Software & IT Services

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Sector Report

Software &

IT Services

Economics & FI/FX Research

Credit Research

Equity Research

Cross Asset Research

“

UniCredit's global Software & IT Services menu

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28 The traditional IT services players: Part 1 – competitive advantage "America" 35 The traditional IT services players: Part 2 – the "Europeans" stuck in the middle? 49 The offshore IT services players: What comes beyond the salary arbitrage game? 59 The software players: The fight for double-digit revenue and earnings growth

79 Plat principal: Could the maturity thesis be wrong?

80 Software as a Service: The sky's the limit 85 Mobility: A larger penetration of the customer base 87 In-memory: A game changer?

91 Salade: Stocks ready to re-rate, to de-rate or to remain stable

97 Fromages: Part 1 – IT Services: Valuation, profitability and guidance overview 102 Fromages: Part 2 – Software: Valuation, profitability and guidance overview 107 Dessert: Company section

109 Allgeier Holding 114 Atos 119 Capgemini 124 COR&FJA AG 129 Dassault Systèmes 133 Indra Sistemas 138 Logica 143 REALTECH 148 Sage 153 SAP 158 Software AG 163 Temenos

Share prices as of 22 August 2011

Knut Woller, CEFA (UniCredit Bank)

+49 89 378-11381

[email protected]

Alexander Rummler, Equity Analyst (UniCredit Bank)

+49 89 378-11335

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Executive summary

What to expect from "UniCredit's global software & IT services menu"?

In September 2009, at the height of the 2008-2009 downturn, we published a sector report with the title: a brief history of the transformation of the software & IT services sector. The report was designed as a strategic view of the global industry and the trends driving the sector. Almost two years later – again with question marks beyond the growth prospects and the outlook for corporate earnings due to the EMU crisis and the debt problems of other countries – it is time for us to revisit our 2009 report with its successor: UniCredit's global

software & IT services menu, a report with a similar strategic approach. Hence, readers

looking for a report driven by tactical ideas, will be disappointed. However, we hope to excite those looking for an in-depth analysis of the current state of the global software & IT services sector and its trends. We hope you will enjoy reading and find some food for thought.

UniCredit's menu – your choice _{UniCredit's global software & IT services menu is designed as a seven-course menu:}

1. Amuse-gueule: A maturing industry or re-thinking growth. The increasing maturity of

the industry in general is our working hypothesis and probably common sense among investors, last but not least also reflected in the de-rating of many tech stocks in the last couple of years.

2. Hors-d'oeuvre: Implications of greater maturity for the industry. After the years of high growth lasting until the tech bubble, the industry has now grown up and is bound to economic cycles. This is also reflected in the increasing vertical consolidation of the industry with the leading vendors like IBM and Oracle driving the consolidation and recurring revenues (maintenance) often contributing the majority of revenues. The consequence: while the earnings growth profile of tech stocks resembled the earnings growth profile of stocks labeled as "cyclical" during the high growth phase of the industry, it has become more similar to stocks labeled as "defensive" today.

3. La soupe: A closer look at the different segments of the technology sector. The

analysis in this section considers the three sub-segments of the technology sector: hardware, IT services and software. It provides an overview of the forecast growth rates, structural changes and challenges faced by each sub-segment. In addition, it introduces the global leading players of each segment, including an overview of their history and business model over time.

4. Plat principal: Could the maturity thesis be wrong? We are playing devil's advocate in this section and question the maturity thesis. We identify three current topics that could accelerate growth in the industry, although mainly for software companies: SaaS (software as a service), mobility and in-memory-based technologies. We provide an in-depth analysis of all topics.

5. Salade: Stocks ready to re-rate, to de-rate or to remain stable. There are several

examples of tech stocks that were able to achieve a re-rating in their history, albeit often only for a limited period of time (e.g. Apple following its move into the consumer segment in 2007) or that suffered a de-rating (e.g. SAP starting in 2006). In this section, we are analyzing – apart from the current recession fears – which stocks in our universe could be ready for a re-rating (SAP, REALTECH and Capgemini), de-rating (Dassault Systèmes and Indra Sistemas), or are likely to remain stable (Allgeier Holding, Atos, COR&FJA AG, Logica, Sage, Software AG and Temenos) and why.

