2011 www.bdoCap.

Com

Q1 2011 Industry Update

ContaCt:
VALENTINA A. MIDURA Managing Director Direct: 617-422-7593 Mobile: 978-873-1314 vmidura@bdocap.com

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ReCent stRength in the teChnology equity maRkets and unpReCedented levels of finanCial fiRepoweR in the hands of publiCly held teChnology Companies have set the stage foR an aCtive m&a maRket in 2011.
Continued improvement in the debt markets and a Private Equity (PE) overhang of nearly $450B of uninvested capital contributed to the recovery of U.S. middle market* technology mergers and acquisitions (M&A) throughout 2010. Renewed PE activity in the sector spurred greater competition for deals and a resultant increase in valuation multiples that rose significantly from 2009. Restored confidence that was apparent throughout 2010, coupled with GDP growth and improving business performance will likely enable technology M&A activity to continue on a positive trajectory throughout 2011. In this newsletter we will discuss the following areas of interest: 2010 Middle Market Technology Deal Activity and Valuations Rebound in Private Equity Technology Transactions Sets the Stage for 2011 Technology Firms Build Up Acquisition Capital with Debt Mobility, Security and Cloud Computing Transactions are Pacing Both the Middle Market and Overall Deal Making in the Technology Sector

This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining specific professional advice. Please contact BDO Capital Advisors, LLC to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a result of acting on information in this publication. BDO Capital Advisors, LLC Member FINRA/SIPC BDO Capital Advisors, LLC is a separate legal entity and is an affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm.

*Unless otherwise noted, defined as deals completed with a total implied enterprise value of $5M-$750M

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The number of technology transactions in the middle market climbed 22 percent from 2009 to 2010 and dollar volume grew by almost 82 percent.

2010 middle maRket deal aCtivity and valuations

Technology M&A activity showed sustained signs of improvement in 2010 as the credit markets continued to ease. In the fourth quarter, the number of transactions increased by 5 percent quarter over quarter and deal values increased by 15 percent, as seen in Figure 1. Although fewer transactions were completed in Q4 2010 than in Q4 2009, total deal values were 47 percent higher than in Q4 2009, giving Q4 2010 the highest average quarterly deal size since before 2006. Middle market deal volume for 2010 outpaced 2009 and is heading towards pre-recession levels, as seen in Figure 2. The number of technology transactions in the middle market climbed 22 percent from 2009 to 2010 and dollar volume grew by almost 82 percent. Additionally, the average deal size grew by 49 percent in 2010 compared to 2009, paced by large deals such as Digital Realty Trusts $725M purchase of Rockwood Capital/365 Main Portfolio (a five-property data center portfolio) and Ricoh Co. Ltd.s $690M purchase of InfoPrint Solutions Company. The increase in average valuations of deals completed in 2010 has driven multiples above the ten-year historical average of 10.9x, rebounding from its lows in 2009 (Figure 3). The most significant factors contributing to this increase are improved economic conditions and a large amount of capital available to consummate deals; the latter factor, which has also increased competition, will be discussed later in this newsletter.

FIgure 1: Quarterly u.s. Middle Market technology M&a activity

$12,000 $10,000 Deal Value ($ in M) $8,000 $6,000 $4,000 $2,000 $0 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 120 100 80 60 40 20 0 Number of Transactions

Deal Value ($ in M)
Source: Capital IQ

Number of Transactions

FIgure 2: annual u.s. Middle Market technology M&a activity

$60,000 $50,000 Deal Value ($ in M) $40,000 $30,000 $20,000 $10,000 $0 600 500 400 300 200 100 0 Number of Transactions

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in M) Number of Transactions

Source: Capital IQ

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As industry growth is expected through 2011, companies within the technology sector continue to be prime targets for both financial sponsors and corporate acquirers.

