Gambit M&A Market ReviewInformation Technology Q3 2015

Content Summary:

Industry Overview Global IT transaction levels have risen 9.9% when compared with the same period in 2014,reflecting improved market confidence. Evaluating the Services & Software sub-sectorsGambit monitors, activity globally remained flat quarter-on-quarter, whilst comparing datafrom the same quarter last year there has been a considerable 16.7% increase.

Macro Outlook Q3 GDP growth slowed slightly to 0.4% but remained 2.0% higher than the comparableperiod from 2014. The UK economy is expected to grow by 2.1% annually due to stronggrowth in services output and consumer spending.

Public Comparables The Gambit IT index again outperformed the FTSE All-Share, by 2.7%, yet also saw priceerosion with the increased volatility seen in most public markets in late August. HewlettPackard’s decline continued and IBM’s near 11% reduction in value against the previousquarter resulted in the Consultants/Infrastructure sub-sector being hardest hit, back 5% onQ2’s closing price.

Sub-Sector Analysis We analyse the significant trends within the Software and Services sub-sectors of theInformation Technology market.

Feature Article Europe’s Single Digital Market – A possible catalyst for future cross-border activity.

Global Cross-Border Analysis

We review global trends in cross-border M&A activity in the Information Technology marketand highlight key transactions. Data analysis this quarter includes sub-sector activity invarious global regions and country standings in terms of M&A activity.

Volumes & Values Global transactions levels in the IT sector, when compared with the same period in 2014, are 9.9% higher

Sub-Sector Analysis Software - UK Software deal activity grew for a second consecutive quarter. Activity was dominated by strategic

buyers (80%) with two thirds of those deals being domestic. Services - Deal volume declined marginally in Q3 within the UK IT Services sector. Similarly to the Software sector,

activity was dominated by strategic buyers although the Services sector saw more cross-border purchasers with45% of deals being fuelled by foreign buyers.

International Transactions Cross-border activity remained robust in Q3 with roughly a quarter of deals involving a foreign purchaser. The US remains a key driver of cross-border activity driving 25% and 46% of cross-border activity in the Software

and Service sub-sectors alike.

Key Observations From Q3 2015:

To sell: Increasingly active corporate acquirers looking to drive growth coupled with a more positive macroeconomic outlook for2016 means there are more buyers than sellers in the market, making for a prime time to consider a sale.

Private Equity: Private equity investors will remain focused on the IT sector, given the potential consolidation opportunities infragmented sub-sectors, with intense competition for quality assets.

Financing: The search for yield in a low interest rate environment is driving investors to provide liquidity to mid-marketcompanies. As a result, we can expect strategic and financial acquirers to use improving liquidity for M&A or LBO purposes. Thepossibility of an interest rate hike in the next few quarters means now is time to take advantage of available financing.

Summary: Favourable M&A conditions in place for mid-market IT companies...

Information Technology Q3 2015 M&A Market Review

Information Technology Industry Overview

Geraint RowePartner, Information Technology

Activity within the global Information Technology M&A market as a whole saw a slight decline in Q3 following astrong and resilient year despite economic uncertainties around the Greek debt crisis, a potential rate hike in the USand the UK election. Despite a 6.5% decrease in activity versus Q2, transaction levels have risen 9.9% when comparedwith the same period in 2014, reflecting improved market confidence in 2015.

Evaluating the Services & Software sub-sectors, activity globally remained flat quarter-on-quarter, althoughincreased considerably 16.7% versus Q3 2014. European transactions contributed more to global figures in Q3 morethan previous quarters with UK Software activity continuing Q2’s improvement. North American activity declinedmarginally with Software companies a little quieter due to uncertainty around the IPO market and increased sharebuy-backs within the industry including big hitters like Microsoft & Google.

“Evaluating the Services & Software sub-sectors Gambit monitors Q3 2015 saw a 16.7%increase in activity compared to the same quarter last year...”

A prevalent theme in Q3 was the activity around cyber and infrastructure security. Cyber security poses intensifyingchallenges for enterprises as legacy estates are moved to more open digital systems and services. Company andcustomer data along with public reputation are at risk during security breaches as seen in recent events involvingTalkTalk and Ashley Madison. These very public breaches will reinforce the importance of resilient measures neededto protect infrastructure especially given that a recent study has shown 63% of 1,000 C-level executives report cyberattacks on a daily or weekly basis. As demand for a service rises so does transaction activity with Accenture acquiringFusionX and Capita purchasing Electranet to increase their cyber and infrastructure security solutions, a trend weenvisage continuing into 2016.

