Exclusive: Martin Wolf Sees Tech Services M&A Lower Than Expected For 2012

That’s one of the big takeaways from an exclusive preview of the second-quarter "Valuation & Deal Insights" report from tech services investment advisory firm Martin Wolf.

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One big reason for the slower than expected activity is the “lasting uncertainty and negativity” from the U.S. presidential election race, said Martin Wolf, founder and president of Martin Wolf, San Ramon, Calif., which has been brokering IT services deals for 15 years. He predicted that it will “plague the economy, slowing recovery and prompting many decisions to be deferred until after Election Day.”

“This combined with the lingering [disappointing] Facebook [IPO] effect that we’ve seen in the past few months will be evident in a less active M&A space,” said Wolf.

Calling the presidential election “the most important election in my adult life,” Wolf asked: “Why would you make a huge [strategic] investment with all the [economic] uncertainty there is with the election?”

Many technology services firms are warily eyeing potential capital gains tax increases and the high cost of foreign sales repatriation and holding back on doing deals, said Wolf in an interview with CRN. “You just don’t know what is going to happen [with federal tax policy],” he said. “That makes doing transactions riskier.”

New federal taxation policy could hit astronomical sums of cash on the balance sheet that are at risk of being taxed again if they are brought back to the United States, said Wolf. “If we want more M&A activity, we need to reduce or eliminate the speed bump of double taxation that comes from bringing money back home,” he said.

Also at risk in the presidential election, said Wolf, is longtime U.S. headquartered companies reconsidering their national status.

“Depending on the outcome of the election, you could see a lot of companies that think of themselves as U.S. companies no longer considering themselves U.S. [-based] companies,” he said. “Those companies have an obligation to shareholders, and the majority of their manpower is not in the United States.”

One bright spot in the M&A landscape is the “increase in cross-border activity as Chinese and Indian firms begin to mature and join the race to increase scale in the face of declining margins,” said Yousif Abudra, a senior analyst for Martin Wolf, in the report.

India currently offers the “highest multiples for comparable companies,” said Abudra. That’s because over the past “five to seven years, cross-border M&A has become a new strategy for growth, market access and global reach for Indian IT services companies,” he said.

China IT services and Business Process Outsourcing (BPO) players are “still in an early phase but are transitioning into a growth phase,” said Abudra.

Martin Wolf has an office in Bangalore, India. Wolf himself, meanwhile, just returned from a trip to China to speak at one of the largest IT forums in the country.

Wolf told CRN that he sees larger deals being done in India and accelerating M&A activity in China. “In China, they are just beginning to look at [technology services] acquisitions,” he said. “They are buying companies worth less than $10 million.”

Martin Wolf is currently advising two companies looking at selling technology services assets into China, said Wolf.

Tim Mueller, principal for Martin Wolf, pointed out that a recent analysis from mergermarket showed that “last year was the busiest for cross-border M&A since 2008.” He sees that trend heading up as “buyers expand their presence in areas such as China, India and Southeast Asia.”

PUBLISHED JULY 30, 2012