Rebound in pRivate equity teChnology tRansaCtions sets the stage foR 2011
As industry growth is expected through 2011, companies within the technology sector continue to be prime targets for both financial sponsors and corporate acquirers. PE deal volume in the second half of 2010 totaled $3.4B, an increase of 69 percent over the prior year period (Figure 4). The drivers of this activity were Thoma Bravo and Teachers Private Capitals $507M acquisition of SonicWall, Hellman & Friedmans $587M acquisition of Internet Brands, Inc. and CCMP Capitals $637M acquisition of infoGROUP.

FIgure 3: annual u.s. Middle Market technology transaction Multiples

14.0x 12.0x 10.0x EV / EBITDA 8.0x 6.0x 4.0x 2.0x 0.0x 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 10.6x 11.1x 9.7x 10.1x 12.6x 11.2x 12.1x 12.4x 11.2x 8.5x

softwaRe
While the number of software transactions was down modestly in Q4 2010 from Q4 2009, the software M&A market saw an increase in deal value of 11 percent quarter over quarter and 4 percent over the prior year period (Figure 5). The average deal size for the software sector was higher in 2010 ($84M) than 2009 ($58M), but, as seen in Figure 6, the software industry continues to be dominated by smaller transactions with 55 percent of deals under $50M for 2010.

Source: CapitalIQ Excludes multiples <3.0 and >20.0x

EV / EBITDA Multiple

Average Over 10 Years

FIgure 4: Quarterly u.s. Middle Market private equity technology M&a activity
$1,800 $1,600 $1,400 Deal Value ($ in M) $1,200 $1,000 $800 $600 $400 $200 $0 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 9 8 7 6 5 4 3 2 1 0 Number of Transactions

it seRviCes
The middle market IT services industry experienced a surge in deal value in Q4 2010 with 26 percent growth since Q3 2010 and 42 percent growth over the prior year period (Figure 7). Windstream Corporations $310M acquisition of Hosted Solutions was a factor in the deal-value increase, as was Cubic Corporations acquisition of ABRAXAS for $124M. Although the number of transactions was unchanged from Q4 2009, activity increased by 56 percent from Q3 2010. Deal size was also an indication of a market recovery. As cash flowed into the markets, acquirers became more aggressive with larger sized deals, creating bidding wars and

Source: CapitalIQ

Deal Value ($ in M)

Number of Transactions

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M&A is expected to remain a prominent trend in the sector for the foreseeable future as technology corporations utilize their war chests of cash to continue to diversify business lines and enhance product offerings.
valuation premiums. As seen in Figure 8, almost 60 percent of deals in 2010 were over $50M, compared to only 33 percent in 2009.

FIgure 5: Quarterly u.s. Middle Market software M&a activity

$3,000 35 30 25 20 15 10 5 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 0 Number of Transactions

Deal Value ($ in M)

teChnology fiRms build up aCquisition Capital with debt

Technology firms in the United States are increasing cash holdings as the top 15 publiclytraded firms together have amassed nearly $250B in cash. There is speculation that the increasing corporate cash balances represent a longer term behavioral shift in the wake of the financial crisis. BDO Capital, however, believes that companies are simply taking advantage of the historically low interest rates that are available in the market as more technology companies raise capital through debt offerings. The low cost of capital associated with debt in todays market makes it far less expensive than the dilution associated with a comparable equity raise. This move towards debt proves to be a shift from historical capital raising trends in the technology sector. In 2002, seven of the largest 25 software companies worldwide (by revenue) raised debt, compared to 24 of the largest 25 firms in 2010. M&A is expected to remain a prominent trend in the sector for the foreseeable future as technology corporations utilize their war chests of cash to continue to diversify business lines and enhance product offerings. Significant strategic buyer interest is also attributable to a reduction of internal research and development efforts, causing companies to purchase new technologies from outside sources to expand their businesses. This is true for non-technology firms as well, who are increasingly becoming interested in buy-side technology deals for technologybased competitive advantages in an effort to become a one stop shop. Industry trends such as mobility and its associated security needs are other factors that have helped to drive momentum in M&A activity.

