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Page 1 www.martinwolf.com IT INDEX A Proprietary Analysis of Market Value for Key Segments in Information Technology 3Q15 Overview The martinwolf IT Index is a proprietary analysis of selected securities of global IT companies, with separate Indexes for IT Services companies in India and China. The securities are weighted according to the market value of their outstanding shares. Individual indices are composed of companies determined by the martinwolf staff to be representatives of their space, and are evaluated on a regular basis to ensure ongoing accuracy. The martinwolf IT Index is tracked on a 5-year basis and is accompanied by commentary on the latest industry news and trends. (See Page 8 for the formula used to calculate the martinwolf IT Index) martinwolf IT Index Q3 2015 Analysis: Overall Now that we have closed out Q3 and are well on our way to 2016, the trends that we have observed and remarked upon each quarter keep snowballing forward and gaining momentum. Organic growth remains elusive in many industries, further driving the banner year in M&A that has seen both record-breaking megamergers and an abundance of smaller transactions. This trend has been industry-agnostic, affecting segments from consumer goods (Anheuser-Busch InBev and SABMiller for $104 billion), healthcare (Anthem and Cigna for $48 billion and Aetna and Humana for $37 billion), and, of course, technology. As of the beginning of October, in fact, a record 45 $10 billion+ M&A deals were announced for a combined total of $1.15 trillion, as tracked by Dealogic. This figure is up 89 percent from last year and represents the highest 9-month total, ever. And these stats show no sign of slowing before the end of the year. Shortly after the above figures were announced, it was reported that Dell would be acquiring EMC in a deal totaling $67 billion—the largest deal in technology history. As we’ve said earlier this year, this boom in M&A is driven by a combination of factors, including slow overall growth, low interest rates and easy access to capital (as well as the specter of pending expiration dates for both of those trends). The end of our previous Index report concluded with a shakiness in overall markets, driving both the Nasdaq Composite benchmark as Organic growth remains elusive in many industries, further driving the banner year in M&A.
Transcript of IT INDEX - Martin Wolf · (Anthem and Cigna for $48 billion and Aetna and Humana for $37 ... The...
Page 1 www.martinwolf.com
IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
Overview The martinwolf IT Index is a proprietary analysis of selected securities of global IT companies, with separate Indexes for IT Services companies in India and China. The securities are weighted according to the market value of their outstanding shares. Individual indices are composed of companies determined by the martinwolf staff to be representatives of their space, and are evaluated on a regular basis to ensure ongoing accuracy. The martinwolf IT Index is tracked on a 5-year basis and is accompanied by commentary on the latest industry news and trends. (See Page 8 for the formula used to calculate the martinwolf IT Index)
martinwolf IT Index Q3 2015 Analysis: Overall Now that we have closed out Q3 and are well on our way to 2016, the trends that we have observed and remarked upon each quarter keep snowballing forward and gaining momentum.
Organic growth remains elusive in many industries, further driving the banner year in M&A that has seen both record-breaking megamergers and an abundance of smaller transactions. This trend has been industry-agnostic, affecting segments from consumer goods (Anheuser-Busch InBev and SABMiller for $104 billion), healthcare (Anthem and Cigna for $48 billion and Aetna and Humana for $37 billion), and, of course, technology.
As of the beginning of October, in fact, a record 45 $10 billion+ M&A deals were announced for a combined total of $1.15 trillion, as tracked by Dealogic. This figure is up 89 percent from last year and represents the highest 9-month total, ever.
And these stats show no sign of slowing before the end of the year. Shortly after the above figures were announced, it was reported that Dell would be acquiring EMC in a deal totaling $67 billion—the largest deal in technology history.
As we’ve said earlier this year, this boom in M&A is driven by a combination of factors, including slow overall growth, low interest rates and easy access to capital (as well as the specter of pending expiration dates for both of those trends).
The end of our previous Index report concluded with a shakiness in overall markets, driving both the Nasdaq Composite benchmark as
Organic growth remains elusive in many industries, further driving the banner year in M&A.
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IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
well as each of our individualized tailored IT indexes lower. August saw the Nasdaq decline 6.9% — its worst August performance in 14 years and its worst monthly return in three years. But each of our Indexes closed out the last three months above where they started, suggesting that the correction has abided (at least for today).
Looking to the end of the year, all eyes will be on the Federal Reserve as observers await a decision on whether the agency will determine the market healthy enough in December to raise interest rates (having declined to do so at its September meeting).
IT Services and BPO Over the three-month period ending Oct. 30, the IT Services market as tracked by the martinwolf IT Index closed up above 5 percent, outpacing the NASDAQ composite and comfortably regaining the value lost in the downturn this past August. This has been largely thanks to a strong October, which saw each major index report a banner month.
Notable transactions occuring in the IT Services and BPO spaces since our last report emphasized the push for traditional providers to expand both geographically and in regards to capability.
