The following summarizes its key findings:

Global consulting firms were very active in Q1 2013 and announced multiple M&A transactions.

Highlights of IT Services M&A transactions announced in Q1 2013 include:

• KPMG acquires purchasing and supply chain management consulting firm BrainNet and adds approximately 300 employees at 14 sites in Europe, Asia, the USA and Latin America.
• KPMG acquires the Oracle ERP systems integration practice of The Hackett Group with estimated revenues of approximately $12 million in 2012.
• Quadrant 4 Systems acquires Blazerfish LLC, Teledata Technology Solutions, Inc., and Momentum Mobility representing a combined $25 Million in gross revenue during the past calendar year (2012).
• Teletech Holdings acquires Avaya specialist and communications systems integrator and consulting firm Technology Solutions Group.
• Ernst & Young acquires Germany based J&M Management Consulting AG which has 320 employees across Europe and generated an annual revenues of approximately €50m in 2011.
• Linedata Services SA agreed to acquire banking software development and consulting firm CapitalStream, Inc. from HCL Technologies Ltd. For $45 million.
• Deloitte Consulting acquires talent and HR management consulting firm Bersin & Associates.
• Deloitte Consulting acquires Salesforce.com and Microsoft SharePoint specialist consulting firm Vivens; based in Germany with 50 employees.
• Deloitte Consulting acquires global strategy consulting firm Monitor Group.
• Groupon acquires internet consulting services and software development firm Mashlogic.

"Large global IT consulting firms were very active in Q1 2013," according to Aaron Solganick, CEO and founder of Generation Equity Advisors. "We believe that consolidation will continue for the next 12 to 24 months within the IT Services sector due to an improved U.S. and global economy and increasing demand for IT outsourcing."

You can download the complete report (free) at: www.generationequityadvisors.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

There were just under 600 M&A transactions in the IT Services sector announced for 2011, up from 443 in 2010. Q4 2011 noted 148 transactions announced, slightly down from 161 the previous quarter.

Consulting deal volume jumped 38% in 2011, with median deal size more than doubling to $59.7 million. The median revenue multiple for the period fell, however, weighed down by a number of deals during Q1, including as CSK Corporation's acquisition by Sumitomo (0.3x) and RWD Technologies' acquisition by GP Strategies (0.4x). The subsector's largest transactions included Charterhouse Capital's $950 million investment for 65% of Environmental Resources Management at 2.0x revenue, as well as Genpact's $550 million acquisition of Headstrong for 2.5x revenue.

Systems integration deals rose year-over-year, but median deal size dipped to a lowof $10.2 million. The median revenue multiple stayed flat at 0.8x and the median EBITDA multiple slipped to 7.4x, although there were few data points for comparison. The majority of deals in this subsector are valued well below $100 million, a sign that consolidation of smaller innovators by larger players continues to dominate. The largest systems integration deals of the year included the acquisition of Value Team S.p.A by NTT Data Corporation for $364.5 million, as well as Ness Technologies' acquisition by Citi Venture Capital for $341.8 million. Stefanini IT Group (Brazil) acquired U.S. based Code X, Inc. (CXI) in Q1 2011 for an undisclosed amount. Generation Equity Advisors advised on this transaction.

The number of deals in the offshore outsourcing sector ticked up 37% year-over-year, the median deal size of $93.5 million exploded for the second year in a row, boosted by the $1.2 billion investment in Patni Computer by iGATE. Even excluding the Patni transaction, median deal size grew to $50 million in 2011 versus $20 million in 2010.

Government services is the only sub-sector that reported lower deal volume. Announced deals slipped 28% while median deal size fell 49%. These declines reflect increased scrutiny of spending and overall uncertainty surrounding the federal budget. Multiples remained relatively unchanged, however, and the median revenue multiple ticked slightly higher in 2011 to 1.3x while the median EBITDA multiple of 12.1x in 2011 was boosted by deals including Paradigm's acquisition by CACI International for $61 million and 29.5x EBITDA, Ares Management's acquisition of GTEC for nearly $315 million and 16.4x EBITDA, SRA International's sale to Cerberus Capital for 12.1x, and High Performance Technologies sale to Dynamics Research for 12.0x EBITDA.

IT staffing deal activity decreased slightly in 2011, but median deal size grew more than 93% year-over-year, to $89.0 million. The IT staffing sectors median revenue multiple for 2011 was flat at 0.3x and its median EBITDA multiple was higher at 9.5x. The largest transaction in the subsector was SFN Group's acquisition by Randstad Holdings for $760 million. Other interesting deals in the space included the acquisition of Staffmark by Recruit in October for $295 million; Staffmark was one of the few IT staffing firms to have filed for an IPO (estimated $125 million) earlier in 2011.

