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Les Bons Temps Rouler

October 22

The rising number of US M&A transactions is being driven by computer software and service company sales. Why?

According to Mergerstat, US M&A dealflow for 2004 looks like it will easily beat 2003’s recovery year. That’s already the case with total value and will probably remain true for transaction headcount as well.

More specifically, last year saw about 8,500 transactions: this year has generated 7,500 in its first three quarters. And on value, the first three quarters of 2004 currently exceed by about $6 billion last full year’s total of about $525 million.

Where’s the action happening? In five sectors: Computer Software, Supplies & Services; Leisure & Entertainment; Broadcasting; Communications; and Printing & Publishing. Of these, Computer Software, Supplier & Services (ahem) leads the pack with about 1,200 transactions, or about 15% of the total through September. The average sector transaction was valued at about $23 million.

In addition, various Computer Software, Suppliers & Services subsectors – Prepackaged Software, Information Retrieval Services, Computer Programming, Computer Integrated Systems Design and Computer Related Services – are among the most active selling industries.

It’s interesting to speculate on the reasons for such strong information industry selling activity. We believe three factors are driving the phenomena. First, the appetite for both buying and selling is directly related to revenue trends. If industry sales are down, M&A activity declines. Buyers don’t like purchasing “falling knives”, and sellers hope for better prices. Today, happily, sales are up, or at least stable, for many industry players. The post-2000 deep freeze has thawed, (though the weather is by no means tropical).

Second, the information biz is mature and consolidating. Customers are increasingly narrowing the number of vendors they are willing to entertain, and many software applications categories like CRM, ERP and EAM are overcrowded, especially with VC-funded dotcom-era wannabies. Seeing the opportunity to recover at least some of their investment, many VC’s have concluded that getting out now would be wiser than waiting around for even better times

Last, outsourcing continues to relentlessly pare the ranks of American-based programming and implementation services vendors. The larger of such vendors are increasingly finding themselves in the cross-hairs of cheap overseas competitors: the only place to hide from this sort of commodization is under the skirts of smaller projects or with very strong senior-level customer relationships. Even then, growth can look problematic or even impossible. Or, said another way, selling now looks good.

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