In August, Fidelity National Information Services acquired SunGard in a $9.1 billion transaction that will create a $9.2 billion revenue behemoth with more than 55,000 employees, ending talk of SunGard going public and providing FIS with a stable cash flow of recurring revenue.
September saw Accenture’s acquisition of Atlanta-based cloud-computing consulting firm Cloud Sherpas, providing the $30 billion outsourcing giant a means to service clients throughout their cloud transitions. The transaction was only the latest development on the cloud front for Accenture, whose cloud revenues hit $1 billion in 2013 and which added 1,100 cloud professionals with the acquisition.
October saw the acquisition of Australian IT services provider UXC Ltd by CSC, the third acquisition announced by CSC’s commercial business, which this month is separating from the company’s public sector business. With this transaction, CSC builds its presence in Australia and creates an expanded portfolio of services to offer its customers, particularly in the Microsoft Dynamics space where UXC is a market leader.
Strong performers over the last three months continue to be large staffing companies like Heidrick & Struggles, while hosting providers like Internap and Rackspace continue to experience difficulty and uncertainty thanks to competition from cloud giants.
Notable transactions emphasized the push for traditional services providers to expand both geographically and in regards to capability.
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IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
IT Supply Chain The past few months have been extremely active for the IT Supply Chain, with several key deals illustrating the unprecedented amount of consolidation in the space. Since our last Index report we’ve issued eight spotlights featuring IT solution providers, all of which feature companies looking to inorganic growth as a hedge against declining margins or market saturation.
On the international scene, CDW completed its acquisition of UK-based solution provider Kelway after initially acquiring a 35 percent stake in November 2014. The transaction will help the company maintain growth that leads its peer segment and continue to achieve scale.
But a major trend was the continued investment by private equity companies, which is increasingly common as IPOs are becoming increasingly rare. These past few months saw Sirius announce an acquisition by Kelso, Pomeroy’s acquisition by Tolt Solutions, a portfolio company of Clearlake Capital Group, and AHEAD’s acquisition by Court Square—among several similar transactions.
In partnering with private equity, solution providers are looking both for resources to gain scale through additional M&A and in many cases for the capital to transform their business offerings to higher value solutions. NWN, which announced in October its sale to New State Capital Partners, emphasized in its announcement that it would use the capital to build its cloud initiatives and further its high growth.
It has been a good few months for the IT Supply Chain Index components, with leaders Systemax and Tech Data enjoying significant share price growth. Black Box continued to bring the Index lower, with the company reporting yet another loss for Q2 2016 last week.
Software and SaaS The Software and SaaS indexes continue to be rocked by the cloud transition, as disruptor and disrupted alike look to harness the ongoing market shift.
For many established software providers, this means a concentration of resources on cloud initiatives. In August, Symantec sold its Veritas storage and server management business to the Carlyle Group in an $8 billion transaction. The company announced intentions to use the resources to focus on its computer security software, as the company has been hit hard by currency impacts and a decline in demand for traditional software licenses.
Oracle spent its recent OpenWorld conference trumpeting its efforts in the cloud space, emphasizing to attendees that expected its partners
The past few months have been extremely active for the IT Supply Chain with several key M&A deals.
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IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
to consistently push its cloud services. Larry Ellison’s keynote speech touched on some of the major investment priorities for today’s cloud providers: big data, analytics and cloud.
To combat declining PC sales (and their corresponding declines in operating system revenue), Microsoft is aggressively challenging its partner network with new Surface hardware and emphasizing its own cloud offerings in competition with Amazon’s AWS and Google’s cloud-enabled software. The result? A commercial cloud annualized revenue run rate of more than $8.2 billion—more than 70 percent year over year growth.
As software providers work to incorporate the cloud, SaaS providers—themselves traditionally the disruptors—are looking to avoid being disrupted themselves by newer and more dynamic competitors. At the same time, they remain tempting takeover targets. Just this week, Constant Contact was acquired for $1.1 billion by holding group Endurance International Group Holdings.
India and China: A More Modest Quarter The Indian IT industry continued to grow roughly in line with the US Nasdaq, benefitted by the stimulus impact of continually falling oil prices and the continued business-friendly nature of the Modi government. According to EY Services Ltd, M&A activity involving indian companies saw an 18 percent growth in value at $7.7 billion, an 18% increase over last year. Technology continues to be the dominant sector, as companies pursue Social, Mobile, Analytics and Cloud capabilities. Looking forward, the IMF states that the country remains on track to be the world’s fastest-growing large economy—a status that will be reflected in continued strong M&A performance.
For China, always the most volatile component of our Index, this year has been one of tremendous growth and correspondingly tremendous drops. From September, however, the Chinese IT Index has seen a more modest (relative to past performance) performance, closing the last three months approximately even to where it began the quarter. From an M&A perspective, Chinese acquirers have been extremely busy, with 92 $1 billion+ deals and a total of $486.1 billion in M&A YTD (85 percent of which were domestic transactions).