2012 M&A Outlook

We expect M&A activity to remain steady for 2012 and possibly uptick further if the lending environment eases globally. While Europe is in economic turmoil, the U.S. is stabilizing. Emerging markets such as Brazil, Argentina and China are all on the upswing and in growth mode. We expect some financial buyers (private equity) to remain on the sidelines while strategic buyers (companies) will acquire to capture growth.

Buyout firms accounted for around 16 percent of company takeovers in 2011.

As for IT Services firms, large acquirers have strong balance sheets and the ability to make both sizable and small, tuck-in acquisitions to complement organic growth. More diversified services firms will continue to support higher public market valuations (e.g. Accenture, CGI, IBM) which should drive aggressive M&A strategies in 2012.

Sellers now are looking for both speed and certainty in a deal, and also pursuing various alternative options and scenarios as they proceed as a way of maximizing the asset's value. With sellers in the driver's seat, buyers must remain poised and ready when deal negotiations continue for a prolonged timeframe. Overall, the M&A markets are on track to stabilize further and increase overall over the next few years.

Epam Systems Inc, an IT services provider with operations in Russia, is aiming to move ahead with its planned U.S. initial public offering in the first quarter of 2011, according to Reuters.

Epam filed with U.S. regulators in June to raise up to $100 million in an initial public offering of its common stock. The company did not reveal how many shares it planned to sell or their expected price, but said at the time it would use the proceeds for acquisitions and general corporate purposes.

Both Glasshouse Technologies and Fusionstorm cancelled their IPO's for 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Q4 2011 - Global M&A Update

According to MergerMarket, global M&A for 2011 totaled $2,178.4 billion, up 2.5% from the same period in 2010 ($2,125.9 billion), making it the busiest year since 2008 (which was at $2,405.8 billion). 12,455 deals were announced in 2011, 1.3% below the number for 2010 (12,296 deals).

Activity did, however, decrease over four successive quarters, with $432 billion-worth of deals announced globally in Q4 2011, down 22.5% from Q3 2011 ($557.5 billion). Fourth quarter activity was 39% lower than in Q4 2010 (US$ 708.1bn), with the lowest quarterly total since Q3 2009 (US$ 325.4bn).

2011 was the busiest year for cross-border M&A since 2008, in spite of a gradual slowdown in M&A activity after the first half of the year. Cross-border deals (by individual countries) announced in 2011 added up to $874.4 billion and regional cross-border deals were up to $593 billion, an increase of 9.8% and 19.6% respectively since 2010, which saw $796.7 billion-worth by country and $495.7 billion-worth by region. 2011 booked cross-border deals between individual countries accounting for 41.5% of global M&A activity, the second highest proportion since 2007 when $1,564.4 billion-worth accounted for 42.8%.

According to The 451 Group, acquirers spent $219 billion by purchasing 3,690 information technology, telecommunications and Internet companies around the world in 2011-a 17% increase in spending and a 13% increase in number of deals year-over-year.

The total dollar value increase was led by multibillion-dollar strategic deals from top-tier technology companies such Hewlett Packard (HP), Google, Microsoft, SAP and Texas Instruments. Mega deals included Microsoft's $8.5 billion purchase of Skype, Google's $12.5 billion successful bid for Motorola Mobility patents, Texas Instrument's $6.5 billion acquisition of National Semiconductor, HP's buyout of Autonomy for $11.7 billion, and SAP spending $3.65 billion to acquire human capital management software vendor SuccessFactors.

It was also noted that the Media, Information, Marketing Services and Technology sectors in the U.S. booked nearly 900 transactions in 2011 totaling $47 billion, a 9% increase over 2010.

Emerging market (BRIC) buyout activity, valued at $32.3 billion, accounted for 11.6% of global buyout activity in 2011, up from 11.5% in 2010, and the highest contribution since 2009 (19.1%). Europe is the region that invested the most in the emerging markets in 2011, accounting for 40.2% of cross-border deal value ($80.4 billion): the UK, France, Germany and the Netherlands accounting for 21.1%, 17.6% and 9.6% (for both Germany and the Netherlands) of European-related inbound deal value respectively.

The global average deal size for Q4 2011 was $291 million, the lowest Q4 average since 2007 (at $277m).

Cash-only was the preferred structure for cross-border deals in Q4 2011, with cash-only deals accounting for approximately 94% of the value of all cross-border deals announced in Q4 2011, compared with 90% in Q3 2011.

In all, technology acquirers increased M&A spending for the second year in a row. Moreover, total deal count hit its highest level since 2006, as M&A activity across sectors and across value continues to rebound from the downturn of the 2008-2010 recession.

