-m&a it service sectors

www.redcapgroup.com 1

REDWOOD CAPITAL: SECTOR OVERVIEW IT Services: The Evolving Cloud Service Providers

INTRODUCTION

This report focuses on the emerging area of managed and hosted

services for small and mid-sized businesses. In particular, the report

looks at the consolidation activity currently taking place and the

acquisition strategies being pursued by larger players in the telecom,

IT services, hosting and data center businesses as these players look

to evolve and migrate their businesses to become the leading cloud

service providers of the future.

OVERVIEW

The IT services sector is an extremely large and diverse industry.

There are literally hundreds of players with half a billion dollars or

more in revenue providing some mix of connectivity, systems inte-

gration, hosting, managed services or product sales to small and mid-

size businesses. As the IT services space evolves and SMB custom-

ers continue migrating to managed services and cloud offerings, this

shift presents a significant opportunity for established players who

can develop the right models and leverage their existing relationships

to capture a greater share of their customers IT wallet while estab-

lishing high margin, contractually recurring revenue streams.

Not surprisingly, many large players are using M&A to aggressively

expand their businesses. Telecom players are acquiring data center

players; data center players are acquiring hosting providers; and

hosting providers are acquiring each other to broaden their solutions.

And so as not to be left behind, integrators are acquiring managed

service providers to try and move to recurring revenue models. Even

large IT players like Best Buy and Dell have made acquisitions in the

managed services space. And of course, private equity players are

always there, buying or selling wherever the opportunity seems right.

So how can a smaller, emerging players make sense of this landscape

and understand the trends impacting their decision around when and

to whom to sell. This report looks at M&A activity across a broad

range of subsectors comprising cloud and IT services for small and

mid-size businesses. In doing so, we identify some of the key trends

shaping consolidation activity.

Section 2 graphically takes a quick look at some of the consolidation

activity for a few large players to highlight some of the key acquisi-

tion trends taking place. Section 3 focuses on the key valuation met-

rics and how they vary across sectors and business models. Section 4

looks at acquisitions within each category of acquirer to see where

there are acquisition strategies that cross business lines. Of course

telecom players acquire telecom players and data center players ac-

quire each other. But are the they acquiring MSPs or integrators?

Are distributors like Arrow moving upstream through acquisition?

These are the key acquisition trends this report aims to identify as

well as to understand whether an unusual deal (like Best Buys acqui-

sition of MSP Mindshift) is really reflective of a trend or simply a

one-off deal that may not likely be repeated. Finally, Section 5 pro-

files many of the most active acquirers in seven different subsectors,

shown in the index at the left. For each, weve identified some of

their recent acquisitions, relevant business activity, and speculated on

what types of acquisitions they may make next.

Because this report covers a rather wide swath, weve not attempted

to included every transaction or every player, but rather identify some

of the highlights that we think are important to understand, and which

are reflective of trends that will have a meaningful impact on the

evolution of the competitive landscape over the next several years.

INSIDE THIS ISSUE Page

1. Introduction 1

2. Subsector Consolidation 2

3. Valuation Metrics 4

4. M&A Activity by Sector 8

5. Acquirer landscape 29

Managed Hosting

Data Center

Telecom Service Providers

Systems Integrators

New Voice Services

Large IT Equipment Players

IT Distributors

Contact:

Russell Crafton, Partner [email protected] 212.508.7110

July 2012

Redwood Capital: 885 Third Avenue, 25th Floor New York, NY 10022

M&A in the Cloud and IT Services Sectors The Evolving Cloud Service Providers



Consolidation in the IT Services space is beginning to cross sub-sectors, with many

players beginning to use M&A to expand their solution sets and move into higher

margin offerings. For example, whereas the data center space has been actively

consolidating for the past decade, telecom players have now moved in, as evi-

denced by CenturyLinks acquisition of Savvis and Verizons acquisition of Terre-

mark. Many industry watchers have long expected that the data center business,

being a heavy facilities-based business, to eventually find its way into the telecom

umbrella.

While other sectors in the cloud services market may be at a somewhat earlier stage

regarding consolidation, we expect that this too may likely change. The managed

services and hosting areas are two spaces we think are very likely to see increased

M&A interest. BestBuys recent acquisition of IT managed services player Mind-

shift is one example, we think, of how larger IT equipment vendors selling into the

SMB customer base will look to acquire services offerings as well to grow their

share of wallet and maintain a strong presence and control of the customer.

SUBSECTOR CONSOLIDATION

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Hosted Solutions

QCom Corp

Xeta

Cavalier Telephone

McLeod

Embarq

Qwest Wam!Net

Cable & Wireless America

Napster

DealTree

Dynamic Digital

Union Square Tech

Invision.com

Collaboration Online

CloudSwitch

MCI

DataReturn

Accris

DS3 DataVaulting



Other moves that we think may be reflective of things to come include Arrow, a

large distributor that has recently made moves upstream with its acquisitions of

telephony integrators Shared Technologies and Cross Telecom. Many distributors

have pondered moving into the integration space for some time, and the competi-

tive implications with their channel, but few have made any significant acquisitions

(with CDWs acquisition of Berbee a few years ago being a key exception). We do

think the distributors are extremely well positioned to sell into the SMB space and

may look at other businesses, such as hosting, that they can push through their ex-

tensive channel networks to easily reach a major share of the SMB market.

Finally, there are many players, such as J2 Global, that will continue to purse a

strategy of remaining focused on their core business, in J2s case, the offering of

SaaS applications for SMBs in UC and related applications. Perhaps J2 could even-

tually be the right add-on for an Arrow or Avnet that wants to have a set of hosted

apps to sell through its reseller network.

SUBSECTOR CONSOLIDATION (CONTINUED)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

ICC NetASPx

Abanza & Jupiter

WayThere

RoadRunner

Cross Telecom

Shared Technology

Nu Horizon

Richardson RFPD

Zintel

Lanslide Tech

Offsite Backup

Protus IP

Venali

FuseMail



Shown below, and on the next several pages, are a variety of metrics providing

trading valuations for public IT services players. While the markets have improved

significantly over this time, although lots of ups and downs, some areas of IT have

done very well while others have significantly lagged.

As shown in blue in the bar chart below, data center and managed hosting players

all trade at very strong EBITDA multiples, in large part due to the significant

growth these players have demonstrated. Not surprisingly, growth is what the mar-

ket focuses on the mostas indicated by the relatively good degree of correlation

in the scatter plot and regression line shown at the lower right.

Given the significantly higher valuations for recurring revenue businesses, many

players in more traditional spaces such as system integration and distribution

(which trade at 4.8x and 4.2x EBTIDA respectively) are actively trying to migrate

their businesses to more of a recurring revenue model. For integrators, this in-

volves several strategies including the migration to managed services business

models and the introduction of complementary lines of business such as cloud in-

frastructure services where revenue is on a contractually recurring basis. These are

core trends playing out across the IT services landscape where nearly every reseller

and integrator are introducing managed services models.

For distributors and consultants, their future strategies pose much greater challeng-

es as it requires more of a fundamental shift in their businesses. The distribution

business in particular has always operated on very tight margins (hence the 0.1x

revenue multiple below) and consulting business face the challenge of lots of one-

time project oriented work. While both consulting and distribution are important

functions that will always remain, they do not present the same high growth as oth-

er spaces and thus suffer on the valuation front.