6. Fromages: We are aware of the risk of spoiling our "menu" metaphor by using the term "financial", but we have no choice: No (financial) menu would be complete without an

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Rating and/or

target price changes The following table summarizes our current ratings and target prices for our coverage

universe. It highlights, in addition, rating and/or target price changes, which we made in our sector report. Our target price changes result from lowered estimates and applied lower target multiples due to the increasing risks of a slowing economic momentum.

OVERVIEW OF OUR COVERAGE UNIVERSE

Rating Currency Target price

Company prev. new prev. new

Allgeier Holding Buy Buy EUR 16.00 16.00

Atos Hold Hold EUR 36.00 35.00

Capgemini Buy Buy EUR 42.00 36.00

COR&FJA AG Hold Hold EUR 1.54 1.30

Dassault Systèmes Sell Sell EUR 52.00 47.00

Indra Sistemas Sell Hold EUR 11.60 11.90

Logica Buy Buy GBp 155.00 140.00

REALTECH Buy Buy EUR 11.80 11.80

Sage Not rated Hold GBp – 265.00

SAP Buy Buy EUR 51.00 48.00

Software AG Buy Buy EUR 37.00 36.00

Temenos Buy Buy CHF 27.00 24.00

Source: UniCredit Research

A comparison of our

and consensus estimates The following table highlights our EPS estimates for our coverage universe and current

consensus estimates, according to Reuters and Vara.

OVERVIEW OF PRO FORMA EPS ESTIMATES AND VALUATIONS

Company Rating Curr. Price Target price Consensus 2011E UniCredit 2011E Consensus 2012E UniCredit 2012E Consensus P/E 2012E P/E 2012EUniCredit

Allgeier Holding** Buy EUR 10.00 16.00 n.a. 1.20 n.a. 1.69 n.a. 5.9

Atos Hold EUR 31.71 35.00 3.20 3.16 4.02 3.51 7.9 9.0

Capgemini Buy EUR 27.05 36.00 2.50 2.60 3.00 3.01 9.0 9.0 COR&FJA AG*** Hold EUR 1.37 1.30 n.a. 0.12 n.a. 0.14 n.a. 9.8 Dassault Systèmes Sell EUR 52.61 47.00 2.81 2.81 3.18 3.13 16.5 16.8 Indra Sistemas Hold EUR 11.85 11.90 1.20 1.22 1.26 1.19 9.4 10.0 Logica Buy GBp 80.50 140.0 12.60 13.14 13.97 14.02 5.8 5.7 REALTECH* Buy EUR 5.90 11.80 0.57 0.69 1.08 0.89 5.5 6.6 Sage Hold GBp 241.20 265.00 19.87 19.79 21.58 20.87 11.2 11.6

SAP Buy EUR 34.52 48.00 2.71 2.69 3.10 3.10 11.1 11.1

Software AG* Buy EUR 27.91 36.00 2.40 2.44 2.69 2.61 10.4 10.7 Temenos**** Buy CHF 15.15 24.00 1.51 1.49 1.69 1.62 11.4 11.8

Average 9.8 9.8

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A tribute to current market turbulences

UniCredit's toolbox _{Recession fears caused by the EMU crisis as well as the downgrade of the USA by Standard}

and Poors in combination with comparably week economic data lead to turbulent times at the capital markets in the recent weeks. To respond to the current concerns, we decided to do three things: 1. Providing an overview of the trough and peak multiples of the last two recessions and the EPS downward revisions from peak estimates to trough estimates in the last recession. 2. Revisiting our model assumptions for all stocks with a more conservative stance towards revenue growth and margin expansion potential in 2011 and mainly in 2012.

3. Saying goodbye to peak multiples, where we still applied them and instead opting more conservatively for average multiples instead. Although our economists recently reduced their GDP forecast for some regions (e.g. Euro zone from 2.1% to 1.7% in 2011 and from 1.7% to 1.0% in 2012), we are not expecting a fall-back into recession for the world economy and hence no testing of the trough multiples of the last downturn.

Software companies: a more defensive revenue mix than IT services

Software stocks are not defensive due to their cyclical revenue component "licenses" and hence vulnerable to sudden break down in demand (as e.g. witnessed after 9/11 or the Lehman bankruptcy). But the shift of the revenue mix towards the high margin maintenance revenues, which often account for around 50% of total revenues today, provides them some visibility and "defensiveness" in that respect that earnings downward revisions are less pronounced than for IT services companies – at least in Europe. In contrast to IT services stocks, where as a rule over thumb multiples contract significantly faster than earnings estimates are cut, software stocks tend to reflect the expected earnings cuts significantly faster. The following heuristic helps assessing possible share price downside: taking peak EPS estimates as base, reducing them by the expected earnings cut and multiplying them with the trough multiples of the last recession helps by deriving a possible downside. The simplification of this approach is that it is an analogy and does not assess whether there have been any company specific changes suggesting higher or less earnings downside than in the last cycle. The following table summarizes what would happen if we would fall back into recession and the companies had to face the same downward revisions like in the last cycle.

