A rare consecutive decline
In line with generally unsettled markets the MBTW All-Share index suffered its first quarterly decline since inception in 2011.
In the three months to September, the Megabuyte Taylor Wessing (MBTW) All-Share suffered its first consecutive quarterly decline since the second half of 2011. The index enjoyed an extended rally through 2012 and 2013, but momentum has deteriorated significantly in the current year.
Following a 3% decline in the second quarter, the MBTW All-Share edged a further 2% lower in the three months to September. However, on a relative basis, following its
underperformance in the second quarter, the MBTW All-Share performed slightly ahead of the market (FTSE All-Share), which declined 3% in the period. Moreover, on a 12 month view, whilst returns for the MBTW All-Share have slimmed to 11%, they still sit far ahead of an overall 3% return for the market.
Software was again the stronger of the two sectors, ending the period 2% lower, compared to a 3% decline for the ICT Services sector. Meanwhile, 12 month returns for both sectors remain just about in double-digits, with Software up 12% and ICT Services 10% higher.
Within the Software sector, there were contrasting performances from the two longer term under-performing peer groups, with Security & Infrastructure Software up 10% and Specialist Applications down 13%. The latter was impacted by a surprise first half revenue warning from its largest constituent, AVEVA, whilst Security & Infrastructure Software enjoyed a positive upswing following Micro Focus’s $2.35bn acquisition of Attachmate.
The Consulting & Systems Integration group continues to be the star performer of the ICT Services sector, returning 9% for the quarter and 38% over the last 12 months. Infrastructure Services was the only other ICT Services peer group to deliver a positive return, up 2%, compared to declines of 2% for both Data Centre & Hosting Services and Telecoms & Networks, and a more significant 10% fall for Mobile Wireless & Satellite.
Chart 1: Megabuyte Index Series – Q3 2014
1050
1030
1010
990
970
950
930
910
890
MBTW All-Share Software ICT Services
Source: Megabuyte, Capital IQ
08-Jul-14 28-Jul-14 17-Aug-14 06-Sep-14 26-Sep-14
Technology Barometer n Share prices and valuation | 5
Chart 2: Megabuyte Index Series – since inception
2800
2300
1800
MBTW All-Share Software ICT Services
1300
800
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
Source: Megabuyte, Capital IQ
Valuations fall to lowest level in 12 months
Although the MTBW All-Share is still 11% higher than at the same point last year, valuations have contracted at a much faster rate, with the index’s PE multiple now roughly unchanged from a year ago, at 18.9x. This follows a quarterly decline of 4% and compares to highs of 23x, recorded in January this year. It’s a similar story for the EV/EBITDA multiple attached to the MBTW All-Share, which contracted 5% in the quarter to 10.5x.
|
Multiples track the decline in the MBTW index
The quarterly reduction in the MBTW All-Share PE multiple was driven by a 7% contraction for the ICT Services sector to 18.9x, compared to a more modest 1% decline for the Software sector to 17.9x. As a result, on this valuation metric, the premium paid for ICT Services over Software has reduced significantly from 13% to 5%. Interestingly, on an EV/EBITDA basis, both Software and ICT
Services valuations were down between 4% and 5% in the quarter to 11.1x and 10.5x, maintaining the software sector’s premium.
6 | Share prices and valuation n Technology Barometer
Chart 3: Valuation statistics
28.00
23.00
MBTW All-Share Software ICT Services
18.00
13.00
Source: Megabuyte, Capital IQ
8.00
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
Software PE valuations were enhanced by a 21% jump for the Security & Infrastructure Software peer group, driven by Micro Focus’s acquisition of Attachmate. This was offset by a 7% fall for Specialist Applications to 18.2x, related primarily to
AVEVA’s profit warning. Accounting & Enterprise Software and Media & Telecoms Software also ended the quarter lower, both down 3% to 16.8x and 12.8x respectively, whilst the sector’s most highly valued peer group, Banking & Insurance Software, finished the quarter up 4% to 22.4x.