Sources: Capital IQ, Venturewire, Redwood Capital

2012 EBITDA and Revenue Multiples

VALUATION METRICS

2012 EBITDA / 2012 EBITDA Growth Rate

13.9x

9.2x

10.9x

5.9x

8.6x

4.2x4.8x

8.1x

7.3x

3.1x 3.4x

2.4x

1.2x

0.1x 0.4x

1.4x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

Data Center M anaged

Hosting

Web

Hosting

CLECs New Voice

Services

Distributors Integrators Consultants

EBITDA Revenue

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

0% 10% 20% 30% 40% 50%

2011-2012E EBITDA Growth Rate

2012E T

EV

/ E

BIT

DA

Mu

ltip

le




Publicly Traded IT Services Companies

$ millions

Stock 52 Week Market

Company Name Price High Cap TEV Revenue EBITDA Revenue EBITDA Revenue EBITDA Revenue EBITDA CY 2011A CY 2012E CY 2011A CY 2012E

Data Center

Equinix $171.9 $178.4 $8,265 $10,500 $1,220.3 $476.8 $1,606.8 $666.2 $1,901.2 $876.9 18% 32% 6.5x 5.5x 15.8x 12.0x

Digital Realty Trust 74.7 76.0 8,234 12,117 870.7 503.2 1,067.7 606.7 1,178.6 725.3 10% 20% 11.3x 10.3x 20.0x 16.7x

Telecity Group 12.7 12.9 2,530 2,788 318.0 135.1 388.3 171.9 466.3 213.7 20% 24% 7.2x 6.0x 16.2x 13.0x

Median 18% 24% 7.2x 6.0x 16.2x 13.0x

Mean 16% 25% 8.4x 7.3x 17.3x 13.9xManaged Hosting

Rackspace $44.7 $60.6 $6,038 $5,995 $780.6 $217.6 $1,025.1 $292.7 $1,322.9 $454.4 29% 55% 5.8x 4.5x 20.5x 13.2x

Internap 6.7 8.0 340 416 244.2 34.6 244.6 39.4 276.4 52.5 13% 33% 1.7x 1.5x 10.6x 7.9x

j2 Global 25.6 32.7 1,186 1,021 255.4 118.4 330.2 155.7 354.4 184.0 7% 18% 3.1x 2.9x 6.6x 5.5x

iomart Group 2.2 2.4 221 218 37.7 8.5 50.4 16.1 60.6 21.7 20% 35% 4.3x 3.6x 13.5x 10.0x

Median 17% 34% 3.7x 3.2x 12.1x 9.0x

Mean 17% 35% 3.7x 3.1x 12.8x 9.2x

Web Hosting

Web.com $18.8 $19.1 $878 $1,575 $120.3 $6.5 $199.2 $17.2 $467.1 $144.7 134% 741% 7.9x 3.4x 91.5x 10.9x

Tucows 1.1 1.7 51 49 84.6 4.5 97.1 5.7 - - 0.5x 8.6x

Median 134% 741% 4.2x 3.4x 50.1x 10.9x

Mean 134% 741% 4.2x 3.4x 50.1x 10.9x

CLECs

Windstream $9.9 $13.4 $5,807 $14,712 $3,710.7 $1,812.2 $4,285.7 $1,886.6 $6,246.7 $2,437.1 46% 29% 3.4x 2.4x 7.8x 6.0x

Frontier 3.9 8.2 3,874 11,810 3,797.7 1,802.9 5,243.0 2,461.6 4,946.7 2,363.5 (6%) (4%) 2.3x 2.4x 4.8x 5.0x

CenturyLink 38.9 41.3 24,141 45,478 7,042.0 3,639.0 15,351.0 6,518.0 18,272.7 7,501.2 19% 15% 3.0x 2.5x 7.0x 6.1x

Cincinnati Bell 3.6 4.2 708 3,362 1,377.0 501.6 1,462.4 522.0 1,483.3 529.0 1% 1% 2.3x 2.3x 6.4x 6.4x

TDS 21.1 32.0 2,289 3,610 4,986.8 1,063.5 5,180.5 1,127.5 5,211.7 1,153.6 1% 2% 0.7x 0.7x 3.2x 3.1x

Median 10% 8% 2.6x 2.4x 6.7x 6.0x

Mean 15% 10% 2.7x 2.4x 6.5x 5.9x

Sources: First Call mean estimates for projections; Capital IQ historical financial and operating data. Price Close 06/20/2012.1) 1 GBP = 1.56 USD `

TEV / Revenue TEV / EBITDA

Trading MultiplesFinancial and Operating Data

CY 2010A CY 2011A CY 2012E Growth '11-'12

Research Projections




Publicly Traded IT Services Companies (continued)

$ millions

Stock 52 Week Market

Company Name Price High Cap TEV Revenue EBITDA Revenue EBITDA Revenue EBITDA Revenue EBITDA CY 2011A CY 2012E CY 2011A CY 2012E

New Voice Services

cBeyond $6.0 $13.8 $182 $184 $452.0 $59.1 $485.4 $69.3 $489.6 $88.3 1% 27% 0.4x 0.4x 2.7x 2.1x

Vonage 2.0 4.8 444 469 885.0 148.1 870.3 153.4 847.5 123.0 (3%) (20%) 0.5x 0.6x 3.1x 3.8x

8x8 4.3 5.4 306 282 67.8 6.3 79.8 9.0 103.2 14.2 29% 58% 3.5x 2.7x 31.3x 19.9x

Median 1% 27% 0.5x 0.6x 3.1x 3.8x

Mean 9% 22% 1.5x 1.2x 12.3x 8.6x

Distributors

Arrow $35.0 $43.4 $3,916 $5,462 $18,744.7 $861.6 $21,390.3 $1,056.0 $21,173.6 $992.7 (1%) (6%) 0.3x 0.3x 5.2x 5.5x

Ingram Micro 17.6 19.8 2,675 2,024 34,589.0 547.1 36,328.7 521.1 36,723.0 573.1 1% 10% 0.1x 0.1x 3.9x 3.5x

Tech Data 47.9 59.3 1,908 1,580 24,376.0 381.3 26,488.1 413.5 26,102.1 434.6 (1%) 5% 0.1x 0.1x 3.8x 3.6x

Median (1%) 5% 0.1x 0.1x 3.9x 3.6x

Mean (0%) 3% 0.1x 0.1x 4.3x 4.2x

Integrators

BlackBox $27.2 $32.8 $477 $636 $1,054.1 $114.1 $1,086.6 $113.2 $1,087.7 $99.3 0% (12%) 0.6x 0.6x 5.6x 6.4x

Insight Enterprises 15.4 23.1 685 693 4,809.9 165.0 5,287.2 193.0 5,508.5 215.1 4% 11% 0.1x 0.1x 3.6x 3.2x

Median 2% (0%) 0.4x 0.4x 4.6x 4.8x

Mean 2% (0%) 0.4x 0.4x 4.6x 4.8x

Consultants

Cognizant $60.4 $78.0 $18,376 $15,885 $4,592.4 $972.0 $6,121.2 $1,260.6 $7,550.8 $1,537.4 23% 22% 2.6x 2.1x 12.6x 10.3x

Accenture 59.6 65.9 38,403 33,362 22,213.7 3,481.5 26,535.9 4,227.1 28,574.7 4,570.4 8% 8% 1.3x 1.2x 7.9x 7.3x

Wipro 7.1 8.0 17,462 16,245 5,605.5 1,207.0 6,716.1 1,295.2 7,908.5 1,549.0 18% 20% 2.4x 2.1x 12.5x 10.5x

Cap Gemini 36.0 51.7 5,526 5,002 11,351.6 943.7 12,651.6 1,148.6 13,029.1 1,212.3 3% 6% 0.4x 0.4x 4.4x 4.1x

Median 13% 14% 1.8x 1.6x 10.2x 8.8x

Mean 13% 14% 1.7x 1.4x 9.3x 8.1x

Sources: First Call mean estimates for projections; Capital IQ historical financial and operating data. Price Close 06/20/2012.1) 1 GBP = 1.56 USD `

TEV / Revenue TEV / EBITDA

Trading MultiplesFinancial and Operating Data

CY 2010A CY 2011A CY 2012E Growth '11-'12

Research Projections



While the last two years have certainly been a bit choppy for public equities, IT

services businesses with recurring revenue streams have significantly outperformed

all other sectors. While our universes are small enough that they may be subject to

individual company performance, nevertheless, the adoption of hosted offerings and

the general uptake in data center resources has provided a solid base upon which to

grow. Surprisingly, many other sub-sectors, such as integrators (BlackBox, Insight

Enterprises) and New Voice Services (8x8, cBeyond) have not faired nearly as well.

The slow economic rebound has certainly provided a difficult climate in which to

sell new IT upgrades. Going forward, we think that recurring revenue businesses

should continue to perform extremely well, regardless of the broader markets per-

formance or the economic recovery. These businesses are benefiting from the out-

sourcing of IT and reduction of the overall IT budget that many enterprises are in-

creasingly focused on during challenging economic times.

Regarding private companies, the valuation trends are consistent, with recurring

revenue businesses in the hosting, managed services and cloud infrastructure areas

commanding significant premiums. Also important to note in the private market is

that for the few players of scale, the premium over smaller competitors is quite sig-

nificant. We believe that this is due to the significant scarcity value of private play-

ers of scale relative to the number of larger players looking to make acquisitions.


Public Stock Trends

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Data Center Managed Hosting Web Hosting CLECs New Voice Services Distributors Integrators Consultants



The hosting area has been one of the most active sectors from an M&A standpoint.