TROUGH AND PEAK 1Y FWD P/E MULTIPLES OVER THE LAST TWO CYCLES

Recession Trough 2001-03 Recovery Peak 2004-08 Consolidation = multiple contraction Peak 2007-08 Recession Trough 2008-09 Recovery Peak 2009-11 22 August 2011 1Y fwd EPS August 2011 EPS correction of the last recession (%) Implied share price with Trough EPS Current share price 22 August 2011 Down-side (%) Software Dassault Systèmes 10.7 29.1 21.7 12.3 21.9 17.2 3.00 15 31.4 52.6 -40 Microsoft 21.5 25.2 20.6 8.3 15.9 8.2 2.90 23 18.5 24.0 -23 Oracle 17.0 28.4 17.9 9.9 15.3 10.1 2.46 7 22.6 25.1 -10 Sage 13.4 21.2 18.8 10.5 14.6 11.3 21.3 4 214.7 241.2 -11 SAP 14.7 33.6 23.3 12.8 17.3 12.0 2.87 13 32.0 34.5 -7 Software AG 5.7 20.9 20.9 9.0 16.7 10.8 2.59 2 22.8 27.9 -18 Temenos 2.2 43.0 31.1 6.8 21.1 9.3 1.62 32 8.8 15.2 -42 TIBCO 23.3 64.5 24.5 8.6 30.5 18.0 1.04 8 8.2 18.9 -56 *Temenos is the only software stock in the panel above that faced earnings downward revisions in 2011. Source: Thomson Datastream, UniCredit Research Hence, the implied share price is derived by reducing peak EPS estimates of this cycle of USD 1.90 by 32%

IT service stocks: Average downside risk in a recession scenario of 26%

For IT service stocks we derive the possible share price downside by multiplying the current consensus 1Y fwd estimates by their recession trough multiple at which the stocks traded during the last recession (2008-2009). Excluding Logica and Indra, the average downside risk

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We believe Indra Sistemas' historic recession multiple would not be sustainable in a future economic contraction scenario as Indra's P/E multiple has already started to contract below this level with the start of the austerity programs in 2010 and is expected to continue to suffer due to Indra's high Spain exposure (>50% of FY11E revenues). In addition, the historically high valuation level of Indra was mainly attributable to its high margins, which benefitted from increasing R&D capitalization, which is also not sustainable mid-term, in our view. We expect Indra's valuation to come down as its margins are expected to fall in FY12.

TROUGH AND PEAK 1Y FWD P/E MULTIPLES OVER THE LAST TWO CYCLES

Recession Trough 2001-03 Recovery Peak 2004-08 Consolidation = multiple contraction Peak 2007-08 Recession Trough 2008-09 Recovery Peak 2009-11 22 August 2011 1Y fwd EPS August 2011 EPS correction of the last recession (%) Implied share price with Peak EPS Current share price 22 August 2011 Down-side (%) IT Services Accenture 13.8 22.5 19.9 9.5 16.9 12.8 3.76 9 35.7 48.5 -26 Atos 6.5 19.5 19.5 6.1 13.8 8.4 3.77 31 23.0 31.7 -27 Capgemini 13.0 28.8 18.9 7.2 18.8 9.7 2.86 46 20.6 27.1 -24 IBM 14.0 20.1 15.5 8.4 12.7 11.1 14.20 7 119.3 159.0 -25 Indra Sistemas 12.7 24.0 20.2 12.1 13.7 9.6 1.24 4 15.0 11.8 27 Logica 9.2 22.9 15.0 6.1 11.3 5.9 14.21 14 86.7 80.5 8 Tietoenator 10.6 18.3 17.2 6.0 13.2 8.3 1.16 33 7.0 9.6 -28 Source: Thomson Datastream, UniCredit Research

An overview of

our model changes The following table summarizes the changes of our estimates for the stocks in our universe: MODEL CHANGES FOR THE SOFTWARE AND IT SERVICES STOCKS IN OUR UNIVERSE

Revenues (mn) Pro-forma EBIT (mn) Pro-forma EBIT margin Pro-forma EPS (EUR)

