With $14.25 billion of capital invested in the first six months of 2011, the IT industry is experiencing levels of M&A activity not seen in over a decade.  When compared to the first six months of 2007, this year’s capital investment levels are 45% higher than a year often referred to as the peak of private equity activity.

Much of this buzz is surrounding  social media, SaaS and cloud computing; driving valuations up and forcing many Private Equity groups to mimic recent success stories and chase industry returns.  In RSM McGladrey’s Q3 2011 Quarterly Private Equity Deal Flow Profile, managing director Charles DelGrande indicates that he expects “to see strong deal flow and strong pricing trends to continue as PE firms deal with the fear of being left behind.”

Recognizing that $4.2 billion of the $14.25 billion invested in the industry is related to 3 software transactions (Novell, Activant and Epicor), SDR’s client-base is faced with the question: “What does this mean for lower-middle market IT companies seeking capital or an exit?”   With valuations in the $5MM to $150MM range, SDR’s clients are often add-on targets, and only in rare situations, considered platform investments for PE firms.  Fittingly, the answer likely lies in the analysis of add-on acquisitions as a percentage of total dealflow.


In Q2 2011, add-ons within the IT industry represented nearly 60% of all transactions; a significant variation from the 50% experienced across all PE-backed transactions for the same period.  DelGrande thinks this add-on data may indicate “that PE firms remain a bit risk-averse and are opting to adopt acquisition strategies in support of an existing, proven and reasonably successful ‘anchor’ investment.”