While the capital and scale requirements make the data center and telecom markets

less viable for start-ups, hosting is a much easier and less capital intensive space in

which to launch a new business. Not surprisingly, the list of small hosting start-ups

is lengthy and the recent consolidation activity rather high.

Hosting Players to Remain Focused On Hosting: Our expectation for M&A

among the larger managed hosting players is that they will remain highly focused

on acquiring smaller players within their space, either to acquire customer bases or

for specialized technologies. We dont expect to see hosting companies acquiring

data center players, integrators, or even managed service providers. We believe

that managing hosting providers will entirely focus their acquisitions on acquiring

either smaller hosting players or on niche technology acquisitions to improve the

platforms they use to offer solutions or allow customers and channel partners to

manage and deploy their offerings.

J2 Highly Acquisitive: One highly active player is J2 Global which has completed

over dozen acquisitions during the past several years to expand its offerings of

communications and collaboration solutions. J2 focused on smaller acquisitions to

acquire customer bases that it can migrate to its platforms, or to add niche technolo-

gies. They have successfully expanded into seven key product areas and are likely

considering other spaces as well as geographic expansion as they look to increase

they presence in Europe and Asia.

Private Equity To Remain Very Active In Hosting: Private equity buyers have

also been active in the hosting area to secure platforms for growth, perhaps most

significant was Silver Lakes acquisition of GoDaddy. Other private equity deals

include Microsoft Exchange hosting player Intermedia which was acquired by Oak

Hill. In all cases, we believe these deals are simply platform acquisitions which

the financial owners intend to build up through complementary acquisitions. For

example, in parallel with its acquisition of Intermedia, a hosted MSFT exchange

player, buyout group Oak Hill also acquired Zlago to help enhance their cloud ser-

vice capabilities. Oak Hill also brought in previous Savvis CEO Phil Koen, with

the intention of using Intermedia as a platform for expansion. We expect these new

private equity backed managed hosting companies to become more aggressive in

M&A to expand their offerings.

Selected M&A 2009 - Present

ACQUISITION ACTIVITY BY HOSTING PROVIDERS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target

Space Business Description

12/16/2010 Cloudkick Rackspace - Cloud IT Online platform for cloud server management

04/27/2011 Switch Media iomart Group 2.1 1.0x 15.7x Consultants Digital, creative and marketing, and technical services

02/16/2012 Young CS Technologies Rackspace - Consultants SharePoint consulting services

06/17/2010 Register.com Web.com 135.1 Distributors Domain name registration, domain name transfer, domain

name renewal

10/10/2011 NeoSpire Hosting.com - Hosting Multi-platform server management, dedicated server

hosting; application hosting




Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


06/14/2011 Zlago Intermedia.net - Hosting Hosted desktop, hosted exchange, hosted PBX/VOIP,

software on demand, etc

01/03/2012 Voxel dot Net Internap Network 33.3 Hosting Hosting solutions, cloud computing services, hosting

infrastructure

11/24/2011 EQSN iomart Group 3.8 Hosting Commercial IT hosting solutions to companies

11/01/2010 Titan Internet iomart Group 7.6 Hosting Webhosting services for data centers in the United Kingdom

10/26/2011 C3 Computers Limited,

Online Backup Business

j2 Global - Hosting Virtual dedicated server hosting and secure online backup

services

02/01/2010 Comodo Communications j2 Global 5.9 Hosting Trust and assurance services for the Internet

07/11/2011 DataHaven j2 Global - Hosting Online backup technology solutions for small, medium, and

large businesses

05/05/2010 FuseMail j2 Global 6.6 Hosting Outsourced email hosting services to businesses and

resellers

10/21/2010 keepITsafe Data Solutions j2 Global - Hosting Online backup services

02/06/2012 Landslide Technologies j2 Global - Hosting CRM solution includes contact and account management,

opportunity management, collaboration

04/01/2010 mBox j2 Global - Hosting Strategic marketing, branding, and media agency

01/23/2012 Offsite Backup Solutions j2 Global - Hosting Online backup services for small businesses.




Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


09/08/2010 Venali j2 Global 17.0 1.7x Hosting Internet fax services to various corporations.

02/10/2011 Anso Labs Rackspace - Hosting Software and services for private cloud computing

infrastructure

08/02/2011 EPAG Domainservices Tucows 2.1 Hosting Domain registration services for resellers and corporate

clients

03/02/2010 Innuity, Inc., Web Hosting

Business

Web.com 1.4 Hosting Design, acquisition, and integration of applications to

deliver solutions for small business

08/03/2011 Network Solutions Web.com 793.7 8.8x Hosting Web-related services, including domain name registration

services, Web site hosting, Web site design, e-mail, SSL

certificates07/11/2011 Buzz Networks Limited,

Virtual PBX Business

j2 Global - New Voice

Services

Telemarketing services, such as call recording,

intelligent/call routing, and numbering services

07/26/2010 Alban Telecom j2 Global 2.8 Telecom Non-geographic numbers mobiles and accessories, call

plans, and outbound call select services

02/01/2010 Realty Telecom j2 Global - Telecom Realty Telecom Ltd. offers telecommunication services

02/16/2012 Zimo Communications j2 Global - Telecom Non-geographic numbers and online call management tools

03/01/2012 Zintel Communications j2 Global 12.9 Telecom Provides telecommunication services and solutions for

businesses



DEAL PROFILESHOSTING

Weve profiled two deals below that we think are interesting moves indicative of

what we can expect to see from the larger managed hosting players in the future.

First is the acquisition of SharePoint911 by Rackspace which focused on Share-

Point managed infrastructure. Second is the expansion by J2 into the CRM space

with its acquisition of Landslide Technologies. In both cases, these larger players

bought relatively small, solution specific players in an effort to expand their offer-

ings into new markets.

Young CS Technologies / Rackspace Hosting:

Target: Young CS Technologies-SharePoint911

Acquirer: Rackspace Hosting

Date: February 2012

Description: "For several years, Rackspace has focused on

providing managed SharePoint infrastructure," says John

Engates, chief technology officer at Rackspace. "We are

thrilled to have the world-class expertise of SharePoint911

on our team to give us greater application delivery service

capabilities. SharePoint911 will add the talent and expertise

to our teams to make SharePoint deployments easier for our

customers while increasing their scalability and perfor-

mance through better integration of the workload and infra-

structure."

Source: Rackspace press release, Rackspace Acquires Share-

Point911, Feb 16, 2012.

Landslide Technologies / j2 Global:

Target: Landslide Technologies

Acquirer: j2 Global

Date: February 2012

Description: "The Landslide acquisition reflects continued

execution of our plan to expand our array of cloud-based ser-

vices for business," said Hemi Zucker, CEO of j2 Global.

"Landslide brings us a proven CRM platform for small to mid-

sized businesses and an established customer base. It also pro-

vides us an additional value-added service to sell through our

existing sales channels and into our existing base of more than

2 million paid cloud service subscribers."

Source: j2 Global press release, j2 Global Acquires Cloud-Based

CRM Provider.



The data center space has continued to see the consolidation trend play out with

larger players continuing to expand their core businesses along with the move by

telecom providers to make major acquisitions in the space. There has also been

some continued activity by private equity players, although this has slowed as the

market is maturing and many private equity players tend to be more in the exiting

than acquiring phase.

Telecom Players Moving In: Perhaps in the final phase of the consolidation, tele-

com players have acquired data center players themselves, most notably Centu-

ryLinks $3.1 billion acquisition of Savvis and Verizons $1.9 billion acquisition of

Terremark. Eventually we expect that a significant share the data center market

will be owned by telecom providers and expect to see other large transactions in the

near futre.

A Look to Higher Margin Offerings: While most data center players have so far

remained focused on consolidating within the data center space and tried to capture

the significant organic growth opportunities, as the market matures we expect to see

larger data center players move further in to managed hosting and cloud infrastruc-

ture areas. Currently, there are numerous start-ups leveraging proprietary IP to

offer new IaaS services including dedicated and metered server capacity, cloud

computing, and even hosted desktop and webtop solutions. These, along with man-

aged hosting of certain enterprise applications, may serve as complementary, higher

margin solutions that could allow data center players to continue to growth their

businesses and take a greater wallet share of customer IT needs.


