There is also a lot of MA activity among smaller firms More than 1000 small IT

There is also a lot of ma activity among smaller

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There is also a lot of M&A activity among smaller firms. More than 1,000 small IT consultancies are consolidated every year, according to GITC research. “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,” says Niehaus. Consultants and analysts tell GITC that the demand for IT consulting services 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 commoditize IT services, augurs for a more con- solidated IT consulting industry. Deals are cut Watch Hill Partners has recent- ly completed two acquisitions as part of its buying spree of small firms that can add skills and clients. Watch Hill CEO Brad Waugh says quality firms can be bought for between 0.2x to 0.4x revenue. Several corporate matchmakers say that acquisition prices have sunk to the 0.4x to 0.6x earnings, less than half the earnings multiples paid before the economic downturn. In an all-stock deal valued at roughly 0.4x revenue, Waugh bought Gurnet and added 10 consultants with xml and Java skills and experience in SCM. Waugh’s firm also gets office supply retailer Staples as a prime potential client for its CRM strategic solutions. Watch Hill is a Siebel partner, and Sta- ples uses Siebel’s software. For a similar multiple, he acquired Encore and its project management of- fice, which can complement Watch Hill’s CRM strategies services. Watch Hill plans to double in size this year, adding an additional $4 million in revenue, largely through acquisitions. Acquiring to transform Further up the food chain, IT con- (continued on page 15) REVENUE MULTIPLES SPIKED DURING THE INTERNET GOLD RUSH Source: Management Consulting Mergers & Acquisitions report, Kennedy Information Research Group 1998 1999 2000 1H01 “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. Revenue multiples of average IT acquisitions 2.5 2.0 1.5 1.0 0.5 0
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I N T E L L I G E N C E B R I E F I N G 15 Global IT Consulting Report, May 2002. ©Copyright Kennedy Information, Inc., 800-531-0007. All Rights Reserved. Reproduction prohibited by law. M&A to drive consolidation among IT firms of all sizes (continued from page 14) sultants are using M&A to better posi- tion themselves for growth. Management Network Group saw revenues fall almost 30% in 2001. To regain critical mass, it bought Cam- bridge Strategic Management and plans to leverage telecommunications strategy and products to the combined 600 current and former clients of the two firms. The acquisition fills the need for a high-end strategy piece, says MNG CEO Richard Nespoke. Cambridge will operate as a subsidiary of MNG. The combined firm now offers data ar- chitecture, process transformation, marketing, and strategy in telecommu- nications.
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