’s international M&A, past five years

Date announced Target Deal value Target headquarters
May 16, 2012 ancotel Not disclosed Frankfurt
May 1, 2012 Asia Tone (certain assets) $230m Hong Kong
February 15, 2011 ALOG Data Centers* $127m Rio de Janeiro
February 6, 2008 Virtu Secure Webservices $22.9m Enschede, Netherlands
June 28, 2007 IXEurope $555m London
January 10, 2007 VSNL International (Tokyo datacenter) $7.5m Tokyo

Source: The 451 M&A KnowledgeBase *90% stake

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NEC converges on business support systems

Contact: Thejeswi Venkatesh

Close on the heels of its announced restructuring, NEC has inked the biggest acquisition in its history. Taking advantage of a strong yen, the Japanese tech giant said last week that it will acquire Convergys’ information management division for $449m. In some ways, the dramatic overhaul at NEC was overdue. But that does not mean the nearly half-billion-dollar bet is certain to pay off.

The company is rolling the dice on M&A as its core business continues to shrink. In recent years, revenue at NEC has dropped about one-third, sliding from ¥4,652bn($41.4bn) in 2007 to ¥3,100bn($40.1bn) in 2011. When the company announced a drastic restructuring in January, it indicated that it would refocus on the IT services, carrier network and social infrastructure sectors. While the latest acquisition bolsters NEC’s IT services division, it is picking up a business that hasn’t done too well under its previous ownership.

According to public filings, sales at Convergys’ information management business unit slid from $723m in 2007 to $329m in 2011. The decline came even as Convergys spent more than $80m over the past three years trying to resurrect the division. All of this underlines the difficulties that NEC, which has precious little experience with acquisition and integration, faces in getting a return on its purchase of Convergys’ castoff business.

On Assignment pays up to bolster IT staffing practice

Contact: Brian Satterfield

In a move designed to bolster its presence in the IT staffing sector, hybrid staffing services provider On Assignment made the largest-ever acquisition in the sector earlier this week when it purchased Apex Systems for $600m in cash and stock. The transaction was also one of the largest credits ever for Wells Fargo Securities, which advised Apex on the sale. Meanwhile Moelis & Company, which got its second $500m-plus print in as many days, worked the buy side of the deal.

Richmond, Virginia-based Apex was an attractive acquisition target for On Assignment both for its growing revenue as well as its sheer size in taking on the larger players in the sector that also handle both traditional and IT staffing duties. Apex, which posted a record $705m in revenue in 2011, more than doubles On Assignment’s total revenue to $1.3bn. (On its own, On Assignment wasn’t expecting to top $1bn in sales until 2015.) Apex had a compound annual revenue growth rate of 30% over the past 12 years and has recovered well from the recession, nearly doubling its own revenue since 2009.

On Assignment claims that the transaction makes it the second-largest IT staffing firm in the US, helping the company to keep its technology practice competitive with some of its much bigger rivals. One such competitor, Adecco, brought in $2.2bn from its IT division alone in 2011, about eight times more than On Assignment’s IT staffing business generated. Apex’s revenue more than triples On Assignment’s IT revenue and helps narrow what had once been a huge gulf between the two rivals. And the company didn’t blow the bank to get the bulk: On Assignment paid 0.9 times trailing sales for Apex, or roughly the same multiple it shelled out when it made its only other M&A move, 2007’s purchase of Oxford Global Resources.

IT distributors take reverse logistics in-house via M&A

Contact: Brian Satterfield

In order to reduce their reliance on third-party providers of equipment refurbishing, recycling and disposal, some of the world’s largest IT product distributors have been turning to M&A to strengthen their own end-of-lifecycle capabilities.

In the past three years, product distributors have represented the buyers in nearly one-third of the transactions in the IT equipment and disposal sector. In the past few months alone, we’ve seen an uptick in this trend, with five deals since last December in what is usually a rather quiet area of tech M&A. In late February, Arrow Electronics purchased IT disposal and recycling firm Asset Recovery Corp, a little more than one month after acquiring a similar Austin, Texas-based company called TechTurn. In both cases, Arrow noted its need to bolster its capabilities in areas that are complementary to its primary business model.

Avnet, the world’s largest IT products distributor, also got in on the action with two recent lifecycle management-related acquisitions. On the final day of January, Avnet bought Platinum Equity-owned Canvas Systems, which has a strong refurbishing side business in addition to its primary distribution activities. And in mid-December, Avnet reached for ROUND2, a pure-play IT asset disposition company.