Turning to the ICT Services Sector, the only peer group to experience an upswing in its PE multiple was Consulting and Systems Integration, ending the period up 6% to 19.2x. In contrast to the Software sector, here, it was the most highly valued, Mobile Wireless & Satellite, group that experienced the great contraction, down 9% to 22.5x. Elsewhere, Data Centre & Hosting Services and Infrastructure Services were both down 2% to 17.8x and 2.4x respectively, whilst Telecoms & Networks slipped 8% to 18.5x.
|
Table 1: Peer Group valuations
Peer Group Weighted average current year valuation
EV/Sales EV/EBITDA PE ratio
|
PE Multiple for consulting and Systems integration
bucks the trend and finishes up 6% to 19.2 x
Trading and confidence
Technology Barometer n Contents | 7
Chart 4: CXO change in confidence in Q3 2014
More confident
No change
Less confident
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Sep-14 Jun-14 Mar-14 Dec-13
Source: Megabuyte
Chart 5: CXO level of confidence over next 12 months
Very positive
Positive
Boardroom confidence remains intact, for now
Despite the subdued share price performances and lower valuation metrics, Boardroom confidence remains very much intact, with 43% of the quarter’s survey respondents noting an increase in confidence levels over the last three months, whilst 51% stated no change, from what we believe to be an overall positive sentiment. It is however worth noting that the proportion of respondents that are less confident than three months ago did increase slightly, from 4% to 5%.
With a significant proportion of CXO’s feeling more confidence than three months ago, we recorded the largest ever percentage of respondents stating that they felt either ‘positive’ or ‘very positive’ for the prospects of their business over the next 12 months, at 92%. There was a greater weighting towards ‘positive’ than ‘very positive’ compared to the prior quarter, but a reduction in the number of ‘cautious’ responses to just 1% further underlines the overall optimistic consensus. The proportion of CXOs sitting on the ‘neutral’ fence also reduced slightly, from 8% to 7%.
Interestingly, whilst the numbers still point towards high levels of Boardroom confidence, the quarter’s qualitative responses provided a more cautious tone, highlighting some deterioration in economic conditions and concerns around current political affairs across the globe. These form some of the most cautious responses we have seen for some time
and, although they are yet to have a significant impact on the consensus result, they do suggest that there is an increased possibility of recording a more cautious outcome in the coming periods.
Neutral Cautious
Very Cautious
|
Business confidence remains strong
|
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Sep-14 Jun-14 Mar-14 Dec-13
Source: Megabuyte
Accounting & Enterprise Software
Within this relatively broad enterprise software group, we have started to see some early signs of consolidation in the SaaS accounting space. Since the start of the year, leading
US accounting software provider Intuit has completed no fewer than seven deals, including those of K.D.K Softwares, PaySuite and itDuzzit in recent months, as it looks to build out its Quickbooks Online offering. Meanwhile, more recently, HgCapital backed e-conomic has acquired Swedish peer SpeedLedger. At the opposite end of the enterprise software market, Oracle founder and CEO for 40 years, Larry Ellison stepped down from his position during the quarter, which we believe removes a significant hurdle to Oracle’s eventual break-up.
Banking & Insurance Software Rumours that Vista Equity Partners was considering an exit from Misys, most likely through an IPO, less than two years after
Security & infrastructure Software
In another busy period for the Security
& Infrastructure peer group, the biggest development was without doubt Micro Focus’s bold strategic move to acquire Attachmate
for an enterprise value of $2.35bn. The deal comes at a tumultuous time in the legacy infrastructure market as leading US technology buyout houses peruse the high earnings visibility and cash generative nature of other legacy infrastructure software players. In the quarter, both Compuware and Tibco have announced that they are to be taken private, by Thoma Bravo and Vista Equity Partners respectively. Also across the pond, it was another consensus- beating quarter for a handful of fast growing
US-based security players including Palo Alto, Qualys, Imperva and FireEye while, closer to home, WANdisco is still waiting for a Big Data lift off.
Telecoms & Networks
Telecoms & Networks remains a hot bed of corporate activity from small and large players alike. Among the big boys there has been continued consolidation in European
mobile (eg Telefonica/KPN in Germany) and fixed line (eg United Internet/Versatel also in Germany), triple play-driven acquisitions of cable companies (eg TDC/Get), whilst several European players jostle for position in Brazil. Smaller company activity in the UK includes an IPO for Gamma, Interoute buying Vtesse and XLN swapping private equity backers, whilst Daisy continues to discuss a take private.
Data Centre & Hosting services
The Data Centre & Hosting peer group continues to be marked by a divergence in enthusiasm between institutional and private investors with the sector under-performing in share price terms over the last year, but with private companies undertaking deals often
at premium valuations (for example Oak Hill/ Pulsant). In share price terms, the two main listed managed hosting players – Rackspace and Iomart – have seen their valuations plummet, not helped by failed M&A: Host Europe and Iomart could not agree a deal whilst Rackspace’s strategic review failed to find a buyer. Underlying trading does, however, remain strong from most players in the peer group.