Multiples and Deal Premiums

The average premium (one day before) of global M&A deals for publicly listed companies in Q4 2011 increased to 33.5%, driving the annual average up to 28.5%, up from 22.2% in 2010. North American premiums averaged 35.9% in 2011, an increase from 31.6% in 2010. Meanwhile, European premiums for the year averaged 21.9%, the second highest average since 2002, only topped by 2008's average of 22.9%. The Asia-Pacific region saw an average premium of 21 %, again the highest average premium since 2008 (24.1%).

The average EBITDA multiple across global M&A in 2011 was 12.6x, down from 14.9x in 2010 and the lowest average since 2003 (10.6x). The European average EBITDA multiple in 2011 was 12.1x, the second-lowest since 2004, and 11.5x in 2009.

The quarterly average global EBITDA multiple decreased in the last quarter of the year to 12.1x, from the previous quarter's 15.8x, a drop driven by significant decreases in North America and Asia-Pacific, from 16.3x in Q3 to 12.8x in Q4 in North America, and from 20.4x to 10.1x in Asia-Pacific. Europe, however, showed an increase in the average EBITDA multiple on M&A deals in Q4 2011 to 15.3x, up from 14.4x in Q3 2011.

The TMT (Technology, Media & Telecoms) sector recorded the highest average EBITDA multiple - at 15.7x - in 2011, overtaking 2010's leading sector Energy, Mining & Utilities which averaged 19.5x.

Digital media M&A

Recent announced M&A Transactions in the Digital Media sector for Q4 2011 and YTD 2012 include:
 

• RIM acquires NewBay for $100 million at approximately 5.0x LTM Revenues
• Yahoo acquires Interclick for $270 million at 2.0x LTM Revenues
• Rakuten acquires Kobo for $315 million
• Facebook acquires Gowalla (undisclosed)
• Google acquires Apture and Katango (undisclosed)
• Evolve Media acquires RealityTea.com, WebEcoist.com (Jan 2012)

The sectors with the largest disclosed median enterprise value multiples for all of 2011 were Broadcasting with 3.8x revenue and Internet Media at 17.5x EBITDA.

The median revenue multiple rose from 1.5x in 2010 to 1.9x in 2011. The median EBITDA multiple moved slightly from 10.4x in 2010 to 10.6x in 2011.

The sector with the largest increase in volume in 2011 over 2010 was Online Marketing with a 29% increase from 332 transactions in 2010 to 428 transactions in 2011.

2012 M&A Outlook

We expect M&A activity to remain steady for 2012 and possibly uptick further if the lending environment eases globally. While Europe is in economic turmoil, the U.S. is stabilizing. Emerging markets such as Brazil, Argentina and China are all on the upswing and in growth mode. We expect some financial buyers (private equity) to remain on the sidelines while strategic buyers (companies) will acquire to capture growth.

Buyout firms accounted for around 16 percent of company takeovers in 2011.

Volatile equity markets slowed mounting U.S. deal activity in the third and fourth quarters, following growing deal momentum in the first two quarters of 2011. In light of concerns over Europe and a pullback in financing, U.S. merger and acquisition activity in the second half of 2011 was driven by well-prepared dealmakers focused on executing acquisitive growth strategies and availability of businesses with strong fundamentals- a key trend expected to continue into 2012, according to PwC's Year-End U.S. M&A Outlook.

Sellers now are looking for both speed and certainty in a deal, and also pursuing various alternative options and scenarios as they proceed as a way of maximizing the asset's value. With sellers in the driver's seat, buyers must remain poised and ready when deal negotiations continue for a prolonged timeframe. Overall, the M&A markets are on track to stabilize further and increase overall over the next few years.

As for the Facebook IPO, it is planned to go out between April and June 2012 and will raise around $10 billion at a $100 billion valuation, according to Bloomberg news sources. Facebook's revenue more than doubled to $4.27 billion 2011 from $2 billion in 2010, research firm EMarketer Inc. said.

M&A TABLES AVAILABLE IN FULL REPORT

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Generation Equity Advisors, LLCis an independent investment bank and M&A advisory firm focused exclusively on the global Software, IT Services and Digital Media industry sectors. We advise buyers and sellers of companies and efficiently execute transactions to increase shareholder value. Our professionals have advised on $20+ billion in M&A transactions to date and have current relationships globally with technology and media companies as well as leading private equity firms.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

• The increased number of smartphones and tablets is already playing a role in affecting revenue shares earned by traditional media.
• Continued significant newspaper revenue erosion will drive pay walls and other creative approaches for rebuilding revenue base.
• Intense political advertising and uptick in national advertising lifted television and other media revenues in Q4 2010, increasing prospects for the forecast period.
• The interactive/online sector continues to advance and multiply with new formats such as social and mobile.