ACQUISITIONS BY DATA CENTER PROVIDERS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


02/14/2011 Alog Equinix 127.0 Data Center Collocation (Carrier Nuetral) / Managed Hosting, expansion

into South America

08/02/2010 Internet Facilitators

Limited

Telecity Group 33.5 Data Center Colocation (Carrier-neutral), bolstering NW England

presence

09/23/2011 The UK Grid Network Telecity Group 18.1 6.5x 8.0x Data CenterColocation (Carrier-neutral), consolidating England market

08/08/2011 Data Electronics Group

Limited

Telecity Group 143.3 6.7x 13.9x DistributorsCollocation (carrier nuetral), expansion into Ireland

06/01/2020 FusePoint Savvis 124.0 10.4x Hosting Managed Hosting / Colocation, expansion into Canada

(financial services)

11/01/2011 Perimeter Technology

Center

Colo4 - Hosting Co-location and managed hosting services; monitored and

managed services, etc

06/01/2010 SAVVIS Canada Savvis 169.4 3.6x 15.4x Managed

Services

Application and infrastructure managed solutions for

mission critical enterprises



DEAL PROFILESDATA CENTER

Profiled below are two deals that reflect a few key trends indicative of the M&A

activity being led by data center players. First is a geographic expansion by

Equinix with its acquisition of Alog in the South American market. In fact, many

of the deals by Equinix and Telicity recently have been expansions into new inter-

national markets.

The second deal is Savviss acquisition of Fusepoint, also a geographic expansion

as well as a further building of Savvis hosting business, (which as noted in the

quote below) was specifically made to move into Canada, in part at the request of

Savvis customers.

Alog / Equinix:

Target: Alog

Acquirer: Equinix

Date: February 2012

Description: The investment extends Platform Equinix(TM)

to the South America market, creating a footprint of 95 data

centers across 37 global markets. It also gives Equinix the

ability to satisfy strong demand from its network, content,

cloud and financial services customers looking to establish a

presence in the rapidly growing Brazilian market, the world's

seventh largest economy and the second largest IT market in

emerging markets behind China.

Source: Equinix press release, Equinix completes the acquisition

of Alog, April 26, 2011.

Fusepoint / Savvis

Target: Fusepoint

Acquirer: Savvis

Date: June 2010

Description: "The acquisition of Fusepoint is a step toward one

of our most important goals to expand our geographic presence

around the world," said Jim Ousley, Savvis chairman and chief

executive officer. "Our largest customers have been asking us to

expand into Canada, and the acquisition of Fusepoint allows us

to do so in a seamless and efficient manner. Our best-in-class

product set and strong vertical market focus meshes well with

Fusepoint's fast growth and deep penetration of Canadian enter-

prises. Fusepoint has a great track record and extends Savvis'

reach into the highly promising Canadian hosting market includ-

ing Toronto, the financial center of Canada."

Source: SAVVIS press release, Savvis to Acquire Canadian-Based

Fusepoint, June 1, 2010.



Telecom Players Likely to Acquire Most Broadly In IT Services: Telecom

players have probably been the most active group of acquirers, using M&A to move

into a variety of new areas. TDS moved into managed services with its acquisition

of OneNeck. Verizon and CenturyLink moved into the data center space and man-

aged hosting areas with acquisitions of Terremark and Savvis, and Windstream

moved into the hosting area with its acquisition of Hosted Solutions. Going for-

ward, we expect to see much more of all of the above.

Acquisitions Into New Services Likely to Be Pursued By Large and Small Ser-

vices Providers Alike: Going forward we expect to see telecom players across the

board, from large ILECs to smaller CLECS and RLECs expand their service offer-

ings with acquisitions of data center and hosting providers, and managed services

businesses. Since telecom providers offer connectivity services and have large field

service work forces with the ability to go on-premise as needed, they are extremely

well suited to offer a wide range of cloud services, including managed services and

managed hosting which can at times require on premise support.

New Services Exacerbate Economy of Scale Advantages: While, telecom play-

ers will continue to consolidate among themselves, as they also expand into new

offerings such as data center and managed services, the increasingly greater

economy of scale advantages that they achieve will only exacerbate the pressure

on smaller, regional players and CLECs to partner up. Perhaps most aggressive in

this regard has been Windstream which has acquired numerous companies over the

past few years, the most significant of which was PAETEC for $2.4 billion in 2001.

PAETEC itself had expanded broadly, acquiring a telephony integrator (Xeta) and

other service providers including McCloud and Cavalier.


ACQUISTIONS BY TELECOM PROVIDERS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


04/18/2012 Knology WOW! Internet 1,574.9 3.0x 8.8x Telecom Video, voice, data, and communications services to

residential, business customers

03/21/2012 Arialink Broadband Zayo 18.0 Data Center Internet access solutions, like DSL, T1, direct-to-business

fiber optic Internet solutions

02/06/2012 SureWest Consolidated

Communications

564.6 2.3x 6.6x Telecom Data, video, and voice services to residential and business

customers

08/01/2011 PAETEC Windstream 2,356.5 1.3x 7.5x Telecom Integrated broadband communications services to business

06/28/2011 OneNeck TDS 95.0 2.6x Managed

Services

Hosted application management, enterprise hosting,

infrastructure,

04/27/2011 Savvis CenturyLink 2,500.0 2.6x 10.9x Data Center Colocation / Managed Hosting, managed services growth




Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


02/01/2011 NaviSite Time Warner Cable 345.0 2.6x 13.0x Hosting Colocation (carrier-neutral), managed services offering for

SMBs

01/27/2011 Terremark Verizon 1,400.0 4.1x 17.1x Data Center Colocation / Managed Hosting, to accelerate everything-as-

a-service strategy

11/04/2010 Hosted Solutions Windstream 310.0 6.0x Hosting Infrastructure as a service solutions to companies and

enterprises

08/17/2010 Q-Comm Corporation Windstream 779.5 Telecom Telecommunications services to residential and business

customers

04/22/2010 Qwest Communications CenturyLink 24,002.7 2.0x 5.6x Telecom Communications services to residential, business,

governmental, etc



DEAL PROFILESTELECOM

Below are profiles to two telecom acquisitions that reflect the move by telecom

providers into the managed services space. This is a market extremely well suited

to telecom providers as it involves supporting much of the IT the connects through

the service providers network. In addition, managed services allows telecom pro-

viders to leverage many other parts of their organizations, from the field service

technicians when an on-site visit is required, to the centralized back office support

and network operations centers.

OneNeck / TDS:

Target: OneNeck

Acquirer: TDS

Date: June 2011

Description: Our strategy is to have a robust suite of offer-

ings, including colocation, managed services, hosting, cloud,

and solutions delivery, states William Megan, president of

TDS HMS and executive vice president at TDS Telecommu-

nications Corp. in a press release. OneNeck brings sophisti-

cated hosted application management and managed hosting

to our product portfolio that will enable us to leverage the

data center assets recently acquired with VISI and TEAM.

Source: TDS press release, Telephone and Data Systems to Ac-

quire OneNeck IT Services Corporation, June 28, 2011.

NaviSite / Time Warner Cable

Target: NaviSite

Acquirer: Time Warner Cable

Date: February 2011

Description: The acquisition provides Time Warner Cable

Business Class, Time Warner Cables commercial services

business, an immediate presence in the managed services mar-

ket with NaviSites more than 1,200 customers. Following the

completion of the acquisition, Time Warner Cable plans to

continue the exceptional service of NaviSites Enterprise cus-

tomers and to use NaviSites operational expertise and enter-

prise-class infrastructure to meet the rapidly growing demand

for managed services offerings from Time Warner Cables

existing and future small and medium-sized business custom-

ers.

Source: TWC press release, Time Warner Cable to acquire NaviS-

ite, Inc., February 1, 2011.



The systems integration space is probably the broadest in terms of number of play-

ers and types of offerings. The thousands of small VARs, integrators, IT consult-

ants and other players tend to focus rather narrowly, such as telephony, data, or

storage, and often specialize by a certain equipment vendor. They also tend to be

geographically focused. As a result, the fragmentation is this area is high and con-

solidate activity is a constant.

Expanding Into Managed Services: Historically, much of the M&A activity by

systems integrators has involved consolidation within the sector, with integrator

acquiring integrator. However, going forward we expect to see some of the larger

players accelerate their move into managed services through acquisition. While

most integrators are introducing managed services offerings (which for many is

basically a new pricing model of what they have already been doing), many integra-

tors are finding the transition to be quite difficult. As a result, we expect to see

integrations make acquisitions of managed service providers in an effort to seed

their internal efforts and bring in the skill sets needed to roll out managed service

offerings across their customer base.

