IT Consulting Industry M&A Report Summer 2009
The economic recession is responsible for an estimated decrease in industry revenue by 3.2 percent in 2009. Over 40 percent of IT consulting revenue comes from the banking, finance, and insurance market sectors, which makes the industry particularly vulnerable during depressed economic times. Despite the overall slide, we expect a strong surge in information technology spending during the second and third quarters of 2009 and estimate that overall IT consulting industry revenue will grow by an average of 3.5 percent during this period. The surge, which will result from improving confidence in macro-economic conditions, will allow companies to spend money on postponed technology projects. However, we believe that the prosperity during the second and third quarters of 2009 will be a result of pent-up demand, so we anticipate revenue to drop by an average of 3.8 percent in the forth quarter of 2009 and the first quarter of 2010 before producing consistent growth in the second quarter of 2010 and beyond. Some of the growth in 2009 will come from the government sector, which is responsible for over 20 percent of IT consulting revenue. The Obama administration's new budget, which calls for dramatic changes in information technology spending throughout the federal government, includes 1.3 billion in new broadband spending and additional funds for healthcare information technology and systems that support smart energy grids. This ought to spark a significant demand for government IT consulting and other government contracting businesses.
There was a 19 percent decrease in the number of mergers and acquisitions in the computer, software, supplies, and services sector in 2008 from 2007. The economic slow-down has carried over into 2009. There has been a 70 percent decrease in the total number of deals in the first quarter of 2009 compared to the first quarter in 2008. Despite the limited recent activity, there is good reason to approach the final three quarters of 2009 with cautious optimism. Technology valuations are above what they were in 2007 and companies that are not distressed can attract reasonable valuations with proven business models. In addition, the eight largest technology firms have a combined $107 billion cash on-hand. As the revenues of IT consulting firms begin to increase, healthy firms will feel more comfortable digging into their cash reserves to execute their acquisition strategies. Several large IT firms have begun to realize the value of adding telecommunications units to their scope of operations; therefore we expect more acquisitions of companies that have telecommunications competencies. There have been 27 mergers and acquisitions in the computer, software, and supplies sector during the last two weeks of May, making it the most active sector in the economy. Deal volume should continue to increase until industry revenue drops in the forth quarter.
Despite a recent surge from financial institutions, the U.S. economy suffers from a high jobless rate and a continued downfall of production. Output fell in the first quarter of 2009, down 6.1% from the previous quarter. Unemployment, which plagues 13.6 million Americans, tops a decade high unemployment rate of 8.9%. Unfortunately, the worst is still to come for the job market; the Fed expects the jobless rate to reach 9.6% and not return to a healthy a level until 2011. Coming out of the recession, the U.S. normal rate of unemployment is predicted to hit a new standard of 6.5%, according to Bloomberg analysts. However, there are signs the economy has hit rock bottom and is set to move forward. The first quarter GDP contraction of 5.7% is less severe than the 5.5% projection by many economists. Much of the progress is attributed to the 9.6% increase in durable goods purchases. Many economists also predict positive output growth in the third quarter of 2009. Consumer confidence is also at its highest since September of 2008, according to the Conference Board's sentiment index.
There was a 19 percent decrease in the number of mergers and acquisitions in the computer, software, supplies, and services sector in 2008 from 2007. The economic slow-down has carried over into 2009. There has been a 70 percent decrease in the total number of deals in the first quarter of 2009 compared to the first quarter in 2008. Despite the limited recent activity, there is good reason to approach the final three quarters of 2009 with cautious optimism. Technology valuations are above what they were in 2007 and companies that are not distressed can attract reasonable valuations with proven business models. In addition, the eight largest technology firms have a combined $107 billion cash on-hand. As the revenues of IT consulting firms begin to increase, healthy firms will feel more comfortable digging into their cash reserves to execute their acquisition strategies. Several large IT firms have begun to realize the value of adding telecommunications units to their scope of operations; therefore we expect more acquisitions of companies that have telecommunications competencies. There have been 27 mergers and acquisitions in the computer, software, and supplies sector during the last two weeks of May, making it the most active sector in the economy. Deal volume should continue to increase until industry revenue drops in the forth quarter.
Despite a recent surge from financial institutions, the U.S. economy suffers from a high jobless rate and a continued downfall of production. Output fell in the first quarter of 2009, down 6.1% from the previous quarter. Unemployment, which plagues 13.6 million Americans, tops a decade high unemployment rate of 8.9%. Unfortunately, the worst is still to come for the job market; the Fed expects the jobless rate to reach 9.6% and not return to a healthy a level until 2011. Coming out of the recession, the U.S. normal rate of unemployment is predicted to hit a new standard of 6.5%, according to Bloomberg analysts. However, there are signs the economy has hit rock bottom and is set to move forward. The first quarter GDP contraction of 5.7% is less severe than the 5.5% projection by many economists. Much of the progress is attributed to the 9.6% increase in durable goods purchases. Many economists also predict positive output growth in the third quarter of 2009. Consumer confidence is also at its highest since September of 2008, according to the Conference Board's sentiment index.
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