Corporates again dominated activity in comparison to Private Equity activity. Private Equity exits have reduced oflate. We view this downturn from financial buyers as one that is temporary as new funds are raised with investmentpassing the €20bn mark in the EMEA for 2015. Well managed firms who have reliable cash flows, especially whencombined with growth and favourable market positions, are prime targets for dependable returns on investment.

Cross-border activity remained robust in Q3 with roughly a quarter of deals involving a foreign purchaser. This issomething that has proven to be evident in recent quarters in which firms are trying to access global markets inorder to increase growth and focus on the markets recovering from the economic crisis. Such activity is apparent inthe technology sector with 92% of technology executives reporting that future M&A activities have a cross-borderfocus. The US remains a key driver of cross-border activity driving 25% and 46% of cross-border activity in theSoftware and Service sub-sectors alike, taking advantage of the availability of cheap debt and a stronger dollar.American Strategic and Financial Buyers are both looking outside of their domestic territory with The BlackstoneGroup acquiring Secro’s private sector BPO operation based in India for £250m and CDW Coproration purchasing theUK’s Kelway Limited for a reported £270m.

“Cross-border activity remained robust in Q3 with roughly a quarter of deals involving aforeign purchaser. This is something that has proven to be evident in recent quarters ...”

Corporate confidence has improved as economic recovery continues, such that M&A appetite has strengthened.Markets are developing quickly, and through acquisitions, firms are able to exploit these growing markets andenhance growth. Strategic purchases are expected to remain strong as tech companies continue to seek scale, withconsolidation in sharp focus.

Gambit’s view is that M&A transaction activity within the IT sector will continue its trend and increase momentum aswe head into the New Year. A rate hike in the US may slow things down in North America, however, UK valuationswill remain buoyant and attractive to all domestic and foreign purchasers.

Gambit has extensive experience in Mergers & Acquisitions, Disposals, ManagementBuy-Outs and Strategic Advice and Consultancy. If you would welcome a confidentialno obligation meeting to discuss the benefits of these services could bring to yourbusiness, please contact one of the team.

Company Name

Enterprise Value (£m)

EV/EBITDAShare Price change to 30 September 2015

3 months % 6 months % 12 months %

Datacentre/Managed Hosting

Equinix 10,439 12.8x 7.6% 17.4% 28.7%

Iomart 234 7.1x 13.3% 36.4% 24.5%

Rackspace 4,202 9.5x (33.6%) (52.2%) (24.2%)

Telecity 1,949 11.5x 5.8% 24.3% 45.5%

Sub-sector (weighted average) 11.8x (2.8%) 1.1% 17.4%

Consultants/Infrastructure

Accenture 37,451 10.6x 1.5% 4.9% 20.8%

Computacenter 611 5.0x (2.6%) 10.2% 20.0%

Cap Gemini 6,635 6.3x 10.9% 16.4% 56.4%

CGI Group 7,698 8.4x (26.1%) (15.0%) (4.6%)

CSC 2,964 2.2x (6.5%) (6.0%) 0.4%

Cognizant 19,234 11.0x 2.5% 0.4% 39.8%

Hewlett Packard 21,722 2.6x (14.6%) (17.8%) (27.8%)

IBM 112,902 8.1x (10.9%) (9.7%) (23.6%)

Infosys 24,127 14.4x 17.2% 4.5% 23.4%

Tietoenator 1,195 8.3x 7.8% 3.1% 14.2%

Sub-sector (weighted average) 8.8x (5.0%) (5.1%) (3.4%)

Software

Dassault 9,249 13.2x 11.9% 16.7% 44.8%

Micro Focus 3,682 11.5x (11.6%) 1.9% 13.5%

Microsoft 186,821 8.6x 0.2% 8.9% (4.5%)

Oracle 115,072 10.3x (10.4%) (16.3%) (5.6%)

Red Hat 7,867 21.7x (5.3%) (5.1%) 28.0%

SAP 58,106 11.1x 2.9% (4.4%) 12.6%

Sub-sector (weighted average) 9.9x (2.5%) (0.9%) (0.2%)

FTSE All-Share Index (6.6%) (9.4%) (5.6%)S&P Global 1200 IT Index (9.2%) (9.4%) (7.7%)Gambit IT Index (3.9%) (3.2%) (1.7%)

IT Public Company Comparables

Source: Thomson ONE

Following a growth of 0.5% in Q2 in the UK, Q3 slowed slightly to 0.4% but remained 2.0% higher than the comparableperiod from 2014. The UK economy is expected to grow by 2.1% annually due to strong growth in services output andconsumer spending. Consumer demand remains solid with retail sales growing significantly in Q3.

Interest rates were held again at 0.5%. The slight slowdown in GDP puts pressure on the Bank of England to delay thefirst interest rate rise until, most likely, mid to late 2016.