$2,500 $2,000 $1,500 $1,000 $500 $0

Deal Value ($ in M)
Source: CapitalIQ

Number of Transactions

FIgure 6: u.s. software transactions by Deal size

60 Number of Transactions 50 40 30 20 10 0

25 0M

50

0M

0M

1B

<$

50

10

-$

-$

-$

0M

10 0M

0M

$5

>$

>$

Source: Capital IQ Includes disclosed deals >$5M

2010

25

2009

>$

50

0M

>$
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-$

1B

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Consumers are increasingly involved in the future of IT as more and more people are buying web-connected devices that can tap into consumer and corporate applications.

Deal Value ($ in M)

mobility, seCuRity and Cloud Computing tRansaCtions aRe paCing both the middle maRket and oveRall deal making in the teChnology seCtoR
Mobility has been and will continue to be a key focus of technology consumers as ever-increasing amounts of data are consumed by mobile users and consumers choices of mobile data sources expand. Consumers are increasingly involved in the future of IT as more and more people are buying web-connected devices that can tap into consumer and corporate applications. Companies are expected to invest significantly in mobility to bring about not just smart phones but connected devices in multiple forms including tablets. Recently, deals have been consummated by large corporations trying to expand their mobile presence. Large-cap examples include SAPs $5.4B acquisition of Sybase, Tycos $1.3B acquisition of ADC Telecommunications and HewlettPackards $1.2B acquisition of Palm. In the middle market, deals such as Broadcom Corp.s $316M acquisition of Beceem Communications, NTT DOCOMOs $172M acquisition of PacketVideo Corporation and Juniper Networks $152M acquisition of Trapeze Networks illustrate this trend. Similar to mobility, security is also a key consideration and M&A driver as it now assumes a fundamental component of online and mobile computing. Todays approach to digital security does not fully address the surge in cyber threats associated with new internet-ready devices, including mobile and wireless devices, TVs, cars, medical devices and ATM machines. Providing protection to an increasingly diverse online world requires a fundamentally new approach involving software, hardware and services. Hardware giant Intels $7.7B acquisition of McAfee (at a premium of over 60 percent to its pre-announced deal stock price), HewlettPackards $1.5B acquisition of ArcSight and

FIgure 7: Quarterly u.s. Middle Market It services M&a activity

$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010

16 14 12 10 8 6 4 2 0 Number of Transactions

Deal Value ($ in M)
Source: CapitalIQ

Number of Transactions

FIgure 8: u.s. It services transactions by Deal size

30 Number of Transactions 25 20 15 10 5 0

50 0M

0M

0M

1B

50

-$

<$

25

10

-$

-$

-$

0M

0M

0M

$5

>$

Source: CapitalIQ Includes disclosed deals >$5M

2010

>$

25

10

2009

>$

50

0M

>$
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Symantecs $1.1B acquisition of Verisigns Authentication Services Business demonstrate the significant demand for security offerings. Likewise, in the middle market, Thoma Bravo and Teachers Private Capital purchase of SonicWALL for $507M, Symantecs purchase of PGP Corporation for $306M and Windstream Corporations acquisition of Hosted Solutions for $310M underscore this increased demand for digital security. The need for digital security in areas such as government, energy and e-commerce will also make this a strategic area for buyers. Traditional defense companies are attempting to diversify into the security business to take advantage of these trends. Boeings acquisition of Narus Networks demonstrates this market trend while Wyle bought CAS for $235M and SAIC acquired Reveal Imaging Technologies for $218M, which are all notable middle market transactions. The consumer internet and mobile data phenomena have vastly increased the amount of data that must be processed and stored by companies remotely. This increase in mobilityenabled technology and the associated applications, which store data almost exclusively in the cloud, is expected to drive a large proportion of technology hardware growth in the next two years. The increasing prevalence of cloud computing is also driving up the number of servers in the data centers even though many organizations are looking to cloud computing to reduce their hardware footprint. Ultimately, the adoption of cloud computing could diminish the number of servers deployed in proportion to the number of users served but that is unlikely to happen until late in the decade. Notable recent deal activity includes Cincinnati Bell Technology Solutions $644M acquisition of Cyrus Networks, GI Partners acquisition of SoftLayer Technologies for $475M, Harmonics $250M purchase of Omneon and IBMs acquisition of Storwize for $140M.