Mobile Services
Despite the massive size and opportunity of mobile markets, many smaller providers of mobile-related services struggle to find
investing in it, have dominated the fintech
headlines in recent weeks. Elsewhere, M&A and private equity activity continues apace in the insurance software sector. Following the acquisitions of AgencyPort Europe and Total Objects by Xchanging, HgCapital snapped up the another leading software vendor to the Lloyds market, Sequel Business Solutions
and, in the general insurance software market, Montagu Private Equity (re)acquired broker software provider OpenGI from Towergate.
Sub-sector trends
commercial success or face occasional trip- ups from external factors. Companies such as Bango (mobile billing) and Truphone (low cost calling) are still making losses after many years. MoPowered (mobile shopping) had
to raise funds at barely 5% of its IPO price less than a year after IPO, Mobile Streams (content) got badly burnt by Argentinian currency moves, mobile advertising players such as Byyd and Millennial Media have had to adopt new technology models to survive, and even Monitise (mobile money) has been hit by a move to a SaaS model.
|
Specialist Applications
In this group of vertical software applications, we saw provider of CAD/CAM software Vero turn from diner to dinner, following
its acquisition by Sweden-based Hexagon, whilst there has been a notable amount
of corporate activity in the UK Healthcare software market, as it begins to settle under its post NPfIT structure. Such deals include McKesson’s eventual divestment of System C to Symphony Technology Group and Allscripts’ acquisition of Oasis Medical Solutions. Meanwhile, EMIS continues to be active in the market, acquiring Indigo
4 Systems, which provides clinical and administrative messaging solutions.
Media & Telecoms Software
There is a significant variation of market conditions within the Media & Telecoms peer group. At one end of the spectrum structural decline in print publishing is having a material impact on the financial performance of vendors such as Publishing Technology and Miles 33, whereas compliance procedures have created opportunities for the more telecoms focused solution providers. One particular area of note is Payment Card Industry Data Security Standard (PCI DSS) compliance, which has benefited vendors such as Eckoh and Semafone, with the latter recently securing a £4m investment from the Business Growth Fund.
Consulting & Systems Integration
After a period of significant M&A activity earlier in the year, which saw Atos acquire Bull and Steria and Sopra join forces, it has been
a relatively quiet season in this part of the market. However, the silence was shattered more recently by news that HP is to split itself in two, with the $55bn revenue enterprise software and services business split away from the similarly sized printer and PC element. Interestingly, the demerger has prompted speculation that it could be a pre-cursor to further M&A activity in the IT services space
Infrastructure Services
The big news in the UK infrastructure Services market in recent weeks has been the near collapse, and subsequent acquisition by Liberata, of Dunedin-backed reseller Trustmarque. For us, this surprising turn of events calls into question once again the appropriateness of significant leverage in
a reseller business. Away from this rather negative piece of news, this peer group is in good health. Computacenter reported a
strong set of interim results, in the UK at least, and our recent discussions with Logicalis and others suggest that the mid-market Cloud integrator opportunity is growing.
}Private equity drives activity, whilst public markets at rest
Software focused M&A and behind the scenes private equity
There remained a steady level of corporate activity in the third quarter, with a total of 43 deals completed. Notably, interest in the Software sector rebounded, both from a strategic M&A and private equity viewpoint. However, IPO activity dried up in the period, with only a handful of follow-on fundraisings to count.
The September quarter was notable for the rebound in Software- related activity. The most significant deal saw infrastructure software provider Micro Focus purchase US-based Attachmate for $2.35bn. Meanwhile, Sage acquired German payroll solutions and services business Lohn from Exact for €16m and, more recently, bought US-based and SME-focused PAI Group for
$157m. Elsewhere in the enterprise software space, Kofax acquired Softpro, a provider of signature verification, fraud prevention and electronic signature software and services for $34.7m.
In insurance software, Xchanging boosted its software portfolio with the acquisitions of Total Objects and Agencyport’s European operations for £13.0m and £64.1m respectively, while Acturis completed its second deal of the year through the purchase of NAFI GmbH and Innovation Group bolstered its US BPS business with the acquisition of Driven. Other noteworthy software deals include Sweden-based Hexagon’s acquisition of CAD/CAM software provider Vero, while Bridgepoint finally exited Oasis Medical Solutions, to US healthcare software vendor Allscripts.