Curr. Rating 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E

Allgeier Holding EUR Unchanged 372 422 17.3 22.7 4.6 5.3 1.20 1.69

Atos EUR Prev. 6,891 8,841 413 486 6.0 5.5 3.18 3.84

New 6,875 8,681 410 476 6.0 5.5 3.16 3.51

Capgemini EUR Prev. 9,694 10,275 737 873 7.6 8.5 2.60 3.30

New 9,694 10,178 731 804 7.5 7.9 2.60 3.01

COR & FJA AG* EUR Unchanged 137 143 4.7 6.5 3.4 4.5 0.12 0.14 Dassault Systèmes EUR Prev. 1,766 1,924 519 584 29.4 30.4 2.84 3.22

New 1,754 1,887 514 568 29.3 30.1 2.81 3.13

Indra Sistemas EUR Prev. 2,673 2,929 277 278 10.4 9.5 1.24 1.22

New 2,647 2,876 275 273 10.4 9.5 1.22 1.19

Logica** GBP Prev. 3,883 4,036 287 323 7.4 8.0 13.23 14.60

New 3,880 4,030 286 310 7.4 7.7 13.14 14.02

Realtech EUR Prev. 60 69 5.2 7.9 8.7 11.3 0.73 1.02

New 43 49 3.2 6.6 7.6 13.3 0.69 0.89

Sage** GBP New 1,485 1,530 382 400 25.7 26.1 19.79 20.87 SAP EUR Prev. 13,955 15,369 4,605 5,184 33.0 33.7 2.74 3.16

New 13,890 15,209 4,523 5,092 32.6 33.5 2.69 3.10

Software AG EUR Prev. 1,157 1,222 305 340 26.4 27.8 2.68 2.98

New 1,157 1,208 305 325 26.4 26.9 2.68 2.85

Temenos USD Unchanged 510 558 128 155 25.1 27.7 1.49 1.62

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Amuse-gueule:

A maturing industry or re-thinking growth

The thesis: "M" like "Maturity" _{There is a lot of discussion among investors regarding the increasing maturity of the}

technology sector and its implications for the valuation of technology stocks. Since the bursting of the tech bubble in 2000 the sector has witnessed a broad based de-rating. While many tech stocks enjoyed a multiple expansion in following the economic recovery, unfulfilled growth hopes, as well as increasing M&A activity since 2003, has led to a further de-rating. While some companies (e.g. Dell and IBM) are trading at their multiples from 1992, others (e.g. Oracle and SAP) are currently trading well below their levels of the beginning of the 90s. In the following, we are analyzing the increasing maturity of the technology sector and its impact on earnings growth and valuations.

Higher maturity = lower

(organic) revenue growth rates Growth rates in the technology sector (hardware, software and IT services) did not recover to

the pre-tech bubble burst levels – at least for the established players. There are still some structural growth stories left (e.g. salesforce.com and/or Temenos). However, the majority of the players have never achieved a return to the growth rates of the past. This holds true for all individual segments in the industry as can be seen from the chart below (SAP and Oracle as software companies, IBM as an IT service company and Dell as a hardware company).

REVENUE GROWTH RATES (PRO-FORMA) OF DELL, IBM, ORACLE AND SAP

-40% -20% 0% 20% 40% 60% 80% 100% 120% 140% 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

SAP IBM Oracle Dell

Heigh time of the tech bubble (1995-2000)

2001-2003

recession 2008-2009 _recession

Source: Company data, UniCredit Research

Higher maturity = bound to cycles _{The strong revenue growth rates that the technology stocks enjoyed in the course of the tech}

bubble is also reflected in substantial earnings growth as highlighted by the EPS trends of Dell, IBM, Oracle and SAP up to the year 2000 (please note that Oracle's FY ends May). The 2001-2003 recession left skid marks in the EPS trend of the cited companies as well as the 2008-2009 recession, although Oracle and IBM were able to avoid declining earnings by cost cutting and the earnings accretive nature of their acquisitions. Still, having "grown up" means for the majority of the technology companies that they are now exposed to the traditional economic cycles just like any other industry.

