Signal Hill

Michael Parent
Managing Director mparent@signalhill.com

Matt Fiore
Vice President mfiore@signalhill.com

Signal Hill Sector Update: IT Services 2011-2012

The IT services sector closed just under 600 M&A transactions in 2011 -- an impressive level of deal activity (up from 443 in 2010 and 293 in 2009) in light of a softer-than-expected economic recovery and tremendous volatility in the equity markets. Even as market confidence began to waver again in Q2 2011, the IT services sector bucked the trend and delivered a steady increase in deal making on a quarter-over-quarter basis. Both Q2 and Q3 boasted more than 160 announced IT services transactions, more than any other quarter tracked by Signal Hill in the last five years. The 161 deals announced in Q3 represent a 62% rise over the same quarter in 2010. Deal activity in Q4 was almost as impressive as Q2 and Q3, with 148 announced transactions, including the acquisition of Ironworks Consulting by ICF International, where Signal Hill acted as investment banking advisor.
Figure 1: IT Services Yearly M&A Metrics, 2007-2011 Source: Signal Hill Total Number of Deals % change from prior year Total Enterprise Value ($M) % change from prior year Median Announced Deal Size ($M) % change from prior year Median EV/TTM Revenue Multiple % change from prior year Median EV/TTM EBITDA Multiple % change from prior year Figure 2: IT Services Quarterly M&A Metrics, 2010-2011 Q/Q Rev Source: Signal Hill 2010 Total Number of Deals % change from prior quarter Total Enterprise Value ($M) % change from prior quarter Median Announced Deal Size ($M) % change from prior quarter Median EV/TTM Revenue Multiple % change from prior quarter Median EV/TTM EBITDA Multiple % change from prior quarter Q1 106 $4,444 $24.6 0.7x 6.0x Q2 113 6.6% $7,967 79.3% $33.8 37.4% 0.7x 0.0% 7.9x 31.7% Q3 99 -12.4% $14,196 78.2% $58.9 74.3% 1.2x 71.4% 8.3x 5.1% Q4 125 26.3% $5,494 -61.3% $52.3 -11.2% 1.1x -8.3% 10.5x 26.5% Q1 127 1.6% $4,985 -9.3% $35.0 -33.1% 0.7x -36.4% 9.9x -5.7% Q2 162 27.6% $11,136 123.4% $64.0 82.9% 1.1x 57.1% 12.0x 21.2% 2011 Q3 161 -0.6% $3,433 -69.2% $37.8 -40.9% 1.2x 9.1% 10.0x -16.7% Q4 148 -8.1% $3,232 -5.8% $30.5 -19.3% 1.1x -8.3% 8.9x -11.0% 2007 446 $42,481 $30.4 1.0x 11.8x 2008 343 -23.1% $31,722 -25.3% $46.0 51.3% 0.9x -10.0% 10.0x -15.3% 2009 293 -14.6% $20,280 -36.1% $21.7 -52.8% 0.9x 0.0% 7.9x -21.0% 2010 443 51.2% $32,101 58.3% $40.0 84.3% 1.0x 11.1% 8.3x 5.1% 2011 598 35.0% $22,786 -29.0% $37.4 -6.5% 1.1x 10.0% 9.1x 9.6%

Private equity buyers remain active in the sector, with 24 transactions worth over $5 billion in 2011, or roughly 22% of total announced enterprise value, according to Signal Hill data. Thats up from a mere 10 deals worth $2.9 billion in 2009, although well below $7.5 billion of private equity deal activity in 2010. Despite healthy PE activity in the sector, average deal size trended down, as far fewer mega deals took place given the smaller amount of sizable, high quality services firms in play. Providence Equity Partners $1.8 billion acquisition of government consulting firm SRA International was the only billion dollar deal on record in 2011. Charterhouse Capital Partners purchase of a 63% stake in Environmental Resources Management, a provider of information, environmental, health, safety and social consulting services, was a close second, valued at $950 million. Lackluster equity markets have somewhat spurred private equity investments in IT services companies -- there were 33 investments in IT services companies tracked by Signal Hill in 2011, up from 25 in 2010, with the majority of the investments in MSP, Government and BPO. IT Services Sector Update 2011-2012 www.signalhill.com