Going forward, observers are going to be carefully watching the Chinese economy to determine whether it can sustain the growth it’s been historically known for. With the announcement that the national government would be targeting a 6.5 percent growth rate through 2020, it’s obvious that we will not be seeing the double-digit growth that defined the country in the past. But in an economy defined by constant growth, a slowdown will have effects on companies across every industry.
Looking forward, the IMF states India remains on track to be the world’s fastest-growing large economy.
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IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
About the martinwolf IT Index The martinwolf IT Index includes 108 companies that are a composite representative sampling of enterprise values in the following categories: 1. IT Services & Business
Process Outsourcing (BPO) a. 40 companies, including
16 in BPO 2. IT Supply Chain Services
a. 14 companies 3. Software
a. 18 companies 4. SaaS
a. 36 companies Below are category descriptions and representative companies:
1. IT SERVICES & BPO The IT Services category includes companies that provide a range of IT services such as application development, application management, data center operations, testing or quality assurance to organizations on an outsourced basis. Some IT Services companies provide horizontal services to organizations in any industries, while others deliver services by specialized by function or industry. The Business Process Outsourcing (BPO) subcategory includes companies providing both voice (call center) and non-voice based services that are considered "non-core" to an organization’s primary business strategy. IT Services subcategories and representative companies are: • Managed Infrastructure Services: Rackspace Hosting, Inc.,
Digital Realty Trust Inc. • Commercial IT Professional Services: Accenture, Unisys • IT Staff Augmentation: Computer Task
Group Inc., ManpowerGroup Inc. • Governmental IT Professional Services:
MAXIMUS, Inc., ManTech International corporation
• Business Process Outsourcing – Voice: Convergys Corp., Harte-Hanks, Inc.
• Business Process Outsourcing – Non-Voice: Automatic Data Processing, Inc.
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IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
2. IT SUPPLY CHAIN SERVICES The IT Supply Chain Services category includes companies providing one or more services that are directly linked to the flow of products, services, finances and information from a source to a customer. IT Supply Chain Services subcategories and representative companies are: • IT Solution Providers: PC Connection, Systemax Inc. • IT Product Distributors: Arrow Electronics, Ingram Micro 3. SOFTWARE The Software category includes companies involved in the development, marketing, sale and maintenance of computer software using various distribution models. Software subcategories and representative companies are: • Enterprise Applications: Microsoft, SAP • Middleware, Tools & Integration: Software
AG • IT Management Software: Check Point
Software Technologies, Symantec • Business Software: Adobe, Advent Software 4. SAAS The Software as a Service (SaaS) category is broken out for further analysis. Software as a Service includes companies delivering software of all types only through an on-demand distribution model in which software and its associated data are hosted centrally by a third party, typically in the cloud and accessed by customers using a web browser over the Internet.
Representative SaaS companies are:• Salesforce.com • Workday
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A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
martinwolf IT Index (India Edition) The martinwolf IT Index (India Edition) includes 38 IT Services and Business Processing Outsourcing (BPO) companies traded in the U.S. (NYSE and NASDAQ) and Indian (BSE) stock markets that are a composite representative sampling of enterprise values.
Representative companies are:
• Cognizant • HCL Technologies • Infosys • Tata Consultancy Services • Wipro
martinwolf IT Index (China Edition) The martinwolf IT Index (China Edition) includes 23 IT Services and Business Processing Outsourcing (BPO) companies traded in the U.S. (NYSE, NASDAQ, and OTC), London (LSE AIM), Chinese (SZSE, SHSE, SEHK) or Taiwanese (TSEC) stock markets that are a composite representative sampling of enterprise values.
Representative companies are:
• Chinasoft International • Beyondsoft Corporation • Hundsun Technologies, Inc.
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IT INDEX
A Proprietary Analysis of Market Value for Key Segments in Information Technology
3Q15
Description and Formula The martinwolf IT Index is a market-value-weighted index. The representation of each security in the index is proportional to its last sales price times the total number of shares outstanding, relative to the total market value of the respective index.
The formula used to determine the index value is as follows:
Current Market Value Index Level = Adjusted Base Period x Base Value Market Value
Current Market Value After Adjustments x Previous Base Period
Adjusted Period = Current Market Market Value Before Market Value Value Adjustments
Adjustments for securities being added to or deleted from the index, or capitalization changes, are made periodically. Stock splits and stock dividends are likewise adjusted for during the process. In the case of cash dividends, no adjustment is made.
About martinwolf martinwolf is the world’s leading middle market IT M&A advisory. With offices in the San Francisco Bay Area and Bangalore, India, martinwolf is focused on companies in the IT Services, IT Supply Chain, IT-Enabled Business Process Outsourcing and Software as a Service (SaaS) space. Since 1997, our team has completed more than 140 transactions in nineteen countries and sold seven divisions of Fortune 500 companies. Member FINRA, SIPC. For more information, visit http://www.martinwolf.com.
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