• We are seeing a significant increase in M&A activity in the global BPO and IT services market.
• M&A grew considerably in 2010, with the total number of deals, aggregate Enterprise Value, and median deal size all up more than 50% from 2009.
• The median revenue multiple for deals in the BPO sector ticked up to 1.6x EV/Rev (Enterprise Value-to-Revenue) and 1.2x EV/Rev for IT services deals, back to levels last seen before the economic crisis and market crash (pre-2008).
• We believe that BPO and IT services M&A activity in 2011 and 2012 could continue its increased activity and rise above the sector’s pre-recession deal flow.
• There is a significant and growing BPO and IT services market in addition to increased M&A activity in Latin America; we are spotting increased investments in Brazil, Argentina and Mexico.
• There were 7 acquisitions of Managed Services companies announced in January 2011

M&A activity in the BPO and IT services sector was strongest in the second and third quarters of 2010 with large deals like Aon’s acquisition of Hewitt Associates ($4.8 billion) and NTT’s acquisition of Dimension Data ($2.9 billion) driving up deal multiples and aggregate volume. Median deal sizes also increased over the course of the year, with the Q4 median at $53 million, more than double the Q1 median of $26 million. Median transaction value to LTM revenue multiples also moved up sharply over the year, from 0.7x in Q1 to 1.2x in Q4 for IT services firms, indicative of a strong market.

We noticed a number of companies that earned multiples much higher, including Diamond Management and Technology Consultants’ acquisition by PricewaterhouseCoopers for 1.7x LTM revenue and 14.5x LTM EBITDA; Stefanini’s acquisition of TechTeam Global for 1.26x LTM revenue (EBITDA was nil); NTT Data’s acquisition of Keane International Inc. for 1.5x LTM revenue (estimate); and iGate’s acquisition of Patni for 2.3x LTM revenue.

Strong M&A Market in the Latin American BPO and IT Services

Latin America has become an increasingly important and dynamic BPO and IT services market. Significant investments are being made, and companies based there are growing across borders into geographies like North America, as Brazil-based Stefanini IT Solutions did with its acquisition of U.S.-based TechTeam Global in late 2010. Latin America is number three overall in jobs outsourced from the U.S., its local economies are growing, and both acquirers and investors are betting on its BPO and IT services opportunity.

Indian outsourcing giant Tata has leveraged its presence in 14 countries in Latin America, with offshore centers in Brazil, Uruguay, Mexico and Chile to serve its clients with local and global IT resources. There were 14 M&A transactions involving Latin American targets in 2010, a substantial increase compared to the three Latin American targets in all of 2009. Many U.S. players, including HP, Accenture and Unisys, are increasing their presence in Brazil in particular, a growing center for BPO and IT services.

Significant M&A transactions in this area for 2010 included Apax Partners’ $950 million investment in Brazil-based TIVIT S.A., a provider of integrated services in IT infrastructure, application systems and business process outsourcing. Capgemini also made a notable entry into the Brazilian market, paying $560 million for a 55% in CPM Braxis S.A., a provider of application services, infrastructure technology services and business process outsourcing.

2011 will continue to see additional M&A activity from Latin American BPO and IT services firms.  Valuations and deal volume will be up to pre-2007 levels. As the BPO and IT services market demands more global capabilities, many firms from Europe, the U.S. and India will expand further into Latin America, both organically and by acquisition.

Large global IT Services Providers will Continue to Consolidate, Build Scale, and Gain Differentiation

Large IT services providers such as CSC and Accenture made multiple acquisitions during 2010, and acquisitions during the fourth quarter alone show these firms are diversifying their portfolios. CSC acquired ImageSolutions, a privately-held, global life sciences leader in regulatory submission management solutions and related implementation and outsourcing services, to bolster its Healthcare practice (largely the former First Consulting Group). It also acquired Vulnerability Research Labs to strengthen its cyber security offerings across an array of industries, including the public sector.

Accenture made 3 acquisitions over the past three months: 1) Beijing-based Genesis Interactive Technology, a mobile outsourced product development offering business which further entrenches Accenture in China where it currently has over 4,000 employees; 2) Knowledge Rules, a Philadelphia-based consulting company that gives Accenture a foothold in implementing and integrating business solutions using Pegasystems’ BPM software; and 3) Ariba’s BPO assets, which will strengthen its sourcing and procurement services offering.

One consistent theme coming out of the most recent global economic downturn is that the largest BPO and IT services firms big keep getting bigger; they have strong balance sheets to continue that trend through 2011 and 2012. We expect to see continued increasing investments and M&A into the BPO and IT services market for the next few years.

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