By Ken Bresnen
Catalyst Corporate Development
Information and communications technology (ICT) companies in the United States and Europe are rapidly increasing their presence in both markets through mergers and acquisitions.

The Market for ICT Companies in 2004
In 2004, overall acquisition activity in the ICT sector worldwide was up 44% from 2003. Dollar volume of transactions increased at a slightly slower rate of around 25%, as more middle-market and emerging-growth companies were sold or merged. The median value of transactions during this period was approximately $30 million.

All sectors of the ICT industry were active, with the largest number of transactions, both in the U.S. and Europe, in the systems software, services, networking and wireless sectors.

North American companies, who accounted for three quarters of all purchases, were the most active buyers, followed by European companies (20%) and ASPAC and others (5%).

Indicators of a strengthening market were apparent in rising valuations. Transaction value to revenue ratios for software companies acquired rose from an overall figure of 1.6x in 2003 to 1.9x in 2004. IT services rose from 0.9x to 1.0x. There continued to be a tremendous amount of variation in valuation among companies in these categories.

Cross Border Acquisitions
During 2004, almost one third of all ICT company acquisitions worldwide were cross-border transactions, with about half of these being between Europe and the United States.

U.S. companies were the buyer of over 40% of the European tech companies sold during this period, while European firms were the buyers for only 6% of U.S. firms. This imbalance is beginning to change as European firms are increasingly interested in establishing or adding to operations and market presence in the U.S. The relatively low value of the dollar against European currencies make U.S. companies attractive at this time, even at rising valuations.

Of the ICT companies bought by European firms in 2004, 21% were located in North America. During this same period, only about 15% of acquisitions by North American firms were located in Europe. However, because North American buyers acquired roughly four times as many ICT companies worldwide as the Europeans, this 15% represented almost 2.5x as many firms as were bought by Europeans in North America.

What is driving ICT firms to buy companies in other markets?
Today, even small to medium-sized ICT firms find they must be able to serve their customers and meet their competitors in most major world markets. This is especially true for the U.S. and European markets which together account for over 60% of world spending on ICT products and services. The markets for ICT products and services in the U.S and the EU are almost the same size and many customers or potential customers have operations in both areas.

Often ICT firms initially serve foreign markets through distribution or partners. However, many firms quickly recognize a need for their own local presence. Because it can be expensive and time-consuming to recruit and build a new team, establish new operations from scratch and develop appropriate new products, many firms look for companies to acquire.

Reasons to Acquire Internationally
There can be a wide variety of reasons for acquiring compatible companies in international target markets, including:

• Serving existing customers who have international operations
• Expanding served geographical markets and world market share
• Adding an experienced team with local market knowledge and language skills
• Acquiring new customers and distribution channels
• Acquiring new products and technology applicable to all served markets
• Accessing new industry sectors and capital markets
• Vertical integration

A good example of one IT product firm which is increasing its value by systematically searching for and closing strategic international acquisitions is US-based SSA Global Technologies, Inc.. Catalyst’s client, SSA GT, a leading provider of enterprise solutions, acquired Netherlands-based Baan Corporation, from Invensys plc. for $135 million. SSA GT then went on to acquire EXE Technologies, Arzoon and Marcam. SSA picked up 6,500 customers to bring its total customer roster to 16,500. It also expanded its product offerings, increased geographical coverage and accessed new industry segments. Through these acquisitions and internal growth, SSA GT grew its total annual revenues to $638 million in 2004 from $296 million in FY 2003.
Professional services businesses and businesses with a strong service component are also aggressively seeking to expand their "local" resources through cross-border acquisitions.
Ericsson, the world’s largest supplier of mobile systems, recently engaged Catalyst to help reinforce its strategically important systems integration business in the French market, resulting in its acquisition of Audilog, the French network systems integration specialist. Another client, Unilog SA, a Euro 600 million IT services provider, is actively seeking to implement a series of international acquisitions. The first of these acquisitions is Mezenet Ltd., the Manchester, UK based business intelligence consultancy. Through well considered cross border acquisitions, both companies have very effectively and quickly increased the level of service they can provide their customers in these areas.

Reasons to Seek Out and Sell to International Buyers
When they are ready to sell their businesses or to divest no-longer strategic business units, astute principals of ICT companies look for potential buyers both in their own home markets and "across the pond". In 2004, European and North American companies accounted for 98% of the buyers in each of these two markets with only 2% of buyers coming from Asia and other countries. The main reasons for seeking out prospective buyers on the other continent include:

• "Casting a wider net" - This frequently can double or triple the number of potential buyers bidding against each other.
• Achieving higher valuations - Non-domestic buyers often have a different value perspective. They will usually have all the same reasons to buy that domestic prospects have, plus they often ascribe additional value to such things as instant market presence, executive team familiarity with the local market and laws, completely new customer relationships, language capabilities, etc..
• Improving future results - The acquired company can gain additional access and credibility for its products and services in the "other" market. This often leads to higher sales and profits in the years after acquisition or merger which can positively effect earn-outs and contingency payments to selling shareholders and drive faster appreciation of shares received from the buying company.

Most sophisticated management teams and investors increasingly realize that these factors and others provide a powerful incentive to ICT firms to actively seek cross-border M&A transactions. Frequently, they find that engaging advisors, specialized in the industry and in international transactions, greatly accelerates the process, minimizes the time impact on management and significantly improves the chances for ultimate success. Cross-border transactions in the information and communications technology industry will be increasingly common in the coming years.

ABOUT THE AUTHOR
Located in Austin, Ken Bresnen is a Managing Director of Catalyst Corporate Development Catalyst provides international merger, acquisition, divestiture, funding, strategic transaction and corporate development services for Information Technology, Electronics, Telecommunications, and other companies employing these technologies. Offices in the United Kingdom, France, Germany, The Netherlands and the U.S.(Boston and Austin). www.IT-catalyst.com (512) 327-9988.