Software, Internet & IT Infrastructure M&A Report: 2011

In this year of cautious optimism and grinding economic growth, it is safe to say that buying won in the proverbial buy versus build question. In 2010, many companies slashed costs and hoarded cash. However, in Q1 2011, the economy began to grow and growth expectations in the market elevated; as a result, equity investors favored growth companies. Faced with the decision to invest in organic growth (risky corporate finance projects or internal R&D), grow through acquisition, or distribute funds back to investors, CEOs overwhelmingly decided to make small strategic hyper-growth acquisitions of companies they were familiar with. One example was Teradata’s acquisition of Aster Data, in which they were already a strategic investor.

M&A that occurred in 2011 was healthy M&A, meaning that companies were making strategic acquisitions in growth markets as opposed to mergers or consolidation plays in mature markets. Particularly hot areas of investment included cloud, virtualization, and mobile; each of these sectors fetched extremely high valuations, although the next step is to translate hype into customer growth.

Major takeaways from 2011:

• Private equity firms have returned to the market and increased their appetite for acquisitions
• M&A was driven by the need to grow, and valuation and the perception of growth were highly correlated
• Desktop management, asset management, and security M&A were driven by consolidation and performance enhancement
• Vendors acquired solid ‘tuck-in’ technologies that enhanced existing offerings
• Buyers acquired complementary technologies to their existing product line in order to capture additional customer budget
• Enterprise vendors sought to expand into adjacent markets such as marketing automation and HR to capture more budget
• Cloud and virtualization solutions played an increasing role in mainstream IT solutions, and as a result garnered substantial investment

For the most part, the primary driver of M&A was growth. But in order to complete transactions, buyers and sellers must agree on value. In 2011, valuations ended the year where they started, but there was a substantial amount of volatility in the public markets. This volatility did not appear to affect private market transactions as much as it did the IPO market. More importantly, sellers opted to be acquired by buyers that understood their businesses and provided access to customers rather than endure the scrutiny of the equity markets.

There were a substantial number of transactions in the virtualization and cloud sectors. If there was an acquisition theme in 2011, it would have to be the quest to solve the big data paradigm that is confronting medium and large enterprises. Private cloud and virtual storage are the front-running solutions to the big data paradigm and vendors are positioning themselves to offer these wares to their Fortune 500 and Russell 2000 enterprise client bases. Public cloud adoption also gained significant momentum with small-to-medium enterprises and operators, which motivated operators such as Verizon and Time Warner to make significant acquisitions in cloud infrastructure. Many others are sure to follow in 2012.

The full report from Peachtree Capital Advisor can be downloaded here.