IT Services Sector Update 2011-2012

Recent M&ATrends
Strategic buyers continue to emerge from new sectors and geographies. One of the most unexpected pairings this year was retailer Best Buys acquisition of MSP Mindshift for $167 million. The rationale behind the acquisition is strong, however. Mindshifts small and mid-size customer recurring revenue model complements Best Buys other current services offerings, including Geek Squad, which it acquired in 2002 and its Best Buy For Business operations, providing opportunities for cross-selling and pull-through. Similarly, Time Warner Cable acquired Navisite, a provider of enterprise-class hosting, managed application, messaging and cloud services, to bulk up its commercial services business, which it views as a key growth driver for the company. Traditional pure-play BPO firms have also continued expanding their offerings: Genpact acquired IT consulting and services provider Headstrong for $550 million and TeleTech announced its purchase of the Integrated Contact Solutions (ICS) business unit and associated assets of eLoyalty Corporation, which provides a number of IT services offerings including consulting, systems integration and application development. ICF International, a strategic consulting firm serving the federal government and other sectors including energy and healthcare, diversified its non-federal offerings and broadened its IT and interactive consulting capabilities with the $100 million purchase (1.8x revenue) of Ironworks Consulting, a Signal Hill client. Acquisitions increase for cloud computing-related services companies. The number of acquisitions involving cloud-related services targets grew significantly. Signal Hill tracked 30 cloud-related services deals in 2011, compared with 18 deals in 2010, five deals in 2009 and essentially no transactions in 2008 and prior. In addition to cloud hosting, IDC expects worldwide IT cloud consulting spending to grow at CAGR of 44.7% to $2.4 billion in 2015, compared to a 3.8% CAGR for traditional IT consulting. Cloud-related services transactions this year included multi-billion dollar acquisitions of high profile managed service providers, such as Verizons $1.8 billion acquisition of Terremark and CenturyLinks $3.1 billion acquisition of Savvis. Smaller cloud consulting deals included Salesforce.coms acquisition of Model Metrics, one of its premium consulting channel partners, Rackspaces acquisition of cloud consulting firm Anso Labs, and Appirios acquisitions of Infowelders and Saaspoint, both Salesforce.com implementors. Significant pick up in Microsoft-, Oracle- and Sage-related transactions; Oracle outpaces SAP for first time in last five years. Deal activity is up approximately 100% compared to 2010 for Oracle-, Sage- and Microsoft-related companies. Microsoft-related activity picked up significantly in 2010 and continued on an even bigger tear in 2011 with 48 deals, compared to 24 in 2010 and 16 in 2009. Oracle-related deal activity outpaced SAP for the first time in five years in both number of deals and total transaction volume. SAP-related systems integration and consulting deal activity remained essentially flat for the last five years, but in the aggregate (total number of deals), is second only to Microsoft-related activity.
Figure 3: IT Services Deals by Software Package

Signal Hill

IT Services IPOs cant dodge equity market weaknesses. Of the six IT services IPOs that priced in 2010 Asia-based companies HiSoft, Camelot Information Systems, Persistent Systems, Infinite Computer Solutions, ISS (iSoftStone) and U.S.-based Booz Allen Hamilton -- none were able to end the year up from their initial trading price. Hi-Soft was in positive territory for most of the year, but shares sank during Q4. The others, some of which rose 20% to 30% (and even 150% in the case of Camelot), are all now in negative territory. As of December 30, Camelot and Infinite were off more than 70% compared to their debut price, while ISS was off 50%; Perisistent and Booz Allen were both down between 10-20%. Still, there is activity occurring in IT services IPOs: FusionStorm, a provider of IT products, professional, support contract and managed services, and EPAM Systems, a global IT services provider, have filed for $175 million and $75 million IPOs, respectively. Glasshouse Technologies, which filed for a $75 million IPO at the beginning of 2011, cancelled its IPO after selling an undisclosed minority stake to Citrix Systems in January, hiring a new CEO, Patrick Scannell Jr., in November and subsequently announcing it will focus on growth instead of an IPO in the coming quarters. Staffmark, a staffing services company with an IT staffing component, also filed for a $125 million IPO earlier this year, but was acquired by Japan-based Recruit Co. for $295 million before it could go public.
Figure 4: Largest IT Services Deals by Enterprise Value, 2011 Source: Signal Hill Date Buyer Announced Seller 01-Apr-11 SRA Providence International, Inc. Equity Partners Enterprise Value ($M) $1,804.3 EV/TTM Revenue Multiple 1.1x EV/TTM EBITDA Multiple 12.1x