FIgure 9: Cash positions of 10 largest technology Companies (within Q3 2010) total Cash & short term investments ($b) 43.3 39.9 33.4 27.0 23.6 20.8 14.7 11.7 10.3 6.7

Company Microsoft Corporation (NasdaqGS:MSFT) Cisco Systems, Inc. (NasdaqGS:CSCO) Google Inc. (NasdaqGS:GOOG) Apple Inc. (NasdaqGS:AAPL) Oracle Corp. (NasdaqGS:ORCL) Intel Corporation (NasdaqGS:INTC) Hewlett-Packard Company (NYSE:HPQ) International Business Machines Corp. (NYSE:IBM) QUALCOMM Incorporated (NasdaqGS:QCOM) EMC Corporation (NYSE:EMC)
Source: CapitalIQ

We at BDO Capital believe that these technology trends, along with continued improvement in the debt markets and a buildup of cash to deploy, will allow for a continued increase in M&A transactions in the technology sector from 2010 to 2011. We have a long background of assisting owners of middle market companies in the technology sector in exploring their strategic liquidity alternatives. We would welcome the opportunity to assist you in these or other capital markets needs.

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ReCent notable teChnology tRansaCtions

enterprise Value ($M)
$725.0

Close Date
07/13/10

acquirer(s)
Digital Realty Trust, Inc. (NYSE:DLR) Ricoh Co. Ltd. (TSE:7752) Cincinnati Bell Technology Solutions, Inc. CCMP Capital Advisors, LLC

target
Rockwood Capital/365 Main Portfolio InfoPrint Solutions Company, LLC Cyrus Networks LLC Infogroup

target Description
Comprises five data center facilities in San Francisco, El Segundo, Oakland, California; Chandler, Arizona; and Chantilly, Virginia Provides digital output solutions for businesses; it offers general office, industrial, workgroup, cut sheet, light production, and production print solutions Provides corporate colocation and data center services

eV/ revenue
6.2x

eV/ eBItDa

06/30/10

$690.0

0.7x

06/11/10

$644.0

9.9x

17.9x

07/01/10

Provides business and consumer databases for sales leads, mailing lists, direct marketing, database marketing, e-mail marketing, and marketing research solutions Comprises Product Lifecycle Management (PLM) software application portfolio, sales and client support operations, customer contracts, and related assets

$637.4

1.3x

7.5x

03/31/10

Dassault Systmes, S.A. (ENXTPA:DSY)

International Business Machines Corp., Sales and Customer Support Unit for PLM Software Bell Microproducts Inc.

$600.0

1.5x

07/06/10

Avnet Inc. (NYSE:AVT)

Distributes storage products and systems and computer products and peripherals to original equipment manufacturers, value-added resellers, and dealers in the United States, Canada, Latin America, and Europe Owns, operates, and develops branded Web sites Provides web-based software that automates the supply chain for the retail and food service industries Designs, develops, manufactures, and sells network security, content security, and business continuity solutions in the United States and internationally Develops illumination and detection solutions, as well as digital imaging solutions for original equipment manufacturers (OEMs) in health, safety and security markets; develops optoelectronic products focusing on various chips on board technology, chip design for LED or PIN diodes, and packaging; manufactures xenon flashtubes and CDS photocells; and provides solutions for biomedical and industrial markets Provides web hosting and on-demand services

$592.8

0.2x

10.9x

12/17/10 07/27/10 07/23/10

Hellman & Friedman LLC Roper Industries, Inc. (NYSE:ROP) Teachers' Private Capital; Thoma Bravo, LLC Veritas Capital

Internet Brands, Inc. iTradeNetwork, Inc. SonicWALL, Inc.

