M&A recovery tied to economyRight now there is too much risk per-ceived in major acquisitions. But thatpsychology will change as IT spendingreturns.While fear of making a costly errortends to retard the number of M&Atransactions in a downturn, fear of beingleft behind by the competition tends todominate in an expanding economy.As the risk paradigm shifts, capitalmarkets become more receptive todeals and loosen the flow of funds, saysJohn Niehaus, Managing Director ofDe Bellas & Co., an investment bank.With nearly $40 billion in cash, Mi-crosoft could buy a major IT consultingfirm, a recent Gartner Group reportspeculates. Microsoft plays down suchspeculation. It has historically opted toform low-risk alliances, such as its jointventure with Accenture known asAvanade, than to take a chance withlarge acquisitions.There is also a lot of M&A activityamong smaller firms. More than 1,000small IT consultancies are consolidatedevery year, according to GITCresearch.“There are just too many companiesout there and I think you’re going to seeconsolidation at the high end and thelow end,” says Niehaus. Consultants and analysts tell GITCthat the demand for IT consultingservices will not support all of the con-sultancies, even when the economy re-covers.Pressure on prices and margins,as well as the trend to commoditizeIT services, augurs for a more con-solidated IT consulting industry.Deals are cutWatch Hill Partners has recent-ly completed two acquisitions aspart of its buying spree of small firmsthat can add skills and clients. Watch Hill CEO Brad Waugh saysquality firms can be bought for between0.2x to 0.4x revenue. Several corporatematchmakers say that acquisition priceshave sunk to the 0.4x to 0.6x earnings,less than half the earnings multiples paidbefore the economic downturn.In an all-stock deal valued at roughly0.4x revenue, Waugh bought Gurnetand added 10 consultants with xml andJava skills and experience in SCM. Waugh’s firm also gets office supplyretailer Staples as a prime potentialclient for its CRM strategic solutions.Watch Hill is a Siebel partner, and Sta-ples uses Siebel’s software.For a similar multiple, he acquiredEncore and its project management of-fice, which can complement WatchHill’s CRM strategies services.Watch Hill plans to double in size thisyear, adding an additional $4 million inrevenue, largely through acquisitions.Acquiring to transformFurther up the food chain, IT con-(continued on page 15)REVENUE MULTIPLES SPIKED DURING THE INTERNET GOLD RUSHSource:Management Consulting Mergers & Acquisitions report,Kennedy Information Research Group1998199920001H01“There are just too many companies out there, and I think you’re going to see consolidation at the high end and the low end.”– John Niehaus, Managing Director, De Bellas & Co.
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