Description Consulting firm focused on solving complex problems for government organizations and commercial clients serving the national security, civil government and global health markets. Global provider of IT services and business solutions, including application development, systems integration, IT consulting, product engineering, customer interaction services, BPO and infrastructure management services. Provider of information, environmental, health, safety and social consulting services. Provides software asset management, software license, consulting, and training services for Microsoft, Citrix, Adobe, IBM, VMware and Oracle software. Offers professional and staffing services, which include temporary staffing, outsourcing and other, and permanent placement services.

Subsector Government

10-Jan-11

Patni Computer Systems / 63% Stake

iGATE Corporation

$1,149.1

1.7x

7.7x

Offshore Outsourcing

15-May-11

Environmental Resources Management /65% Stake Inmeta Crayon ASA

Charterhouse Capital Partners

$950.0

2.0x

12.5x

Specialty Consulting

8-Dec-11

Norvestor LP

$817.4

0.5x

7.4x

Network & Systems Infrastructure Consulting IT Staffing

20-Jul-11

SFN Group, Inc. Randstad Holding NV

$760.3

0.4x

11.2x

IT Services Sector Update 2011-2012

Figure 5: Largest IT Services Deals by Revenue Multiple, 2011 Source: Signal Hill Date Announced 06-Apr-11 Enterprise Value ($M) $550.0 EV/TTM Revenue Multiple 2.5x

Seller Headstrong Corporation

Buyer Genpact Limited

Description A global consulting and IT services company with a specialized focus in financial services and healthcare, delivering targeted domain solutions as well as strategy and business consulting services using multi-shore resources. Provider of electronic data discovery and related services including data collections, forensics and analytics; data minimization; data processing; Web hosting and document production. Provider of clinical, business and information technology (IT) services for healthcare enterprises, primarily serving customers in the commercial hospital market that are implementing electronic health record (EHR) products and systems. An internet and telecommunications company that designs business software that allows users to handle large numbers of internet and telephone queries from customers. Provides a broad range of middle and back office services including transactional, process and voice support, finance and accounting services, and business transformation consulting such as process redesign and reengineering.

Subsector Systems Integration / IT Consulting

05-Apr-11

Encore Discovery Solutions

Epiq Systems, Inc.

$100.0

2.5x

Specialty Consulting

21-Jul-11

Vitalize Consulting Solutions, Inc.

Science Applications International Corporation (SAIC) Capgemini SA

$190.0

2.5x

Systems Integration

14-Jun-11

Prosodie SA

$550.6

2.4x

Outsourcing

31-May-11

Intelenet Global Serco Plc Services Private Ltd

$633.4

2.3x

Offshore Outsourcing / Business Process Outsourcing

Figure 6: Largest IT Services Deals by EBITDA Multiple, 2011 Source: Signal Hill Date Announced Seller 25-Jul-11 Paradigm Holdings, Inc. Buyer CACI International Inc Ares Management LLC Enterprise Value ($M) $61.2 EV/TTM Revenue Multiple 1.5x EV/TTM EBITDA Multiple 29.5x Description Provides cybersecurity and enterprise IT solutions to clients in federal civilian agencies, the Department of Defense, and the Intelligence Community Provider of mission-critical, tech-based systems and services for national security agencies and programs of the DoD, including cyber security systems, intelligence analysis, assured enterprise IT and force mobility solutions. Provider of information, environmental, health, safety and social consulting services. Subsector Government

03-Mar-11

Global Defense Technology & Systems Inc. (GTEC) Environmental Resources Management /65% Stake

$314.7

1.4x

16.4x

Government

15-May-11

Charterhouse Capital Partners

$950.0

2.0x

12.5x

Specialty Consulting

09-Feb-11

XETA PAETEC Technologies, Inc. Holding Corp.