The inflation rate fell 0.1% during the period due to smaller increases in clothing prices and cheaper fuel. Despiteheadline low inflation, price pressures still remain in the economy and it is likely that low inflation will be temporary.When you strip out the effects of cheaper fuel and food prices, which are deflationary, the underlying trend is of risingdomestically generated inflation.

Information Technology Q3 2015 M&A Market Review

Macro Outlook

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It is possible that inflation could rise back to 1-2% bythe first half of 2016. Core inflation rate dropped to 1%from 1.2% which remains well below the 2% target andillustrates that there is no immediate pressure on theMPC to raise rates.

Volatility, as measured by the VIX index, hit highs inAugust not seen since 2011 and witnessed the largestmonthly gain ever recorded as investors looked tooptions to protect downside risk in the markets amidconcerns over China. This was however short lived asthe index settled back into a more normalised rangein the 20’s signalling that the markets have stabilisedsince the middle of the quarter.

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Transaction ActivityAn increase of 50% in UK M&A activity in Q3 from Q2 can mainly be attributed to a more politically stable landscape. Transactionvolumes were predicted to increase during this period and to remain buoyant through to the end of the year and into 2016 ascompanies feel more comfortable undertaking M&A activity while economic confidence is high. Global IT activity was a little moresubdued, down near 6.5% from Q2 with the extreme market volatility witnessed in late August curbing activity. The Software &Service sub-sectors monitored by Gambit remained flat over Q2 and Q3 on a global scale and within Europe increased 10.6%.Companies offering cyber security and fintech products attracted notable activity with the amplified attention on data security andthe rise in economic confidence playing their parts alike. IPO’s have attracted considerable attention of late, especially around the‘unicorn bubble’, with uncertainty between private round and public round valuations postponing some offerings and NorthAmerican Software transactions falling 10% from Q2.

Software

ServicesDeal volume remained subdued in Q3 within the UK IT Services sector. For a second consecutive quarter, and similar to theSoftware sector, activity was dominated by strategic buyers although the Services sector saw more cross-border purchasers with45% of deals being fuelled by foreign buyers, mostly from the US.

Although activity remained flat and the average deal value increased, the Carlyle Group’s buyout of Innovation Group valued at£550 million spurred on valuation metrics. Another notable transaction within the sector from an overseas buyer is American firmCDW Corporation paying £270 million IT services and solutions provider Kelway.

UK Software deal activity grew for a second consecutive quarter. Activity was dominated by strategic buyers (80%) with two thirdsof those deals being domestic. There were in total 10 transactions with buyers residing outside of the UK however, surprisingly,only one American buyer while 7 came from within the EU.

Transaction multiples saw a slight decline and similarly to activity represented a value more in fitting with those in 2014. With thedominance of strategic buyers in Q3 the fall in EV/EBITDA multiples coincided with a fall in average deal value.

Europe’s Single Digital Market – A possible catalyst for future cross-border activity

Sam FormanAnalyst, Information Technology

Earlier this year, the industry supported launch of the European Commission’s proposals for a Digital Single Market(“DSM”) was announced. It reflects a 16 point strategy to provide substantial opportunity for innovation and growthacross the European Union in the realms of the digital market to be delivered by the close of 2016. The initiative is setto create benefits for consumers, businesses and ultimately EU economies as a whole. Providing further convenience,access and protection to consumers and forming a larger, fairer playing field for business across the EU is anticipatedby the European Parliament to create additional growth of €340bn and thousands of jobs.

From studying the figures it is quite evident why such a scheme is being put forward. Viewing the global digital marketthe 28 EU Member States coupled with EU Cross-Border Countries still fall short of the US’s dominance of 54% marketshare with 42% and 4% respectively. European think tank Bruegel support these findings with it’s own researchshowing that only 17% of world leading innovators within ICT originate from Europe compared to just over half fromthe US. The fragmented legislation, regulations, frameworks and market standards that fluctuate from EU member tomember within their digital markets are undoubtedly a hindrance when competing on a global scale.

Levelling the playing field and encouraging businesses to expand their market and consumerreach benefits both sides and if EU consumers had access to a full range of EU goods and services when shoppingonline an estimated €11.7bn could be saved annually. Within the plan there is also emphasis on Digital Networks andthe hope of improving services such as fast broadband and 4G connectivity within Europe as some members see asignificant time lag in roll-out due to telecom rules or infrastructure variances. Online networks are also wanted tocreate improvements in personal data handling, privacy and security with improved usage of big data and cloudtechnologies while ensuring data protection is heightened and not sacrificed.