On the ICT Services front, most deals were completed for sub £20m in value, aside from Murdoch’s media asset shuffle,
which saw BSkyB acquire Sky Italia for $2.45bn and 57% of Sky Deutschland for £2.9bn. Notably, Dunedin-backed Trustmarque complete a quick-fire sale to BPO specialist Liberata following rumours of financing issues at the Microsoft VAR. Meanwhile, Datatec completed two deals in quick succession; first, through its Logicalis subsidiary, Datatec acquired a 51% stake in German mobile applications specialist ituma GmbH for an undisclosed sum; and second, through Westcon, Datatec acquired Colorado-based Cloud distribution platform provider Verecloud for $12m.
OpenGI returns to Montagu
Private equity activity this quarter was confined to the Software sector with the standout deal being Montagu’s (re)purchase of Open International for an estimated £250-300m, having previously sold the business to Towergate in 2007. With close competitor Hellman & Friedman-backed SSP in a process, OpenGI’s change of ownerships could pave way for a merger between the companies. Also in this space, HgCapital backed the MBO of provider of software to the Lloyds of London insurance market Sequel Business Solutions through its Mercury Fund for an estimated
£100m.
Elsewhere, Bridgepoint backed the secondary buyout of Phlexglobal, a provider of compliance-based document management solutions to the life sciences industry. The deal saw Inflexion exit, with the transaction valued at £42m or 10x
Table 2: Selected UK M&A deals
Acquirer |
Target |
Value |
|
Xchanging |
Total Objects |
£13.0m |
|
Xchanging |
Agencyport Europe |
£64.1m |
|
Hexagon |
Vero Software |
£280.0m* |
|
Sage Group |
Exact Lohn |
£12.9m |
|
BskyB |
Sky Italia |
£2450.0m |
|
BskyB |
Sky Deutschland |
£3063.0m (57%) |
|
Kofax |
Softpro |
£18.9m |
|
Datatec |
Verecloud |
£7.3m |
|
NSSL Global |
ESL |
£35.0m |
|
Liberata |
Trustmarque Group |
£18.0m* |
|
Micro Focus International |
The Attachmate Group |
£1447.5m |
|
Sage Group |
PAI Group |
£96.9m |
Source: Megabuyte, Company announcements NB: *Megabuyte Estimate
Technology Barometer n Contents | 11
trailing EBITDA. There were also a couple of growth capital funding rounds in the period for Alfresco (raising $45m) and
Table 3: Recent Private Equity deals
Enterprise
NewVoiceMedia ($50m).
Turning to activity in the ICT Services sector and B2B comms provider Daisy remains in take private talks with CEO Matt Riley and investors Toscafund and Penta Capital, while managed hosting provider Iomart and Cinven-backed Host Europe failed to agree a deal. In early fourth quarter activity, Blackstone’s
Company
Value Investor Deal type
Technology Crossover Ventures, Bessemer
GSO Capital Partners backed the secondary buyout of XLN Telecom from ECI Partners for a press reported £140-150m, or around 8x trailing EBITDA. Blackstone provided mainly debt support in the deal with XLN’s founder Christian Nellmann retaining most, if not all of the equity.
NewVoiceMedia £29.2m
Venture
Partners, Highland Capital Partners, Eden Ventures and Notion Capital
Growth
capital
IPO inactivity
Aside from a £1.4bn placing by BSkyB to part fund the
Sequel Business Solutions
£100.0m* HgCapital MBO
Bridgepoint
acquisitions of Sky Italia and Sky Deutschland, there was a
dearth of public market fund raising last quarter with no IPOs and just £10m in secondary raisings. The £10m in total was
Phlexglobal £42.0m
Development Capital
Montagu
SBO
raised by Software Radio Technology, Outsourcery and Bango
primarily for working capital purposes. Outsourcery raised
£1.5m as part of a £4.5m funding package to get to cash flow
Open International £275.0m*
MBO
Private Equity
Sageview Capital, Accel,
breakeven in 2015, based on strong revenue growth projections.
However, with Outsourcey’s MRR no higher at the end of June than December 2013, it has some way to go to meet market expectations.
Alfresco £27.2m
Mayfield fund and SAP ventures
Growth
capital
Mobile app store provider Bango’s £6m fundraise came as no great surprise given that the company continues to burn
through cash, with the recent half year results showing £2.8m cash spend on operations and capex basically halving the
Source: Megabuyte, Company announcements NB: *Megabuyte Estimate
Table 4: Recent Capital Markets Transactions
company’s cash balances. This is the sixth fund raise since the company’s June 2005 IPO and, at 96p per share, the second lowest price at which Bango has raised money in that time and
less than half the 200p fund raise from February 2013.