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EPS (REPORTED) TREND OF DELL, IBM, ORACLE AND SAP

Dell's EPS trend since 1992 IBM's EPS trend since 1992

-0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 USD -6.00 -4.00 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 USD

Oracle's EPS trend since 1992* SAP's EPS trend since 1992

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 USD 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 EUR

*Includes a net investment gain of USD 6.9mn in 2000. Excl. these special items, EPS was USD 0.35 Source: Company data, Bloomberg, UniCredit Research

Higher maturity =

de-rating of the industry The technology companies had their "golden age" starting in the mid 90s until 2000. In sync

with solid revenue and earnings growth, multiples expanded well above market average, pricing in long-term above market average earnings growth rates. The tech bubble burst was the starting point for the de-rating of the sector. While Dell and IBM are currently trading at around the same 1Y fwd P/E level as they were at the beginning of 1992, Oracle and SAP are both trading below their 1992 levels, reflecting investors' concerns regarding the (organic) growth opportunities of the companies.

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1Y FWD P/E TREND OF DELL, IBM, ORACLE AND SAP*

Dell's 1Y fwd P/E trend since 1992 IBM's 1Y fwd P/E trend since 1992

0 10 20 30 40 50 60 70 80 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

0 10 20 30 40 50 60 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Oracle's 1Y fwd P/E trend since 1992 SAP's 1Y fwd P/E trend since 1992

0 20 40 60 80 100 120 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

0 10 20 30 40 50 60 70 80 90 100 Ja n-92 Ja n-93 Ja n-94 Ja n-95 Ja n-96 Ja n-97 Ja n-98 Ja n-99 Ja n-00 Ja n-01 Ja n-02 Ja n-03 Ja n-04 Ja n-05 Ja n-06 Ja n-07 Ja n-08 Ja n-09 Ja n-10 Ja n-11

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Hors-d'oeuvre:

Implications of higher maturity for the industry

"The" growth industry is now bound to cycles

What does the cyclicality mean

for the different segments? Given the higher maturity of the industry, the companies are exposed to the traditional

cyclicality of the business today. Looking at the individual segments within the technology sector, some are more vulnerable than others to a downturn. 1. Hardware faces severe declines in demand in a recession. Companies prolong the use of existing hardware and slash hardware spending. Hence the traditional replacement cycle is delayed. In addition, hardware has the lowest margin in the industry with operating margins rarely crossing mid-single digits in a purely hardware-focused business model. 2. IT services-driven business models show a higher resilience to a downturn than hardware, given the often longer term projects (projects often run 3-6 months). Even in a crisis, projects are normally finished, providing some stability for IT services companies before they are hit by a recession. In addition, at least for onshore IT services business models, margins are traditionally somewhere in a range of mid to high single digit, providing more of a cushion than for hardware players. 3. Software driven business models are the most defensive. While license revenues are highly cyclical, the software players' life insurance in a downturn are the maintenance revenues that often account for more than 50% of revenues for the more mature players in the industry. This explains the relatively high earnings stability of software companies compared to the other segments of the technology sector.

THE DEPENDENCE ON CYCLES: REVENUE AND MARGIN TREND OF THE DIFFERENT SEGMENTS

Revenue growth rates of IBM's segments Operating margins (reported) in the industry

-30% -20% -10% 0% 10% 20% 30% 1Q 0 7 2Q 0 7 3Q 0 7 4Q 0 7 1Q 0 8 2Q 0 8 3Q 0 8 4Q 0 8 1Q 0 9 2Q 0 9 3Q 0 9 4Q 0 9 1Q 1 0 2Q 1 0 3Q 1 0 4Q 1 0 1Q 1 1 2Q 1 1

GTS GBS S&T Software Total

Spill over of the financial crisis to the real economy

0% 5% 10% 15% 20% 25% 30% 35% 40% 2002 2003 2004 2005 2006 2007 2008 2009 2010

SAP Oracle IBM* Indra HP Dell

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The phenomenon of increasing vertical consolidation

The beauty of the tech

industry: strong operating cash flows

The higher maturity of the industry is also reflected in the trend of the cash out for acquisitions since 2004. Based on companies' cash flow statements since 2004, Oracle has spent the highest amount on acquisitions with around USD 36bn, followed by HP with USD 29bn and IBM with USD 22bn. All the other companies have spent significantly below USD 20bn since 2004 cumulatively. Given the strong operating cash flow trend of the large tech companies based on the high-margin nature of their business and partly due to their sheer size, there is substantial financial leeway to pursue non-organic growth options. For example, Oracle had an operating cash flow yield (as a percentage of revenues) of 28% in 2010 (calendar year), SAP reported 24%, IBM 20%, Microsoft and Google 38% and HP 9%. Given the increasing maturity of the industry and hence tougher times to generate sustainable double-digit revenue growth rates organically, this strong cash flow is used for acquisitions. Recent news flow like Google's announcement on 15 August to acquire Motorola Mobility and Hewlett-Packard's announcement on 18 August to acquire Autonomy highlight that the Big 6 are still "hungry".