The idea of a European DSM is one that is well thought-out and can provide benefits to consumers and an array ofindustries and the businesses that operate within them. A single market rather than split states will increase the effortfor standardisation and unquestionably increase competition to a market containing over 500 million consumers.Opening up a market to the broadest spectrum of big, small, existing, growing or new firms is sure to get boardroomsthinking about their new environment and where they sit within the pecking order. These situations often lead tosmaller firms taking action to consolidate within their domestic market due to a new posed threat from new largercompetition or firms simply looking to expand into a region which had previously posed difficulties now removed withthe introduction of a DSM. Either way with the proposed open market consolidations, bolt-ons and strategicacquisitions will be seen both domestically and more commonly across borders within the EU as firms look to cash-in,cash-out or jostle for position. The scale provided by the DSM will also certainly have a global impact and may lead toincreased cross-border activity further afield from the borders of the EU.

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E-Commerce Cross-border Buyers

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E-Commerce and Digital Goods are markets whosegrowth has been well documented over the past twodecades, although, within the EU these markets are stillrather domestic. While 315 million Europeans use theinternet each day, 44% bought online from a domestice-commerce firm while only 15% purchased goods fromanother EU country. There are a number of factorswhich explain the little activity which happens acrossthe borders one of which is consumer confidence with62% stating they lack trust to purchase online fromanother EU member. Another is demand, only 7% ofSME’s within the EU sell cross-border. 57% of EuropeanSME’s would look to either start or increase their onlinesales to other EU members if the same rules for e-commerce applied in all EU Member States, a keyobjective for the DSM.

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Regional Deal Activity by Target – Q3 2015

Notable Global Information Technology Transactions

Acquisition

Target: Kelway Limited (UK)

Acquirer: CDW Corporation (US)

Value: £271m

Sector: Services

Acquisition

Target: Solera Holdings Inc. (US)

Acquirer: Vista Equity Partners (US)

Value: £4,376m

Sector: Software

Acquisition

Target: Linxens France SA (France)

Acquirer: CVC Capital Partners Ltd. (UK)

Value: £993m

Sector: Wireless Technology

Acquisition

Target: Veritas Technologies Corporation (US)

Acquirer: The Carlyle Group (US)

Value: £5,134m

Sector: Software

Acquisition

Target: Bit-isle Inc. (Japan)

Acquirer: Equinix Japan KK (Japan)

Value: £308m

Sector: Services

Acquisition

Target: Anhui LaiWang Technology Ltd (China)

Acquirer: Ngai Shun Holdings Ltd. (China)

Value: £538m

Sector: Software & Services

North AmericaWithin the region Services activity continued itssteady growth as seen in previous quarterswhile Software activity dipped for a secondquarter leaving total activity relatively flat.Financial buyers still remain subdued,representing just 10% of total transactions,within the region whilst Strategic buyers driveactivity as boardrooms fuel growth throughacquisitions with interest rates being held flat.

EuropeEuropean activity was spurred by both sectors inQ3 with Software transactions matching thoseof the North American region. Services saw anaverage deal value upwards of £60 million withinthe region with four deals breaking the £100million mark. Country activity within the regionremained stable with the United Kingdom stillaccounting for a quarter of all European activity.

AsiaAsian activity fell from a busy Q2 with theSoftware section holding the region back.Services remained largely dominated by Indiaand China with the US companies involved in40% of the formers transactions. Softwaretransactions as a whole fell 19% from Q2 withvery little cross-border activity and with only asingle transaction from a Financial Buyer.

Information Technology Q3 2015 M&A Market Review

Gambit Corporate Finance LLPEstablished in 1992, Gambit is an independent corporate financeadvisory firm specialising in advising private and public companies onmid-market transactions in the UK and overseas. With offices inLondon and Cardiff, Gambit is widely recognised as a market leader inM&A advice in the Information Technology sector having built updetailed industry knowledge and an enviable track record in dealorigination and execution.

Key services include: Management Buy-outs/ Buy-ins Mergers and Acquisitions Fundraising/ Development Capital Private Equity Portfolio Advisory Succession Planning Refinancing Financial Restructuring

ContactsGeraint RowePartner, Information Technology+44 (0) 789 992 8029geraint.rowe@gambitcf.com

Danielle Axworthy Sam FormanAnalyst, Information Technology Analyst, Information Technologydanielle.axworthy@gambitcf.com samuel.forman@gambitcf.com

Tel: + 44 (0) 845 643 5500Website: www.gambitcf.com

CFI GroupWe are the sole UK representative of Corporate FinanceInternational, a global partnership of leading mid-market investmentbanking firms with members in North America, Western & EasternEurope and Asia. With over 260 professionals located in 32 officesthroughout the world we are able to provide an international outlookand service for clients.

Website: www.thecfigroup.com