Still, not all well-known tech distributors have dipped their toes into M&A in the sector. Ingram Micro and SYNNEX, for example, have both been absent from the activity despite making relatively frequent buys into other sectors. One IT asset recovery company that has attracted some attention from big vendors in the past is Apto Solutions, an 11-year-old firm based in Atlanta.

NTT continues global expansion, bags Netmagic

Contact: Ben Kolada

NTT Communications has made another move in the Indian datacenter services market, this time taking a 74% stake in Netmagic Solutions. Netmagic provides managed hosting, colocation and infrastructure management services, among others, from seven datacenters throughout India. This is the latest in a growing line of transactions NTT has inked that have been meant to expand the company’s global datacenter and cloud services footprint.

The deal is yet another international investment in datacenter and cloud services for NTT. In the press release announcing the transaction, the Japan-based telco noted Netmagic’s footprint in the growing Indian datacenter services market as among the top drivers for the acquisition. Our colleagues at Tier1 Research previously wrote that NTT subsidiary Datacraft has already been working with India-based telecom provider Bharat Sanchar Nigam Limited (BNSL). However, NTT said the deal has strategic benefits beyond India, and that it will accelerate its infrastructure and cloud services throughout greater Asia.

This isn’t the first India-specific or international move NTT has made in the datacenter or cloud sectors. In July 2010, the company announced that it was forking over roughly $3.2bn for Johannesburg-based Dimension Data, which also has a footprint in India. NTT cited the cloud computing opportunity as the main motivation behind that transaction. Almost exactly a year later, Dimension Data, then a subsidiary of NTT, announced that it was acquiring cloud, colocation and managed hosting provider OpSource. Although based in Santa Clara, California, OpSource’s cloud technology and capabilities will be sold throughout Dimension Data’s global footprint.

Are Internet infrastructure exits interconnected?

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

In Network Solutions’ sale, General Atlantic gets a bit of both exits

Contact: Ben Kolada is acquiring Web hosting and domain name registration vendor Network Solutions in a deal valued at $756m, including the assumption of debt. And we expect that Network Solutions’ owner couldn’t be more relieved. With flat revenue and customer attrition in recent years, Network Solutions’ private equity owner, General Atlantic (GA), wasn’t likely to find much interest for the portfolio company on Wall Street.

However, GA structured the transaction in such a way that – at least for now – it is enjoying a good day on the stock market. Terms of the deal call for just over a quarter of Network Solutions’ price to be covered by shares. (That will leave GA and other Network Solutions’ shareholders owning 37% of the combined company.) initially valued that chunk of equity at about $150m. On Thursday afternoon, the value of the 18 million shares heading to GA and other owners had soared closer to $200m. The reason? Wall Street liked the acquisition as well as’s second-quarter financial results. (We’ll have a full report on this transaction in tonight’s Daily 451 and 451 TechDealmaker sendouts.)

China becoming social in public

Contact: Ben Kolada

While talk of social companies hitting the public markets has so far focused on US firms such as Facebook, GroupOn and LinkedIn, the first vendor to do so may actually come from the Far East. Dubbed the ‘Facebook of China,’ Beijing-based Renren filed its prospectus on Friday and will reportedly hit the NYSE in two weeks, trading under the symbol RENN.

Founded in 2002, Renren today offers social and professional networking, online commerce and gaming to an audience of approximately 117 million. According to its prospectus, the company added an average of two million users per month during the first quarter. Sales have grown at a similarly quick pace. Net revenue soared from $13.8m in 2008 to $76.5m in 2010, representing a compound annual growth rate of 136%.

Excluding underwriters’ overallotment options, Renren will offer a total of 53.1 million American Depository Shares (ADS). (Lead underwriters are Morgan Stanley, Deutsche Bank Securities and Credit Suisse.) The company expects to price at $9-11 per ADS, which at the top of that range would be a whopping $584m raised. However, if interest in previous Chinese IPOs is any indicator of what to expect, then Renren’s total amount raised could be significantly higher. Just two weeks ago, Beijing-based security vendor Qihoo 360 Technology made its debut on the NYSE, offering 12 million ADSs (excluding underwriters’ overallotment shares). Shares hit the market at $27 each, nearly twice the expected initial offering price of $14.50, and eventually closed at $34 each. Shares have dipped a bit since then, but Qihoo is still sporting nearly a $2.5bn market cap, which is approximately 43 times its 2010 sales of $57.7m.