Public Technology – Huge Opportunity in State and Local Software Markets
Ever since 9/11 and the resulting emphasis on Security at the Federal level, the State and Local technology market has been treated as the red-headed stepchild of the Public Sector. There was an incredible amount of M&A activity accompanied by robust valuations in the Federal market for the past 11 years. Conversely, the state and local government market has been less dynamic. With the inevitable end of an unsustainable run aided in part by sequestration, the largely ignored State and Local market is coming to the forefront.
While many areas of the federal government are 5 years behind the commercial market (not including security) in terms of technological advancements, the State and Local market is at least another 5 years further behind. Many systems in the State and Local market are running custom developed systems from the 1990’s or earlier developed by companies no longer supporting these systems including Unisys, Sungard, IBM and BearingPoint. Other services oriented companies like Maximus and ACS who have been largely focused on this huge market have dabbled in software only to conclude that running a software business is very different than running a services business and have de-emphasized or in the case of Maximus divested their software assets. As a result companies like Tyler and NIC have taken advantage of the huge market opportunity in State and Local Government markets and have built solid businesses that have been rewarded by Wall Street. Tyler (NASDAQ: TYL) and NIC (NASDAQ: NIC) trade at between 4-6x revenue, premium metrics by nearly any standard. Investors are realizing that the former stepchild of the public sector now presents one of the greatest investment opportunities in the software market over the next 10 years.
Clearsight has made substantial investment of time and resources in this underserved market and we are seeing strong interest from Private Equity firms and Strategic buyers for our clients. Growing firms with proven, but updated technology, are gaining market share and attracting strong interest and premium valuations. We expect the volume of deal announcements to accelerate throughout the year and continue to accelerate into 2014 and 2015.