$62.4

0.7x

12.1x

XETA Technologies sells, installs and services advanced communication technologies for enterprise customers. Consulting firm focused on solving complex problems for government organizations and commercial clients serving the national security, civil government and global health markets.

Network and Systems Infrastructure Consulting Government

01-Apr-11

SRA International, Providence Inc. Equity Partners

$1,804.3

1.1x

12.1x

Signal Hill

ITServices Sub-Sector Analysis

Figure 6: IT Services Sub-sector M&A Metrics 2010-2011 Source: Signal Hill Number of Deals 2010 2011 82 115 113 156 80 100 19 26 57 41 23 21 Median Deal Size ($M) 2010 2011 $87.1 $79.6 $26.8 $59.7 $18.0 $10.2 $24.5 $93.5 $53.8 $27.3 $46.0 $89.0 Median EV/ TTM Revenue Multiple 2010 2011 1.1x 1.2x 1.7x 1.4x 0.8x 0.8x 0.9x 1.4x 1.2x 1.3x 0.4x 0.3x Median EV/ TTM EBITDA Multiple 2010 2011 8.5x 8.8x 7.1x 9.8x 10.7x NM 9.0x 8.3x 7.4x 6.8x 12.1x 9.5x

OutsourcingT Consultinga Systems Integration Offshore Outsourcing Government Services IT Staffing

Italics represent metrics with three data points or less. *Some deals are categorized in more than one sub-sector. T Outsourcing includes BPO and ITO. a Consulting includes IT and Specialty Figure 7: Signal Hill IT Services Sub-sector Public Indices vs NASDAQ, 2010 - 2011

Outsourcing (including BPO and ITO): The outsourcing subsector grew more than 40% in number of deals announced year-over-year for 2011. Median deal size slipped compared to 2010 due to a lack of transactions valued over $1 billion. The largest deal in the subsector was Sercos $633 million acquisition of Intelenet Global Services, followed by Capgeminis $550 million purchase of Prosodie. In comparison, there were three outsourcing deals valued over $1 billion in 2010, accounting for nearly $11 billion in enterprise value. Still, median deal size is up significantly compared to the $30 million median deal size for the subsector in 2009, showing how far the market has come over the past two years. Revenue multiples also grew slightly, with a number of acquisitions, such as AppLabs/CSC, Prosodie/Capgemini and Intelenet/Serco, valued over 2.0x revenue. BPO, which accounted for the majority of the sectors transactions, was also one the strongest subsectors in the equity markets over the past twelve months. Public