Building Nationwide, Diversified Players: Further driving consolidation, as large

players have begun to develop focused on SMB customers, a top tier of national,

diversified players has emerged including BlackBox, Presidio, and Insight Enter-

prises. These and other large players will likely continue fill out their businesses by

acquiring in areas where they may be week (such as virtualization and cloud infra-

structure) or in geographies in which the lack presence. In either case, because

customers tend to choose an IT partner and stick with them, acquisition of custom-

ers through acquisition of their integrators is a common strategy for growth.

Few Large Deals: As shown in the data below, most deals, even by the larger

players tend to be small in size. Presidios acquisition of INX for $155m in No-

vember 2011 represents one of the larger deals in the space. This will likely also

continue to be the case given just how many players there, are how few have valua-

tions north of a few hundred million.


ACQUISITIONS BY SYSTEMS INTEGRATORS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


02/28/2012 Total Convergence

Solutions

Presidio - Integrator Life cycle services in unified communications, collaboration

and video, etc

01/31/2012 InnerWireless Black Box - Integrator In-building converged wireless solutions

01/10/2012 E Solutions Corporation Knology 13.8 Telecom Rack space, cage space, virtual private servers, service

systems management

01/09/2012 VantiCore eplus Technology 2.5 Managed

Services

Core unified communications support; network server and

infrastructure support

12/19/2011 AFCOM iNET Interactive - Integrator Supports the educational and business development needs

of data center management, executives, and vendors

worldwide11/01/2011 INX Presidio 155.2 0.4x 51.4x Integrator Network routing and switching, wireless networking, WAN

optimization etc




Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


10/03/2011 Midwave Datalink 22.4 0.3x 7.7x Integrator IT advisory services and infrastructure services for medium-

large size companies

09/19/2011 Ensynch Insight Enterprises - Integrator Information technology consulting, project and portfolio

management consulting

07/26/2011 PS Technologies Black Box - Integrator Video conferencing equipment

07/25/2011 Paradigm Holdings CACI International 61.5 1.4x 20.8x Integrator Cybersecurity, enterprise, and mission critical

infrastructure support

07/01/2011 Netarx Logicalis 34.0 0.6x Integrator IP telephony, unified messaging, IM/presence, unified

contact center, etc

06/30/2011 OpSource Dimension Data

Holdings

- Hosting Cloud and managed hosting solutions for enterprises,

service provider, and SaaS

06/20/2011 Tushaus Computer Services Dedicated

Computing

- Integrator Business process improvement, application development

and integration, etc

04/11/2011 CareCentric, Inc.,

Managed Hosting Services

Prime Care

Technologies

- Hosting IT managed hosting services and assets

01/04/2011 ProSys Information

Systems

Applied Computer

Solutions

10.5 0.0x Integrator Data management, infrastructure management, systems

architecture etc

10/25/2010 LOGOS Communications Black Box 12.8 1.0x Integrator Voice, video, security, storage, and wireless technologies



DEAL PROFILESSYSTEMS INTEGRATION

Shown below are two profiles of acquisitions by large integrators. The acquisition

of INX by Presidio allows the company to both broaden its solution set as well as

expand its geographic presence in the US. The acquisition of OpSource by Dimen-

sion Data brings the ability to offer cloud services to a large global solutions inte-

grator. We expect to see many more deals like OpSource as larger players find the

need to offer a cloud alternative for customers.

INX / Presidio:

Target: INX

Acquirer: Presidio

Date: November 2011

Description: We are excited to complete the acquisition of

INX and begin moving forward as one unified company.

Bringing these two outstanding companies together enables

us to broaden our portfolio of services and solutions and to

significantly expand our footprint across the U.S., com-

mented Kevin Penn, Presidios Chairman and a managing

director of American Securities. We are in a great position

to build on our industry leadership position and look for-

ward to a successful 2012.

As a result of the acquisition, Presidio now employs more

than 1,800 IT professionals operating out of over 45 offices

across the United States.

Source: Presidio press release, Presidio Completes Acquisition

of INX, Inc., December 30, 2011.

OpSource / Dimension Data Holdings

Target: OpSource

Acquirer: Dimension Data Holdings

Date: June 2011

Description: OpSource brings a rich set of services, a sound

cloud architecture, and extensive experience in cloud services

that will meet immediate client needs - in addition to a cloud

infrastructure which supports development and growth in this

space. We believe OpSource provides us with an accelerated

time-to-market as their infrastructure and services are well-

established and tested. Dimension Data is now well-

positioned to provide our clients with services that help them

at each step in their journey toward cloud architectures, said

Brett Dawson, Dimension Data CEO.

Source: OpSource press release, Dimension Data Acquires Op-

Source to Accelerate Cloud Strategy, June 30, 2011.



Very Few Players of Scale: Hosted Voice Services players offer telephony related

applications such as hosted PBX, contact center and unified communications. The

players in this space tend to be rather small with some of the larger players being

companies like 8x8 and Cbeyond. Acquisition activity by these players has been

limited and focused around consolidating much smaller players, adding technology

capabilities or related applications, such as 8x8s acquisition of Contactual.

Beyond Small Add-ons, Hosted Voice Players are More Likely Targets Than

Acquirers: Going forward we expect that the larger voice services players will

likely be acquired themselves by telecom players or potentially larger players in the

hosting space that want to offer unified communications as part of their solution

sets for SMBs. In fact, many players like GoDaddy, Intermedia, and others offer

hosted PBX offerings. As the adoption of hosted PBX and contact center continues

to accelerate and as mid-size business begin to take up this service, we expect larg-

er player finally take notice.

There have already been a few acquisitions to date by players outside the space

including Shortels acquisition of M5 Networks. With many more deals like this,

new voice services will be less of a stand-alone space and more of another line of

business for telecom, hosting and telephony equipment vendors.


ACQUISTIONS BY HOSTED VOICE SERVICES PROVIDERS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


02/23/2012 Creative Interconnect

Communications

Utility Telephone - New Voice

Services

Phone serviceshosted solutions with phones, routers, and

dashboards

02/01/2012 M5 Networks ShoreTel 159.8 New Voice

Services

Hosted and managed phone systems

12/27/2011 Consolidated

Technologies, Inc., Hosted

VoIP Division

Stage 2 Networks - New Voice

Services

Hosted voice and data services

09/12/2011 Contactual 8x8 27.7 3.1x -38.2x New Voice

Services

Cloud-based call center and customer interaction

management solutions

07/14/2011 Alteva USA Datanet 17.9 3.0x New Voice

Services

Unified communications and enterprise hosted VoIP

communication solutions

06/20/2011 Zerigo 8x8 2.0 Hosting Virtual private server/cloud server, managed DNS hosting,

and server monitoring services

11/03/2010 Aretta Communications Cbeyond 4.1 New Voice

Services

Hosted communication solutions for SMBs

05/06/2010 Central Host 8x8 1.6 1.6x Data Center Co-location/data center facilities that provide private

cloud, dedicated server hosting



DEAL PROFILESHOSTED VOICE SERVICES

Below are a few deals by players in the voice technology and voice services areas.

ShoreTels acquisition of M5 we think may be somewhat of an inflection point

deal, indicating that even the legacy PBX providers are seeing a competitive threat

and or a need to have a hosted alternate. The 8x8 acquisition of Contactual is the

latest move by 8x8 in its efforts to be the leading provider of cloud communications

solutions.

M5 Networks / ShoreTel:

Target: M5 Networks

Acquirer: ShoreTel

Date: February 2012

Description: The acquisition of M5 positions ShoreTel as a

leader in the fast-growing cloud UC market and delivers a

suite of hosted telephony solutions that is unmatched in the

marketplace, ShoreTel CEO Peter Blackmore said in a state-

ment. This acquisition is a critical step in our evolution and

enables the company to capitalize on trends in cloud compu-

ting and advance our enterprise communications strategy.

Source: ShoreTel press release, ShoreTel Acquires Hosted Unified

Communications Pioneer M5 Networks, February 1, 2012.

Contactual /8x8

Target: Contactual

Acquirer: 8x8

Date: September 2011

Description: The acquisition of Contactual significantly

broadens 8x8's technological expertise and service offerings

in the hosted SaaS (Software as a Service) call center mar-

ket and brings in house the only major software technology

of 8x8's service offerings that was not owned and devel-

oped by 8x8. 8x8 has been reselling the Contactual contact

center technology since 2007. This strategic investment is

one of several recent initiatives implemented by 8x8 to ad-

vance its mission of becoming the industry's premier pro-

vider of broad-based cloud communications and IaaS

(Infrastructure as a Service) solutions.