$587.0 $525.0 $507.2

5.5x 2.4x

14.5x 16.6x

11/29/10

PerkinElmer, Inc.s Illumination and Detection Solutions (IDS) Business

$482.0

10.0x

08/03/10

GI Partners

SoftLayer Technologies, Inc. Diveo Broadband Networks, Inc.

$475.0

12/29/10

DH&C Outsourcing S.A.

Provides broadband internet and data center solutions for corporate customers in Brazil, Colombia, Mexico, and the United States

$420.2

05/25/10 10/20/10 04/09/10

Oak Hill Capital Partners; GI Partners Pace plc (LSE:PIC) ZelnickMedia Corp.; GSO Capital Partners LP; Sankaty Advisors, LLC; S.A.C. Private Capital Group, LLC

ViaWest Internet Provides colocation, managed hosting, and business Services, Inc. continuity solutions to mid-sized businesses 2Wire, Inc. Airvana, Inc. Provides broadband service delivery platforms Provides network infrastructure products that are used by wireless operators to provide mobile broadband services

$420.0 $420.0 $358.7

0.6x 4.5x

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aBOut ValentIna a. MIDura

Ms. Midura is the head of BDO Capital Advisors Technology Industry practice and has more than 13 years of investment banking experience. In addition to overseeing this industry vertical for BDO Capital Advisors, she also is primarily responsible for maintaining BDO Capital Advisors relationships with the private equity community. Ms. Midura is a specialist in numerous transaction structures and processes including leveraged recapitalizations, the auction sale and a variety of other going to market techniques and deal structures. Ms. Midura has authored numerous industry and process-related articles and routinely participates in speaking engagements, presentations and industry symposiums. Her transaction resume includes the successful sale of over 30 companies with total client consideration value approaching $1B. Prior to joining BDO Capital Advisors, LLC (formerly Trenwith Securities, LLC), Ms. Midura served as a director in the investment banking division of Andersen Global Corporate Finance, LLP, joining that group in 1998. While at Andersens Boston office she was a key architect in the firms investment banking technology go-to-market strategy and a contributor to the firms growth across a variety of technology sectors including software, hardware and IT services. In addition to technology, Ms. Midura specializes in analyzing and processing value-enhancing liquidity alternatives for companies across a wide range of industries including manufacturing, healthcare, distribution, consumer products and business services. Ms. Midura began her career with Andersen, LLP providing global business consulting and regulatory advisory services to companies within the public and private sectors. Ms. Midura holds a Bachelor of Science from the Whittemore School of Business at the University of New Hampshire, is qualified as a General Securities Representative, is a Certified Public Accountant and a member of the Massachusetts Society of CPAs and AICPA.
VALENTINA A. MIDURA Managing Director Direct: 617-422-7593 Mobile: 978-873-1314 vmidura@bdocap.com

aBOut BDO CapItal aDVIsOrs , llC

BDO Capital Advisors, LLC is a middle market boutique investment bank that focuses on four product areas: mergers and acquisition advisory, corporate finance capital raising, special situations advisory, and board advisory. Through its highly experienced investment bankers, the firm has raised hundreds of millions of dollars in capital, been involved in the financial restructuring of hundreds of companies and generated approximately seven billion dollars of shareholder transaction value in industries such as healthcare services, specialty manufacturing, software and information technology, specialty chemicals, and retail and consumer products. BDO Capital is a FINRA member firm. BDO Capital Advisors, LLC is a separate legal entity and is an affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm. Through their affiliation with BDOs international network, BDO Capital has access to more than 300 corporate finance professionals domiciled in over 40 countries. BDO is regularly ranked in the top ten in M&A advisory based on number of transactions with values up to $100 million by Thomson Reuters league table ranking, and in the top ten of special situation banks by number of active bankruptcy engagements by The Deal.com.

aBOut BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,082 offices in 119 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. For more information, please visit: www. bdo.com.

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