IT Services Sector Update 2011-2012

BPO companies gained 4.4% for the year in tough market conditions, above many of the other IT services sectors and more than 5% over the NASDAQ composite, which finished in the red. Consulting (including Specialty and IT): Consulting deal volume jumped 38% in 2011, with median deal size more than doubling to $59.7 million. The median revenue multiple for the period fell, however, weighed down by a number of deals during Q1, including as CSK Corporations acquisition by Sumitomo (0.3x) and RWD Technologies acquisition by GP Strategies (0.4x). The subsectors largest transactions included Charterhouse Capitals $950 million investment for 65% of Environmental Resources Management at 2.0x revenue, as well as Genpacts $550 million acquisition of Headstrong for 2.5x revenue. Signal Hill also advised on the acquisition of Ironworks Consulting, an interactive web development firm, by ICF International, a provider of consulting services and technology solutions to government and commercial clients, for $100 million and 1.8x revenue. The consulting subsector fared well in the public markets, shaking off economic pressures and gaining nearly 5% over the course of 2011. Systems Integration: Systems integration deals rose year-over-year, but median deal size dipped to a low $10.2 million. The median revenue multiple stayed flat and the median EBITDA multiple slipped, although there were few data points for comparison. The majority of deals in this subsector are valued well below $100 million, a sign that consolidation of smaller innovators by larger players continues to dominate. The largest systems integration deals of the year included the acquisition of Value Team S.p.A by NTT Data Corporation for $364.5 million, as well as Ness Technologies acquisition by Citi Venture Capital International for $341.8 million. Offshore Outsourcing: While the number of deals in the offshore outsourcing sector ticked up 37% year-over-year, the median deal size exploded for the second year in a row, boosted by the $1.2 billion investment in Patni Computer by iGATE. Even excluding the Patni transaction, median deal size grew to $50 million, well above the $20 million Signal Hill tracked in 2010. Deals of note included Persistent Systems two acquisitions of divested offshore assets to expand its presence Europe and in the life sciences and healthcare markets: the outsourced product development (OPD) business of Infospectrum and its subsidiary, Infospectrum India, as well as the software development unit of Agilent. Another interesting offshore divestiture included Cerberus Capital Managements $137 million acquisition of 3iInfoTechs global billing and payments unit. The unit consists of two subsidiaries the former J&B Software and Regulus Group (a former Signal Hill client) which 3iInfoTech acquired for $25 million and $100 million in 2007 and 2008, respectively. A fundamental shift may occur in the offshore outsourcing market in 2012 as a number of India's biggest firms announced plans to ramp up local hiring in the U.S. and Europe. HCL Technologies intends to hire 10,000 people, or about 12.4% of its current work force, in the U.S. and Europe by 2015; Infosys will increase U.S. head count by 1,500 in the next 12 months; Tata Consultancy Services is planning to hire an additional 1,200 people in the U.S. by March 2012; and Wipro intends to train and hire 400 American veterans of the wars in Iraq and Afghanistan. Government Services: Government services is the only sub-sector where Signal Hill tracked lower deal volume. Announced deals slipped 28% while median deal size fell 49%. These declines reflect increased scrutiny of spending and overall uncertainty surrounding the federal budget. Multiples remained relatively unchanged, however, and the median revenue multiple ticked slightly higher while the median EBITDA multiple was boosted by deals including Paradigms acquisition by CACI International for $61 million and 29.5x EBITDA, Ares Managements acquisition of GTEC for nearly $315 million and 16.4x EBITDA, SRA Internationals sale to Cerberus Capital for 12.1x, and High Performance Technologies sale to Dynamics Research for 12.0x EBITDA. IT Staffing: IT staffing deal activity decreased slightly in 2011, but median deal size grew more than 93% year-over-year. The largest transaction in the subsector was SFN Groups acquisition by Randstad Holdings for $760 million. Other interesting deals in the space included the previously mentioned acquisition of Staffmark by Recruit in October for $295 million; Staffmark was one of the few IT services firms to have filed for an IPO (estimated $125 million) earlier in 2011. The IT staffing subsector realized gains of more than 10% in the equity markets in 2011, well above the other IT services subsectors tracked by Signal Hill.

Signal Hill

2012 ITServices Outlook

Building on 2011 momentum, ITservices sector M&A is rolling into 2012 with a strong start. Signal Hill has already announced its first deal of the year, with the sale of EXZAC to MatrixIT. We believe there are a number of important factors that will be driving M&Ain the sector during 2012. The blurring of IT services models will continue as large Systems Integrators and Outsourcers seek to be all things IT. Large players will continue to deepen industry practice groups and broaden their service offerings and models, similar to the combinations of Headstrong/Genpact and Intelenet Global Services/Serco. Technologies like cloud and SaaS will also continue to evolve and shape enterprise IT strategies and require corresponding expertise and professional skills. Large acquirers have strong balance sheets and the ability to make both sizable and small, tuck-in acquisitions to complement organic growth. More diversified services firms will continue to support higher public market valuations (e.g. Accenture, CGI, IBM) which should drive aggressive M&A strategies. The acquisitions of Keane, Intelligroup, Diamond, Ness, and Headstrong have created a dearth of publicly-traded mid-sized vendors. We believe a few firms are poised to fill this gap in the coming year and we might see a couple explore the IPO route in the latter half of 2012, or early 2013. Very robust deal activity will continue in 2012 for private market transactions. Strategic buyers are flush with cash and we expect that PE buyers will continue to play a meaningful role. Well-performing, differentiated companies will attract premium valuations as both private equity players and strategic buyers compete for attractive targets.