Source: 8x8 press release, 8x8 Completes Acquisition of Contac-

tual, Inc., September 16, 2011.



The consolidation at the very largest levels of the IT industry, that led Dell and HP

to make large IT services acquisitions to better compete with IBM and its Global

Services division, has begun to play out in the SMB market as well.

Best Buy: Best Buy has been building its services business through the Geeksquad,

for some time, but its recent acquisition of Mindshift for $167m clearly moved the

company into the SMB market.

Konica: Another notable deal in this area is copier maker Konicas acquisition of

managed services player All-Covered. With its numerous copier locations around

the country, Konica believes that it can leverage its position in the print space to

expand into other areas of IT management for SMBs.

Dell: Dell was been very active in building its SMB services businesses. Several

years ago, the company acquired managed services player Everdream and has since

completed other acquisitions and made significant internal investments as it builds

out its services offerings for SMBs.

Going forward, we expect to see most large IT players that sell core equipment

such as servers, desktops, copiers and related equipment to build out their solutions

groups. As with the distributor space, as product resale becomes more difficult to

make money, players will need to move to higher margin areasand for the next

few years, thats going to be services. More importantly however, as SMBs rely

increasingly on their solution provider or MSP to handle all their IT needs, the pur-

chase decision for equipment (and many other parts of the IT infrastructure) will

shift to solution providers as customers simply wont care. Wouldnt HP and Dell

love to be able to decide where small businesses should by their technology?


IT SERVICES ACQUISTIONS BY LARGE IT HARDWARE PLAYERS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


02/24/2012 AppAssure Dell -

Hosting

Backup and replication software

11/07/2011 mindSHIFT Best Buy 167.0 Managed

Services

Infrastructure and software services for SMB

05/24/2011 Printelligent HP - Managed

Services

Managed document solutions

03/01/2011 Concept Group Xerox 43.0 Managed

Services

Digital document solutions

01/31/2011 WaterWare Xerox - Integrator Consulting and web-hosting

01/06/2011 All Covered Konica - Managed

Services

Desktop, server, other IT management

12/22/2010 InSiteOne Dell - Storage Enterprise data archiving, storage, etc

01/20/2010 Irish Business Systems Xerox 31.0 Managed

Services

Managed print services

09/21/2009 Perot Systems Dell 4,101.3 1.6x 14.8x Consulting Application modernization, business intelligence, etc.



DEAL PROFILESLARGE IT HARDWARE

Below are a few deal profiles that reflect the major trend by large equipment pro-

viders, both manufacturers and distributors, of moving into managed services. Giv-

en that the managed services space is still highly fragmented, we expect that each

of the acquirers below will likely continue to acquirer in these areas to build a na-

tionwide foot print.

mindSHIFT Technologies / Best Buy:

Target: mindSHIFT Technologies

Acquirer: Best Buy

Date: November 2011

Description: The transaction will accelerate

Best Buy's growth in the small and mid-sized

business IT services category, the company

said. It estimates the small and mid-sized man-

aged services provider market is worth $40 bil-

lion.

mindSHIFT provides cloud service, data center

services and professional services to more than

5,400 US clients.

Best Buy said the combination of mindSHIFT's

capabilities with its own points of distribution

through its retail, Geek Squad services and Best

Buy for Business operations will create a com-

petitive advantage.

Source: Forbes, BestBuy buys into Cloud with

MindSHIFT, November 7, 2011.

Printelligent / Hewlett-Packard:

Target: Printelligent

Acquirer: Hewlett-Packard

Date: May 2011

Description: As a market leader in Managed

Print Services, this acquisition puts us even fur-

ther ahead by strengthening our ability to deliver

services and solutions through our channel part-

ners to SMB customers, said Vyomesh Joshi,

executive vice president, Imaging and Printing

Group, HP. Were reinforcing our commitment

to our channel partners by bringing them a level

of technology and experience that is unprece-

dented in the industry.

With HPs strength, this offering will continue

to grow, and channel partners will deliver an

unparalleled solution to help customers better

manage their print environments, said Rob

Wellman, chief executive officer, Printelligent.

Source: HP press release, HP Bolsters Managed

Print Services Offering..., May 24, 2011

All Covered / Konica

Target: All Covered

Acquirer: Konica

Date: January 2011

Description: "Konica Minolta's acquisition of All

Covered will further enhance our ability to deliver

sophisticated solutions to our customer base and

accelerate the expansion of our IT services busi-

ness," said Rick Taylor, Senior Executive Vice

President and Chief Operating Officer, Konica Mi-

nolta Business Solutions U.S.A., Inc. "By integrat-

ing the scalable business model of All Covered

with our extensive sales and service footprint, we

intend to deliver unmatched value to our end users

and channel partners."

Source: All Covered press release, Konica Minolta

Acquires All Covered, Inc., January 6, 2011.



For years, private equity firms have studied the IT services space for SMBs and

wondered how to take advantage of the highly fragmented nature of the market.

The opportunity of consolidating small, niche players to form a nationwide compa-

ny with a broad solution set has been a very tempting proposition for financial play-

ers. However, success has been rather elusive as many efforts in the space have

failed over the years.

Cloud Based Businesses Provide Better Model of Consolidation Plays: The

recent shift to managed services and SaaS models has provided a new strategy and

much better model for consolidating smaller players. As SMB customers become

much more closely tied to their solution provider under recurring services contracts,

and as the shift to the cloud puts more control in the hands of the solutions provider

(as opposed to the product vendor), we believe that build-up strategies by private

equity groups that selectively use M&A have a much greater chance of succeeding

than in the past.

Not surprisingly, private equity groups have been much more active in this space.

Just over the past 2 years, a number of notable transactions have occurred that high-

light the move by rather large, sophisticated private equity players to take another

shot at creating national players to serve the IT services needs of the SMB market.


IT SERVICES ACQUISTIONS BY PRIVATE EQUITY FIRMS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


10/13/2011 Xand Corporation ABRY 49.0 Data Center Data center infrastructure, co-location, private cloud, and

business continuity services

10/13/2011 CoSentry.net TA Associates - Data Center Colocation (carrier neutral)

10/10/2011 SPS CourtSquare Integrator Design, installation, and support of voice solutions, data

networking, and converged applications

09/12/2011 Bravura Networks Technology Capital

Investors

- Managed

Services

Managed services offering BIT Support that include

managed IT support services

08/08/2011 TelX ABRY + Berkshire Data Center Colocation (carrier-neutral)

08/08/2011 Plimus Great Hill Partners 115.0 Integrator E-business platform for marketing, selling, and distributing

digital goods

06/30/2011 Go Daddy SilverLake + 2,250.0 Hosting Hosting solutions, Web site creation tools, secure SSL

certificates

05/23/2011 Intermedia Oak Hill Integrator Online business communications services

09/25/2009 Pomeroy Platinum Equity 81.7 Managed

Services

Enterprise, network, and end-user technologies



DEAL PROFILESPRIVATE EQUITY

While both the capital raising and M&A sections of this report provide a much

longer list of investments and acquisitions in the sector by the financial community,

below are few notable transactions that we think are important to review as they

highlight some of the key trends discussed through our report.

Intermedia / Oak Hill Capital:

Target:: Intermedia

Acquirer: Oak Hill Capital Partners

Date: May 2011

Description: Intermedia is the largest inde-

pendent provider of managed hosting for Mi-

crosoft Exchange. Oak Hill has significant ex-

perience in the data center space (having done

both Telecity Redbus and ViaWest). As evi-

dence that they have big expectations for Inter-

media, Oak Hill installed former Savvis head

Phil Coen as CEO. While Intermedia and Oak

Hill are likely still working through the strategy,

we expect it will include at least one or more

acquisitions to broaden the solution set and

transform Intermedia into a broad Master MSP.

Source: Intermedia.net press release, Oak Hill Cap-

ital Partners to Acquire, May 26, 2011

Pomeroy / Platinum Equity

Target: Pomeroy IT Solutions

Acquirer: Platinum Equity

Date: September 2009

Description: "In spite of the downturn in the

economy, the Company has improved profitabil-

ity and grown its business in 2009," said Christo-

pher C. Froman, the Company's CEO. "We

know the IT products and services business very

well and have had great success creating value in

this space," said Jacob Kotzubei, partner at Plati-

num that is leading the investment. "Pomeroy has

a compelling product and service offering, strong

customer and vendor relationships, and excep-

tionally talented employees. We believe the man-

agement team has done an excellent job navi-

gating the economic downturn and we look for-

ward to supporting their growth using our full

complement of mergers, acquisitions and opera-

tions capabilities."