Company Mkt cap
@ issue price
Software Radio
Amount raised
Deal type
Follow-on public
UK-listed companies under our coverage have raised around
Technology
£22.9m £1.5m
offering
Follow-on public
£740m (excluding BskyB’s fundraise) through the capital
markets since the start of the year, up just over 3.5x versus the first nine months of 2013, with 60% of funds raised coming through IPOs. Although there were no IPOs in the quarter,
BskyB £13720.7m £1358.4m
Outsourcery
£8.5m £1.5m Group
offering
Follow-on public offering
Gamma Telecom subsequently came to market in early October, with 50% of shares sold to investors for a £162m market capitalisation, or approximately 8.7x 2013 EBITDA.
Follow-on public
Artilium £12.5m £0.5m
offering
Follow-on public
Bango £49.9m £6.0m
offering
Source: Megabuyte, company announcements
12 | About Taylor Wessing n Technology Barometer
About Taylor Wessing
Key Contacts
Russell Holden
Head of Corporate Finance
+44 (0)20 7300 4678
Tim Stocks
Partner, Corporate Finance
+44 (0)20 7300 4737
Mike Turner
Head of International Technology Group
+44 (0)20 7300 4271
Graham Hann Partner, Head of UK Technology Group
+44 (0)20 7300 4839
Robert Fenner
Partner, Private Equity
+44 (0)20 7300 4986
David Mardle
Partner, Venture Capital
+44 (0)1223 446425
At Taylor Wessing we have a long history of acting for technology companies or those involved more generally in the TMT space. A large portion of our work is providing advice to technology suppliers and users. This means we have a greater familiarity with emerging technologies and business practices than would otherwise be the case.
Our in-depth understanding of the legal issues that can arise in connection with the use of technology is based on specialists who have the requisite experience, both legal and practical, needed to analyse that issue, undertake an informed assessment of the risks and deliver a solution.
We undertake the full range of legal services for our clients in the technology sector including M&A, funding arrangements, intellectual property, commercial contracts, employment and disputes.
Equity Capital Markets
Taylor Wessing has one of the largest dedicated capital markets practices in Europe, with genuine cross-border capability and a strong presence in Asia and the Middle East.
The ECM team advises on transactions involving public companies engaged in European and global securities offerings. As well as having experience advising many technology companies, large and small, we act for listed companies, their sponsors,
nominated advisers, brokers and investment banks across all types of European securities offerings.
Our particular expertise in capital markets law and regulation allows us to deal effectively with the increasing disclosure and other ongoing obligations of listed and quoted companies. Our specialist transaction lawyers are highly skilled not only in drafting and negotiating legal documentation, but also in project-managing the transaction process through all stages. This advice includes planning the deal structure and a strategy to complete the transaction, consideration of the tax consequences of the transaction, and how best to mitigate tax.
Private Equity and Venture Capital
Our international private equity practice has really made its mark in the private equity mid-market over the last few years. Our experience in the sector, coupled with our
established venture capital and private wealth offerings, allow us to deliver what we believe to be a unique “private capital” model from fund formation and seed investment, through to growth capital and buy-out transactions.
We are flexible in our approach, which is aimed at developing long-term relationships with
our clients, and use the existing platform and resources of Taylor Wessing to add value to our clients beyond providing legal services.
Our team works with institutions, individuals and management teams in relation to every aspect of the private equity process.
As a leading firm acting on venture capital transactions, Taylor Wessing is involved in matters ranging from early-stage investments, subsequent funding rounds, convertible debt interim fundings, through to trade sales and IPOs.
Besides our in-depth experience of structuring the corporate and tax aspects of venture capital transactions, we bring our
intellectual property expertise to bear as a key component of our advice on investments in all technology-related sectors.
Disclaimer
IS Research Ltd will not accept any liability to any third party who for any reason or by any means obtains access or otherwise relies on this report. IS Research Ltd has itself relied on information provided to it by third parties or which is publicly available in preparing this report. While IS Research Ltd has used reasonable care and skill in preparing this report, IS Research Ltd does not guarantee the completeness or accuracy of the information contained in it and the report solely reflects the opinions of IS Research Ltd.
The information provided by IS Research Ltd should not be regarded as an offer to buy or sell securities and should not be regarded as an offer or solicitation to conduct investment business as defined by The Financial Services and Markets Act 2000 (“the Act”) nor does it constitute a
recommendation. Opinions expressed do not constitute investment advice. Any information on the past performance of an investment is not necessarily a guide to future performance. IS Research Ltd operates outside the scope of any regulated activities defined by the Act. If you require investment advice
we recommend that you contact an independent adviser who is authorised by the Act to conduct such services. IS Research Ltd does not have any direct investments in any companies contained in the report and has compiled this report on an independent basis.