Over the last two years, one of the most dynamic areas of the IT Professional Services space has been Mobile Solutions Developers. While there are many, many small and mid-sized developers in this area, the fastest growing and most successful firms offer a combination of services that not only involve software development for mobile platforms, but also help clients formulate innovative digital media strategies which are then fully integrated with their client’s existing enterprise systems. These firms refer to themselves variously as: “eCommerce and Digital Marketing companies”; “mobile product development agencies”; and “digital design agencies”. These hybrid companies span several industry categories, each of which has a different median enterprise value to revenue multiple:
|Digital Media and Advertising||3.2X|
|IT Integration and Consulting||1.3X|
A number of these firms are beginning to be acquired, in whole or in part. Accenture has been an active buyer and recently acquired two such firms, Fjordnet and Acquity Group, both in May.
Fjord Networks LTD was, until it was acquired, a private firm headquartered in London. Fjordnet had 2012 Revenue of $32.5 million and 200 employees. While the terms of the transaction were not publicly announced, we understand with some confidence that Fjordnet was sold to Accenture for $74 million, cash & stock. The EV to Revenue multiple was 2.3X
Fjord had been in a severe cash crunch since late 2012. They had to do an additional funding with their VC, Beringea, in the amount of $900,000 ($90K equity and $810K debt) in February of this year. Beringa’s investment in Fjordnet totaled about $7.2 million since late 2008. The combination of Fjord’s high Net Operating Assets (NOA) ratio (due mainly to their inability to collect their receivables in a timely manner), combined with their lack of profitability, made it impossible for them to fund their growth and additional employees out of cash flow. I suspect when Accenture came along with an offer reasonably acceptable to them, Beringea drove the sale.
Acquity Group (acquitygroup.com)
Chicago-based Acquity is (was) a small public company trading on the NYSE MKT. Its 2012 revenue was $141 million with 600 employees. Acquity went public selling ADR’s in April, 2012 and raised about $25 million (net of offering expenses). After a run up and run down, the ADR’s had been trading at around the offering price (under $6.00 per ADR) prior to the Accenture buyout offer of $13.00 per ADR. The offer was all cash and totaled about $316 million (roughly an EV/Revenue of 2.0X and an EV/EBITDA of 10.2X.
Acquity did not have the cash flow problems that Fjordnet experienced due to Acquity’s well managed NOA ratio and the fact that they had plenty of cash remaining from their ADR IPO in 2012.
Both Fjord and Acquity are being integrated into Accenture Interactive, which has about 4,000 people at present. For additional detail on either of these companies and transactions, give us a call at 512-213-2008.
Observation: Generally speaking, IT Professional Services firms tend to sell at median valuation multiples less than digital media firms and software companies. This is largely due to such factors as lower operating margins, less recurring revenue, more difficult scalability etc. Those mobile solutions developers that are more heavily focused on digital strategy and marketing advisory work, along with technical development, and those that develop and sell their own proprietary software products are better able to command premium valuations.