Source: Platinum Equity press release, Pomeroy IT

Solutions, Inc. Announces, September 25, 2009

SPS / Court Square:

Target: Strategic Products & Services

Acquirer: Court Square Partners

Date: 2011

Description: Court Square Partners has ac-

quired Strategic Products and Services, a leading

integrator of Avaya telephony solutions including

PBXs, call centers and a wide range of other

telephony and data solutions. This transaction is

one of several recently in the Avaya channel

others including Genstars acquisition of Conver-

geOne and PAETECs acquisition of Tulsa based

Avaya dealer Xeta Technologies.

Source: CapitalIQ, June 29, 2012



As shown in the detail below, distributors have generally stayed focused on acquir-

ing other players at the distributor level. While there have been a few attempts by

distributors to move downstream through acquisitions of systems integrators

(CDW / Berbee, Arrow / Shared Technologies), these deals have tended to be the

exception and pose channel conflict challenges as they potentially place the distrib-

utor in competition with their customers.

Hosted Applications as a Distribution Opportunity: One area where we expect

to see acquisitions by distributors is in the hosted applications area involving play-

ers offering hosted applications through an indirect channel. Currently, many

MSPs and integrators fill out their solution needs for customers through reseller

relationships with a variety of hosting providers such as Intermedia (for MSFT ex-

change), Mozy / EMC (for online backup), Global Relay (archiving & compliance),

GoDaddy (web hosting) or a long list of other players. We think these hosted offer-

ings present excellent expansion opportunities for distributors who have expensive

networks of channel partners through which to push these offerings.

In addition, many of these applications can benefit from integration on the back-end

and there are already a few players such as Verecloud and ThinkGrid that are devel-

oping carrier-grade platforms (similar to Jamcracker) that can provide a wide range

of applications, provisioned by MSPs through a platform that can provide integrat-

ed billing, authentication and a variety of other functions and do it in an integrated

fashion across multiple offerings. We think this presents an excellent opportunity

for distributors and would not be surprised to see some acquisitions by distributors

into this space.

Beyond that, we expect that distributors will generally stay focused on acquiring

within their own space, bolting on other distributors with niche expertise in certain

technologies and components or within certain market verticals.


ACQUISITIONS BY DISTRIBUTORS

Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


11/20/2010 Intechra Group Arrow Electronics 101.1 1.3x Consultants Information technology asset disposition, value recovery,

etc

01/18/2012 TechTurn Arrow Electronics - Consultants Llifecycle management, asset recovery, technology

management

04/03/2012 Altimate Group Arrow Electronics 64.1 0.1x Distributors Distribution of enterprise information technology solutions

08/08/2011 Chip One Stop Arrow Electronics 90.7 2.0x 14.4x Distributors Online distributor of electronic components in Japan

12/06/2010 DIASA Informtica Arrow Electronics 132.8 0.4x Distributors Distributes technology hardware and software




Transaction

Date Target Buyer

Transaction

Value

Rev

Mult.

EBITDA

Mult.

Target


09/20/2010 Nu Horizons Electronics Arrow Electronics 168.2 0.2x 11.6x Distributors Distributes advanced technology semiconductor, and telco

solutions

04/06/2010 PCG Trading Arrow Electronics 138.4 0.5x Distributors Technology supply chain company

10/01/2010 Richardson RFPD Arrow Electronics 211.8 0.6x Distributors Distribution services for RF and wireless infrastructure

communications networks

06/27/2011 Seed International Ltd.,

Distribution Business

Arrow Electronics - Distributors Distributes electronic equipments, which includes digital

signal processor (DSP) and field-programmable gate array

(FPGA)04/06/2010 Verical Arrow Electronics - Distributors B2b marketplace for the high-tech manufacturing industry

07/06/2010 Asiasoft Hong Kong Ingram Micro - Distributors IT solutions for service providers, system integrators,

resellers

09/14/2010 InterAct Ingram Micro - Distributors Distributes data center solutions

07/14/2010 D.L.I.-Distribuio E

Logstica Para A

Informtica

Tech Data Corp - Distributors Distributor of information technology products.

09/12/2011 Mensch & Maschine

Distribution business

Tech Data Corp 34.1 Distributors CAD/CAM solutions for mechanical and electrical

engineering

12/19/2011 ProDesk Tech Data Corp - Distributors CAD software for mechanical engineering; architectural

processes

08/03/2010 Triade Holding Tech Data Corp 61.7 0.0x Distributors Consumer electronics, and mobility and IT products to

retailers

08/05/2010 Shared Technologies Arrow Electronics 252.8 1.0x Integrator Converged and Internet protocol telephony technology

solutions



DEAL PROFILESDISTRIBUTORS

Weve profiled below, two recent deals by Arrow Electronics that demonstrate a

few interesting moves by the company to expand its capabilities beyond just distri-

bution. Intechra provides Arrow with the ability to offer product lifecycle manage-

ment services while Shared Technologies provides telephony integration skills

Both deals demonstrate efforts by Arrow, along with other distributors, to move

into higher margin service areas that can rid on the back of their customer relation-

ships but offer the ability to offer services with much greater margin potential than

simple product distribution.

Intechra Group / Arrow Electronics:

Target: Intechra Group

Acquirer: Arrow Electronics

Date: November 2010

Description: "Intechra serves as a continuation of our strate-

gy to provide comprehensive services across the entire prod-

uct lifecycle for our suppliers and customers," said Michael

J. Long, chairman, president, and chief executive officer of

Arrow Electronics, Inc.

Intechra is headquartered in Jackson, MS, and has approxi-

mately 300 employees. Total sales were approximately $75

million for the most recent fiscal year. The transaction is

expected to be $.03-$.05 per share accretive to earnings in

the first full year of operations.

Source: Arrow press release, Arrow Electronics Acquires Inte-

chra, November 23, 2010.

Shared Technologies / Arrow Electronics:

Target: Shared Technologies

Acquirer: Arrow Electronics

Date: August 2010

Description: This acquisition builds on our strategy to diver-

sify into faster growing, high-margin markets that are com-

plementary to our existing businesses," said Andy Bryant,

president of Arrow ECS. "Shared represents an exciting op-

portunity as we add a leading player in the unified communi-

cations, telephony, and managed services industries to our

product portfolio. They bring deep customer and supplier

relationships as well as extensive industry and technical ex-

pertise."

Shareds sales in 2009 were approximately $250 million.

The acquisition is expected to be $.10-$.12 per share accre-

tive to earnings in the first full year of operations.

Source: Arrow press release, Arrow Electronics Acquires Shared

Technologies Inc, August 5, 2010.



Below are profiles of twenty-four of the larger players across a range of spaces that we think are worth analyzing to understand the likelihood of their making acquisitions

outside of their core markets an into adjacent sectors.

ACQUIRER LANDSCAPE

Managed

HostingData Center Telecom

Systems

Integration

Rackspace Equinix Windstream BlackBox

Savvis (CenturyLink) Telecity Ikano Presidio

Hostway Digital Realty Trust Integra Fusion Storm

TDS Insight Enterprises

New Voice ServicesLarge Public

IT PlayersIT Distribution

cBeyond Dell Arrow

8x8 HP Avenet

BestBuy Ingram Micro

CDW



MANAGED HOSTING

Key Points

Managed hosting providers still have the benefit of significant growth opportunities

in their core businesses and thus dont face the same pressure to move beyond their

current areas of focus.

As a result, we expect that most larger managed hosting players will use M&A to

acquire niche players to better fill out their

core hosting business but do not expect to

see them expand into other areas such as

data center, managed services or on-

premise support.

Over time, we expect to see managed hosting players serve as targets for larger

telecom and data center players.

CenturyLinks acquisition of Savvis is likely just the beginning.

Hostway and Rackspace could well be targets in the managed hosting area

for larger players.



Hosting RACKSPACE

2011 Rev: $1,025m Cash: $160m

2011 EBITDA: $293m Debt: $139m

2011 Net Income: $76m Market Cap: $7,946m

Publicly Traded. NYSE:RAX

Institutional Ownership: 70%

Rackspace Hosting (NYSE:RAX) provides cloud computing services, managing Web-based IT systems for small and medium-sized

businesses, and large enterprises worldwide.

