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 July 16, 2013
Promising second half outlook for middle-market IT M&A 
Corporations Poised to Get Back in the Game
By Geoff Rhizor 
Vice President

When technology solutions provider CDW went public on June 27th, we wrote that its valuation of 9x 2012 EBITDA was a 39 percent premium over the median valuation of companies in the IT Supply Chain Services sector overall, which is 6.5x 2012 EBITDA, based on the latest MW Scoreboard.

Geoff Rhizor


As one of the largest leveraged buyouts in the technology space during the go-go days of the mid 2000s, CDW has stood as a cautionary tale of the risks of over leverage. But as

its recent IPO demonstrates, the company is stronger for it and today it is not just the largest but arguably the most efficient company in its space. That's one reason why CDW was able to successfully tap into the public markets, which few non-SaaS IT Services companies have been able to do in recent years.


Even more important, CDW had a strong first couple weeks trading on NASDAQ. Its stock closed on July 15th at $19.56 per share - 15 percent over its IPO price of $17 per share.


This is, of course, good for CDW. But it should also help the valuations of all publicly traded tech solution providers. And that leads to a broader discussion of the outlook for liquidity opportunities for tech companies.


As I wrote way back in the Q1 2012 issue of our Valuation & Deal Insights, the public markets have been difficult for the vast majority of tech companies and that has not changed. In addition, over the past six months, M&A activity has been sluggish. However, we believe that the M&A picture for tech is about to change. Here's why:


1. Economic indicators are up across the board

No one would describe our economic recovery from the recession as robust, but there is now no question that it has taken hold. Key indicators are slowly but steadily improving. For example, the June jobs report beat expectations, with 195,000 new jobs added and the unemployment rate unchanged at 7.6 percent. Interest rates are rising, but are still at historically low levels. Housing starts in May were up 6.78 percent over April and 28.55 percent over a year ago. Consumer spending and personal incomes were up in May as well, 0.3 percent and 0.5 percent respectively. As of July 12th, the S&P 500 was up 17.81 percent year to date.


2. Corporate mindsets turning to growth   

Corporations have spent the past six years focused primarily on surviving through the recession and as a result of cost-cutting have come out the other side leaner and more efficient than ever. While many have not yet adjusted their mindsets toward growth, there are signs that this is changing. Results from the most recent Business Roundtable CEO Economic Outlook Index - an indicator of expectations of economic growth - are promising as it rose to 84.3 in Q2 2013 - up from 81 in the first quarter and 65.5 in Q4 2012. The survey also revealed that about 32 percent of U.S. CEOs expect to increase hiring in the next six months.

M&A Road Sign  

3. SaaS and the cloud continue to dominate      

One technology area that has stayed strong throughout the recession is cloud computing. Companies have been adopting this IT business model to minimize infrastructure investments and facilitate growth. According to E&Y, 18 percent of IT M&A in Q1 2013 had a cloud flavor to it. Big deals such as IBM's acquisition of SoftLayer for a rumored $2 billion and's acquisition of ExactTarget for $2.5 billion continues to define the need for traditional software firms to buy into the cloud and for SaaS leaders to respond.


4. Private equity firms interest in tech remains high    

According to Preqin, private equity fund raising continues at a brisk pace and PE firms have more than$180 billion waiting to be deployed in new M&A deals. This war chest, coupled with historically low interest rates and lighter covenant terms, will push deals in the next 12 months. Furthermore, given uncertainty about the Fed and interest rates rising, PE firms have a strong incentive to move now instead of waiting. Technology firms, especially those with recurring revenue and strong growth stories, are hot properties.


What all this adds up to for middle market IT companies - directly and indirectly - is a climate ripe for M&A. PE firms - which never stopped making deals - have plenty of dry powder.


Corporations have large stores of cash for acquisitions and seem ready to get back into the game. Competition between the two should make things very interesting for IT companies in the second half of 2013.

Stay tuned. 


A graduate of Boston University, Geoff Rhizor has been involved in M&A, public equity, private equity, and convertible debt transactions with clients across BPO, Enterprise Software, IT services, Digital Media, Wireless Technology, and IT Supply Chain.

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With offices in San Francisco and Bangalore, India, martinwolf is a leading middle market M&A Advisory focused on companies with services-based business models. Since 1997, our team has completed more than 115 transactions in six countries. We are a five-year member of the Merrill Lynch PS Referral Network, and were selected as ICICI Bank's (India's leading private bank) exclusive strategic partner for acquiring U.S. IT companies. martinwolf is a member of FINRA and SIPC. For more information, visit


To learn more about martinwolf, contact Matthew Putzulu at


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