Tag: services

NTT makes $3.2bn IT services play

Brenon Daly

Contact: John Abbott

Japanese telecommunications giant Nippon Telegraph and Telephone (NTT) has made a surprise offer for one of its existing partners, Dimension Data Holdings, an LSE- and Johannesburg Securities Exchange-listed IT services firm with roots in South Africa. This is an unusually large acquisition for a Japanese company, worth 120 pence per share, approximately £2.12bn ($3.2bn) in cash. That’s just over a 15 times EV/EBITDA multiple and 18x the closing share price before the announcement. (NTT has plenty of cash, with about $10bn on hand).

The Dimension Data board has recommended the offer and NTT has assurances from the directors and major shareholders Venfin DD Holdings and Allan Gray covering 52% of Dimension Data’s issued shares. The deal is expected to close by the end of October.

NTT cited the cloud computing opportunity as the main motivation behind the transaction. It brings to NTT specialist managed IT infrastructure and services capabilities that can now be rolled out on a global scale. NTT has its own managed network services, datacenters, system integration and mobile services, but Dimension Data adds to the development, operations and maintenance side of IT infrastructure, including network devices and servers running in customer sites. Geographically, NTT’s main strengths are in Asia, followed by Europe and the US; Dimension Data is strongest in Africa, the Middle East and Australia. NTT rival China Mobile has been making noises recently about investments in South Africa.

Dimension Data was founded in 1983 and listed on the JSE four years later. A series of acquisitions, including that of Plessey South Africa in 1998 and the European networking business of Comparex Holdings in 1999, helped it grow to over $2bn in revenue by 2003. (The deals have continued, with eight listed in The 451 M&A KnowledgeBase since 2004). At the end of fiscal 2009, revenue hit nearly $4bn and net profit was $135m. The company has 11,500 employees and more than 6,000 clients. JPMorgan Cazenove advised on the transaction for Dimension Data and Morgan Stanley for NTT.

Long an LBO target, ACS goes to Xerox

Brenon Daly

Contact: Brenon Daly

Finally, Darwin Deason does his deal. The chairman and overwhelmingly largest shareholder of Affiliated Computer Services (ACS) has had the IT services company he founded in 1988 in play for some time now. The firm was approached by an unnamed private equity (PE) shop some four years ago, but talks were scrapped in January 2006. Then came Cerberus Capital Management, which put forward a $5.9bn bid in March 2007, only to pull it some three months later as the credit markets started tightening. Finally, on Monday, Xerox said it will buy ACS for $6.4bn in cash and stock. (Incidentally, Xerox shares were worth quite a bit less after the announcement, dropping 19% in Monday-afternoon trading.)

It’s noteworthy that a strategic acquirer has replaced PE shops as the buyer of the slow-but-steadily growing services company. We would chalk that up to the recent changes in the credit market. When debt was cheap and plentiful, buyout shops could afford to give up ‘synergies,’ knowing they could make a return because of the low cost of capital. (And the synergies can add up. Xerox expects to save $300-400m in the first three years by cutting duplicate costs and other financial advantages of the combination.) ACS has some $2.3bn in debt, which Fitch gives a ‘speculative’ rating of BB.

Although Deason stepped upstairs at ACS three years ago, he still controls some 44% of the voting stock in the company. (His outsized control in the vendor comes primarily through his ownership of all of the Class B shares of ACS, which carry 10 votes per share.) Looking at the rest of ACS’ board helps to explain at least one other part of the transaction as well, the fact that ACS was advised by Citigroup Global Markets. Longtime Citigroup executive Robert Druskin has served on the ACS board since March 2008. Additionally, Evercore Partners advised the board at ACS. On the other side, JP Morgan Securities and Blackstone Group advised Xerox.

VeriSign’s yo-yo diet

Brenon Daly

We’ve noted several times in the past that former binge eater VeriSign has set itself on a fairly severe corporate diet. (Last November, we outlined VeriSign’s divestiture plan that could trim up to one-third of the company’s revenue.) Having already sold off three businesses so far in 2008, VeriSign is nearing a fourth divestiture, we hear.

At the America’s Growth Capital security conference in early April, we heard hallway chatter that VeriSign was deep into talks with a networking equipment vendor and a services shop about selling its managed security service provider (MSSP) business. Now, a source indicates that VeriSign has a letter of intent signed to shed its MSSP business. The acquirer isn’t immediately known, but we hear it’s a strategic, rather than financial, buyer. Given the recent moves by telcos to buy security service shops – for instance, Verizon Business’ purchase of Cybertrust a year ago and BT Group’s acquisition of Counterpane Internet Security in October 2006 – we could also imagine a phone company adding the MSSP business to its service offering.

Like any divorce, a divestiture tends to take longer and be more expensive than any of the parties imagined at the start. And we can only guess at the discount for VeriSign’s MSSP business. The divestiture would effectively unwind its $140m cash-and-stock acquisition of Guardent in December 2003. Ironically, VeriSign inked the Guardent purchase at a time when it was also dieting, having shed its domain name-registry business and other assets. Is this the corporate equivalent of yo-yo dieting? 

Coming and going at VeriSign

Year Acquisitions Divestitures
YTD 2008 0 3
2007 0 1
2006 8 1
2005 7 1

Source: The 451 M&A KnowledgeBase

Saving on services at HP

Brenon Daly

Like so much at Hewlett-Packard these days, CEO Mark Hurd seems to be succeeding where his predecessor, Carly Fiorina, failed. In this case, Hurd is set to buy outsourcing giant EDS in a $13.9bn deal. While Wall Street roughed up HP a bit, there wasn’t anywhere near the outcry that hit Fiorina when she tried to pull off her multibillion-dollar services deal in late 2000. Following the hammering from investors, Fiorina relented and backed away from her plan to pick up the consulting business at PricewaterhouseCoopers after just two months. (Of course, IBM ended up getting a bargain two years later on the PwC unit, paying $3.5bn for it in 2002. That was just one-fifth the amount HP was set to hand over.)

The goal of the moves by Fiorina and Hurd is the same: build up the services arm of the hardware-oriented company. (With 2007 revenue of $22bn, EDS would more than double the size of HP’s services business.) Hurd has already used that strategy in the company’s software portfolio, shelling out $4.5bn for Mercury Interactive to effectively double the size of that division. Of course, we suspect the support Hurd is enjoying for his planned acquisition has more to do with fiscal reasons than strategic ones. Paying less than 1x sales for EDS is a very ‘un-Fiorina’-like valuation. 

Rival moves in services

Acquirer Target Announced Deal value Target TTM sales
IBM PwC (consulting arm) July 30, 2002 $3.5bn (adjusted to $3.9bn) $4.9bn
HP EDS May 13, 2008 $13.9bn $22bn