Its service offering combines hosting on dedicated hardware and on multi-tenant pools of virtualized hardware in a way that suits each

customers requirements.

The company offers dedicated cloud services comprising customer management portal and other management tools for managing the

data center, network, hardware devices, and operating system

software.

It offers cloud servers for computing, and cloud files for storage, as well as cloud applications, such as email, collaboration, and file

back-ups; and hybrid hosting that provides hosted computing on

dedicated hardware and on pools of shared resources.

Business Description Selected M&A Activity

Key Financials

Key Executives

Ownership

Key Comments

Lanham Napier CEO

Lew Moorman - President

Rackspace has tended to make small acquisitions, primarily of technology-oriented businesses to help seed its internal efforts.

We think Rackspaces approach of small buys to seed internal builds is a smart strategy that allows the company to use its significant internal resources to avoid overpaying for expensive

assets that the company can otherwise ramp itself.

Rackspaces high trading multiples provide the company with a strong currency to use for acquisition.

Rackspace has been the subject of takeover rumors and could makean excellent addition for a major player looking to take a leadership

position in the managed hosting market.

Date Target Price

Rev

Mult. Description

2/16/12 SharePoint911 -- -- IT consulting services

2/10/11 Anso Labs -- -- Cloud consulting services

12/16/10 Cloudkick -- -- Cloud server management

10/22/08 Slicehost/Jungle Disk 28.0 -- Online storage services

4/25/08 Mailtrust -- -- Email hosting services



Hosting SAVVIS

LTM (6/30/11) Rev: $1,016m Cash: $122m

LTM EBITDA: $241m Debt: $784m

LTM Net Income: NM Market Cap: $1,363m

Savvis was acquired by CenturyLink on July 15, 2011

Savvis (Subsidiary of CenturyLink; NYSE:CTL) provides cloud, managed hosting, managed security, co-location, professional and

network services worldwide.

The company offers hosting services comprising co-location services for clients seeking data center space and power for their server and

networking equipment needs; and managed hosting services for

clients IT infrastructure and network needs.

Managed hosting services include cloud services, security, virtualization, Web-based applications, business recovery, dedicated

hosting services, utility computing and storage services.

Savvis was recently acquired by CenturyLink and continues to serve its clientstier 1 Internet servicesthroughout the United States, Europe, and Asia.


Key Financials

Key Executives

Ownership

Key Comments

James Ousley CEO

William Fathers - President

Stewart Ewing CFO

While Savvis has been acquired by CenturyLink, we expect that the Savvis unit will continue to be a focal point for acquisitions for its

parent in the data center and managed hosting areas.

Unlike Verizon, who acquired Terremark, CenturyLink lacked any sizeable cloud services business prior to the Savvis deal so will likely

consolidate all its efforts through Savvis and continue targeted,

smaller deals as its integrates Savvis and refines its strategy for the

combined business.

Savviss future acquisition activity will likely be driven by efforts to find ways to leverage CenturyLinks business base of business customers.

Date Target Price

Rev

Mult. Description

6/1/10 Fusepoint 169.4 3.5x Infrastructure solutions

1/23/04 Cable & Wireless America 167.5 -- Telecom

7/30/03 Wam!Net 3.0 0.1x IT solutions



Hosting HOSTWAY

NA

Private company

Hostway (Private) provides cloud, managed, and dedicated server hosting services to developers, startups, SMBs, and large enterprises

worldwide.

The Companys cloud hosting services include FlexCloud sites for small business Web hosting; virtual private servers for root access

with dedicated resources; FlexCloud servers for instantly deploying

servers and resources on demand; and FlexCloud private servers

that offer complete customization and privacy with public cloud

technology advantages.

Hostway also provides managed hosting services that include custom private cloud servers and customized hosting solutions; and domain,

email, and application services.

Hostway is headquartered in Chicago but has offices globally, including in England, France, Belgium, Germany, Australia and

India.


Key Financials

Key Executives

Ownership

Key Comments

Lucas Roh CEO

Jay Sinder - CFO

While Hostway has developed a solid business, much has come through organic growth as the company has made few acquisitions

in recent years.

Given the companys private equity ownership, we expect Hostways shareholders are likely focused on a path to liquidity and will thus require any acquisition to show very near term impact.

Transactions that could be near-term accretive for Hostway would include acquisitions of similar businesses where they are effectively

adding customers and can realize synergy through scale or cost

reductions.

Date Target Price

Rev

Mult. Description

4/4/07 Affinity Internet -- -- Web design

2/12/04 Registry Services -- -- Infrastructure

1/13/04 Enterprise Networks -- -- Hosting

6/13/03 NetNation Communications 10.1 0.9x Infrastructure



DATA CENTER

Key Trends

We expect the leaders like Equinix, Digital Realty and Telecity to continue to solidify

their leadership positions with acquisitions

of smaller players, primarily to expand into

new geographic markets.

In fact, much of the recent M&A activity by Equinix and Telecity has been aimed at

moving into new markets in Asia, Latin

America, Ireland, and other locations.

While data center players will likely to continue to consolidate smaller players, the

more significant trends will likely be

continued consolidation between data

center players and telecom service

providers as well as the expansion by data

center players into higher margin managed

service and managed hosted offerings.



Data Center EQUINIX

2011 Rev: $1,607m Cash: $915m

2011 EBITDA: $666m Debt: $3,099m


Publicly Traded. NasdaqGS: EQIX


Equinix (NasdaqGS:EQIX) provides data center services to protectand connect the information assets for enterprises, financial

services companies, and content and network providers. The

Company connects businesses with partners and customers through

a platform of data centers containing dynamic ecosystems and the

broadest choice of networks.

Equinix offers: Data service centers and co-location services. Interconnection services across physical and internet

exchanges.

IT infrastructure services.

Equinix provides its cloud-based products and services through a global network that spans more than 38 markets across 13 countries

and 4000 businesses.


Key Financials

Key Executives

Ownership

Key Comments

Stephen Smith CEO and President

Keith Taylor - CFO and Principal Accounting Officer

As one of the leading data center players, Equinix faces the challenge of how to continue pursuing acquisitions in a way that will

make a material impact on its business and better position the

company against highly capitalized telecom competitors.

Over time, we expect that Equinix may begin using M&A to move into newer cloud services offerings including high end managed

hosting and specialized IaaS offerings for enterprise customers.

Continued Geographic expansion will also be a key part of M&A for the company going forward as it continues to build out its global

footprint. Look for more international deals like its recent Asia

Tone acquisition.

Date Target Price

Rev

Mult. Description

5/1/12 Asia Tone Limited 230.5 -- Data center

2/21/12 Carpathia Hosting 1.5 -- Hosting solutions

10/21/09 Switch & Data Facilities 870.2 4.3x Interconnetion

7/29/09 Upminster 28.2 -- Data center

2/5/08 Virtu Secure 25.6 -- Data center

6/28/07 IX Europe 558.1 7.1x Data center



Data Center TELECITY

2011 Rev: $379m Cash: $35m

2011 EBITDA: $168m Debt: $296m


Publicly Traded. LSE:TCY


Telecity Group (LSE:TCY) provides network independent data centers that offer colocation and related services in Europe. The

Company offers:

Hosting and support services. IT infrastructure design and consulting services. Network and connectivity services. Internet security, including firewalls, intrusion detection and

prevention, and distributed denial of service mitigation.

Data storage including backup and disaster recovery Server management and performance optimization

Telecity Group provides its clients with cloud-based technology and services through a global network that spans 29 data centers in

Amsterdam, Dublin, Frankfurt, London, and other major European

cities.


Key Financials

Key Executives

Ownership

Key Comments

Michael Tobin CEO and Director

Brian McArthur-Muscroft Group Finance Director and Director

CEO Mike Tobin recently stated Looking forward, there is still significant growth for us to capture, both in our existing markets

and in new markets in Europe, as the Internet continues to grow and

the cloud increases in significance.

We expect Telecity to continue building out its core data centerbusiness with bolt-ons in existing markets and other small deals that

bring it into new geographic markets.

Date Target Price

Rev

Mult. Description

9/23/11 UK Grid Network 18.1 6.5x Data center

8/8/11 Data Electronics Group 143.0 6.7x Telecom

8/2/10 Internet Facilitators 30.7 -- Data center

8/20/06 Globix Holdings 62.1 -- Hosting services

11/2/05 Redbus Interhouse 104.6 3.0x Data center



Data Center DIGITAL REALTY TRUST

LTM (3/31/12) Rev: $1,100m Cash: $26m

LTM