IT Services Sector Update 2011-2012

The Signal Hill Services Stock Indices are comprised of the following companies: BPO:ADP; CPI-GB; CSGS; CVG; EXLS; FIRSTSOURCE; G; HSII; IRM; PAYX; RCF-FR; SGS; SRT; SYKE; TTEC; TW; WNS Consulting:ABCO; CRAI; FCN; HCKT; HURN; III; MMC-GB; NCI; RECN; SAPE Government:BAH; CACI; DRCO; ICFI; KEYW; MANT; MMS; NCIT; SAI Offshore:CTSH; HCL; HEXAWARE; HSFT; INFOSYS; MINDTREE; NEUSOFT; ROLTA; SONDA-CL; SYNT; TATA; VIT; VRTU; WIPRO Outsourcing:ACN; ATO-FR; CPI-GB; CSC; IBM; UIS Staffing:ANLY; CDI; CTGX; KFRC; MAN; RCMT SI:CAP-FR; CBR; GIB-CA; EDGW; LOG-GB; PRFT

About Signal Hill

Signal Hill is a privately-held investment banking partnership with a sole focus on growth companies. Our professionals have deep expertise in Information Technology, Media & Internet, Telecom Services & Internet Infrastructure, Communications, Education & Business Services, and Healthcare Services. Signal Hill has more than 50 professionals across five offices in Baltimore, Nashville, New York, Reston and San Francisco (SanBruno). Scott Wieler Chairman swieler@signalhill.com Mathew Dahl Managing Director mdahl@signalhill.com Don More Managing Director dmore@signalhill.com Chase Sanders Managing Director csanders@signalhill.com Bart Shaeffer Director bshaeffer@signalhill.com Justin Puccio Vice President jpuccio@signalhill.com Baltimore Nashville N e w Yo r k Reston San Francisco Ira D. Cohen Managing Director icohen@signalhill.com J. Adam Hitt Managing Director ahitt@signalhill.com Jeff Nahley Managing Director jnahley@signalhill.com Matthew Shilling Managing Director mshilling@signalhill.com Franklin E.W.Staley Director fstaley@signalhill.com Greg Ager Managing Director gager@signalhill.com Howard Loewenberg Managing Director hloewenberg@signalhill.com Michael Parent Managing Director mparent@signalhill.com Joel Strauch Managing Director jstrauch@signalhill.com David Dolan Vice President ddolan@signalhill.com Justin Balciunas Managing Director jbalciunas@signalhill.com John MacDonald Managing Director jmacdonald@signalhill.com Henry Sage Managing Director hsage@signalhill.com Douglas Webster Managing Director dwebster@signalhill.com Matt Fiore Vice President mfiore@signalhill.com

Signal Hill Disclaimer The information in this report has been obtained from sources believed to be reliable, but Signal Hill makes no representation as to the accuracy or completeness of such information or any opinions expressed herein. Signal Hill may provide, or may seek to provide advisory services to one or more companies mentioned herein. In addition, employees of Signal Hill may own or may purchase securities in one or more companies mentioned in this report. Signal Hill has no obligation and will not undertake to update, modify or amend this report for any reason, including for errors subsequently discovered. This report is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities. 2012 Signal Hill. All rights reserved.

PENDING

January 2012

$100 million

December 2011

November 2011

November 2011

has been acquired by

received a strategic investment from

has been acquired by

Private Placement

has been acquired by

October 2011

September 2011

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September 2011

August 2011

has been acquired by

company

has been acquired by

has been acquired by

has been acquired by

has been acquired by

$97.5 Million

August 2010

July 2011

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June 2011

Mid-AtlanticSkilled Nursing Group (Sellers) has been acquired in a saleleaseback transaction by Series B Private Placement has been acquired by has been acquired by has been acquired by

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