Since mid August, CRN has tracked a heavy burst of mergers and acquisition (M&A) activity in the Australian tech sector. That is a notable surge in a market that had been otherwise quiet on the M&A front for some months, with one or two notable exceptions.
That recent upswing in takeover activity has been driven by a set of seemingly contrarian forces. On the one hand, the hard slog of growing a business in tough market conditions has made some sellers more open to approaches. On the other hand, the emergence of powerful new market opportunities like cloud computing has made early movers more attractive to buyers.
The motives of buyers are mixed. Where international IT vendors have swooped, their goal has generally been to extend their technology stack, whereas many local deals are driven by the need to build market share and staff capability quickly.
Telsyte managing director Foad Fadaghi said: “Markets typically see an increase in M&A activity when owners of businesses think it’s a good time to get out.
“It’s fair to say that many segments in tech are ripe for consolidation. Given the size of the local ICT market, scale is important for profitable expansion and future growth. Australia is often a market of oligopolies and any segment that remains fragmented will no doubt have pressures for consolidation’”
Fadaghi also suggests that the strong equity markets, although recently more volatile, have likely been a trigger for some businesses to look at selling.
That view needs to be tempered, however, by the fact that many of the target companies were private concerns.
As to the motives of participants, Fadaghi says: “For large acquirers, it is often about buying market share when organic growth has either hit a wall; but some acquisitions are more strategic and about positioning for future growth.”
On the sell side, he suggests that for many owners, exiting the ownership of the business they have built does not necessarily equate to exiting the business altogether.
“Finding a private buyer can remove risks with going public, but it’s also very much about the business’ ambitions. They will often assess whether a potential buyer can bring customers, skills or funding to help them grow”
In early August, CRN flagged a possible upswing into M&A-related activity due to the stress many businesses have been under in recent years, and indeed the pace has been hectic since then. (See table, overleaf) In recent months, Telstra and Deloitte have each bought three IT companies, while VTS, Empired, StrataTel and Vita Group have announced acquisitions of other Australian businesses.
In addition to this activity, private equity company Iron Bridge has sought to privatise Bravura Solutions with a $120 million investment, while Dick Smith’s new private equity owners have flagged a possible trade sale or IPO.
You can add US IT vendors Intel and Arbor Networks to the list. Both have scooped up local security outfits for their technology smarts: the chipmaker pouncing on Sensory Networks and the latter buying Sydney-based Packetloop.
Recent activity falls broadly into three categories: companies looking to build technology capabilities, companies looking to extend market share and those businesses looking break into new or adjacent markets.
Intel’s acquisition of Sensory Networks is a pure technology play, for instance, while Deloitte’s purchase of Digicon was driven by market share considerations and capability requirements. Indeed Digicon will become Deloitte’s Brisbane based Digital Lab operation.
Finally, Telstra’s purchase of Fred IT is a strategic investment designed to extend the company’s coverage of the important health IT sector by leveraging Fred IT’s expertise with the pharmacy and GP markets.
More than money
Buyers and sellers who have been through the M&A ringer say it is important to recognise that price is just one element of the deal and that there are many more considerations for companies when assessing takeover targets. Often the judgements run both ways.
One company leader currently active on the acquisition trail told CRN a critical issue for him is the technology the potential target is using and how they have defined their infrastructure.
“It can be extremely costly for us to bring them up to the standards that we require. That can be quite a big negative,” he said.
The composition of contracts was also flagged as an important element in the due diligence. The days when IT departments used to routinely include poison pills in their contracts to buttress themselves against maintenance contract farmers are mostly a thing of the past because the billing models have moved on, but there are still risks.
Still, it is a good idea to pay a lot of attention to the contracts and the promises written into them, industry leaders told CRN.
A third caveat around M&A centres on company culture. Multiple acquirer Ian Poole, now chief executive of UXC Connect, gave some insight into this at last month’s CRN roundtable. ASX-listed UXC has made up to 60 acquisitions, while Poole has personally led around six.
Poole said: “Something overlooked sometimes is the cultural fit – the people. You start looking at things like strategic fit, solution sets, growing geographically and is it fundable. All of these are great from a shareholder perspective, but then you think, “Are the people going to work?
Good time to buy
Often though there are multiple significant considerations at play, said Adam Powick, managing partner at Deloitte Australia. The advisory firm has been especially active in recent weeks buying three companies – Digicon in Brisbane along with NXG and Quattro, both based in Sydney.
Powick said it was a good time to buy. “There hasn’t been a lot of activity in Australia so it’s a good time for early movers.”
But he added that Deloitte’s recent moves also reflected its optimism on the economy and the scope for further growth in the coming years.
In one sense the timing of the three deals within a tight cluster is coincidental, although it reflects the broader strategy.
“Each operates in a specific domain aligned to our strategy, “said Powick. “Digicon allows us to build a capability around the Sitecore [customer engagement] platform. They have a strong reputation in that area. And it also gave us a good digital footprint in Queensland and we had a gap in that market.”
By way of contrast, he described the NXG deal as a broader play across the firm that related to its finance transformation offering. “NXG specialises in this area and especially in SAP, so it also strengthens our underlying capabilities in that area.”
Finally Quattro provides Deloitte with an end-to-end customer offering around channel, customer segmentation and CRM, said Powick, “And in particular around Salesforce.com which is an increasingly important solution in Australia.”
The deal also dovetails neatly with Deloitte’s drive to expand its cloud expertise. “We want to be the leaders in Australia for cloud-based solutions into the enterprise and mid-tier for both public and private organisations.”
Due to its scale, Deloitte has the advantage of being able to apply its own due diligence capabilities to acquisitions and has a team internally which assesses the fit of potential acquisitions. “We look at three things. Firstly strategic fit, how does the target align with the values of our business and the growth agenda of the company? Secondly, market reputation is critical and we assess them on the quality of their relationships.
“Thirdly, leadership and culture are very important. Do they have a strong vision and a desire to grow, is the culture client- and people-focused, and will they work well in a team-based environment as we need them to integrate in our business quickly.”
Perhaps the most core channel tie-up was Empired’s bid for OBS. In September, when the deal went through Empired managing director Russell Baskerville told CRN: “OBS is a great business and we will be actively supporting the current leadership team in continuing to do what they do best.
“The addition of OBS is complemen-tary to our prior acquisition of Conducive, which was an initiative to diversify into application develop-ment and consulting to complement our strong infrastructure managed services business. OBS adds extensive Microsoft development skills and a presence right across the east coast of Australia,” added Baskerville.
Empired was also buying at expanded geographical footprint. “They have some strong
relationships with the Queensland state government and we’ll use their resources to go after some largest managed services contracts.”
Just the beginning?
Upheavals in the local market are unlikely to settle any time soon. Many of the companies that have been writing cheques in recent weeks are still on the hunt.
Meanwhile, Dave Stevens, managing director of Brennan IT, recently told CRN that it was particularly interested in acquiring another managed service provider with a similar focus to its own. While he stipulated that any acquisition target would need to be associated with Brennan’s core business, Stevens suggested the company would also be happy to look off shore for further opportunities.
Neither of the two most carnivorous players in the market – Deloitte and Telstra – look likely to pull back on their expansion any time soon. Indeed when Deloitte revealed its acquisitions of Quattro and NXG, Powick flagged the company hopes to complete another technology acquisition prior to Christmas.
Telstra has a long, sometimes spotty history of hoovering up Australian tech firms, and this looks destined to continue. At its recent shareholder meeting, chairman Catherine Livingstone pointed to more strategic investments akin to its recent buyouts of NSC Group and IPscape.
Adding to this list of ones to watch are Readify, which recently secured a mulitmillion-dollar pot of investment capital to put toward acquisitions, and Stratatel, which indicated its takeover of JCurve Solutions will not be its last.
The bigger picture
There are other, more powerful forces at worth beyond the local machinations. As the Australian mining boom has receded so has the value of the Australian dollar relative to the US. That makes local players more attractive to North American buyers. Indeed many US companies find the multiples they have to pay in their own backyard for technology providers can be prohibitive, while international companies come relatively cheaper.
For instance, a Dellings Advisory review of 650 acquisitions in the security market revealed that US buyers generally paid a 30 percent discount on prices for non-US tech companies.
Also lurking in the background are the bankers who are testing the waters again after something of a market-imposed hiatus on M&A. Private equity, which fell out of favour after the GFC due to its insatiable hunger for debt, is back.
The most obvious play on the horizon is Dick Smith. When all the aspects of the deal are accreted, Anchorage Capital Partners effectively paid $74 million for the company. Anchorage is a turn-around specialist that has no interest in holding onto assets once it has weaved its financial modelling magic. The likely outcome for Dick Smith is a trade sale or IPO.
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