THE STRONG CASH GENERATION SUPPORTS M&A IN THE INDUSTRY

The operating cash flow trend of the Big 6 Cash out for acquisitions net of cash acquired (2004-2Q11)

0 5 10 15 20 25 30 2004 2005 2006 2007 2008 2009 2010

USD bn SAP GOOG Oracle HPQ IBM Microsoft

13.6 35.9 21.6 11.2 6.8 29.4 0 5 10 15 20 25 30 35 40 1 2 3 4 5 6 USD bn

Oracle SAP Oracle Microsoft Google HP

Source: Company data, UniCredit Research

Higher maturity =

cross sector consolidation Although it has taken on a different flavor since the tech bubble burst, the consolidation of the

industry is not a new topic. The (visionary) transformation of IBM from a hardware company in the early 90s to a service and software driven business model today is, in our view, the blueprint for many business model transformations happening today.

■

Hardware vendors like HP and Dell try to lower their dependency on the commoditized

and hence low-margin businesses by expanding their business into the less volatile and higher margin IT services and software segments. While hardware players have a high incentive to move to the higher margin segments of the technology stack due to the reasons discussed earlier, the majority of the M&A activity of IT services and software vendors happens within their segments or in higher-margin segments.

■

For software vendors the reason is obvious: given the high-margin nature of their

business, the appeal to risk a margin dilution by moving "downstream" through a hardware and/or IT services acquisition is relatively low (an exception could be the acquisition of an offshore-based IT services player, which often have comparatively high operating margins

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■

IT services: Large scale software acquisitions by IT services companies are rare. The major asset of an IT services company is the neutrality that would be at risk if a large scale software acquisition were on the agenda. IBM's software acquisitions are an exception and the majority of the IT services acquisitions focus on regional expansion and market share gains within the IT services sector.

THE IT MARKET SEGMENTS: A SIMPLIFIED OVERVIEW OF THE CONSOLIDATION DYNAMIC

Hardware

Operating margins: up to mid single digit

IT services (onshore)

Operating margins: up to low double digit

Software

Operating margins: up to 50%

Hardware players expand their product portfolio to the higher margin IT services and software segments.

IT services players expand their product portfolio to the higher margin software segments. Offshore IT services generate operating margins comparable to a software business model

Software players try to consolidate the partly still fragmented different layers of the software stack to position themselves as one-stop-shopping alternatives. They rarely move into other lower margin segments in an effort to offer the full stack and to bundle products.

Hardware

Operating margins: up to mid single digit

IT services (onshore)

Operating margins: up to low double digit

Software

Operating margins: up to 50%

Hardware players expand their product portfolio to the higher margin IT services and software segments.

IT services players expand their product portfolio to the higher margin software segments. Offshore IT services generate operating margins comparable to a software business model

Software players try to consolidate the partly still fragmented different layers of the software stack to position themselves as one-stop-shopping alternatives. They rarely move into other lower margin segments in an effort to offer the full stack and to bundle products.

Source: UniCredit Research

A sample of acquisitions

in the industry The following sample of acquisitions in the industry highlights the existing market dynamic.

We take this schema as a guide to describe the current strategies of the leading industry players in the different segments of the technology stack in the following chapters.

A SAMPLE OF ACQUISITIONS ACROSS THE SEGMENTS

Hardware IT services Software Hardware IT services Software

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A comparison:

the individual tech companies in 2004 and today

The reshaping of the technology sector following the bursting of the tech bubble is also reflected in the ranking of the leading players in the industry. We have chosen seven of the leading technology companies to provide a brief overview of the evolution of the industry (HP, IBM, Microsoft, Oracle, Google and SAP): While HP was able to overtake IBM in terms of revenues compared to 2004 and is hence the largest company revenue-wise, it is the fifth largest vendor in terms of market capitalization today. In terms of revenues, Oracle maintained its number four position in the industry, although in terms of market cap it lost its number three position from 2004 to Google. SAP is the smallest player of the six cited companies and while it was number four in terms of market cap in 2004, it is the number five today.

AS TIME GOES BY: SELECTED IT COMPANIES RANKED BY MARKET CAP AND REVENUES

Revenues* (2004) and… …market capitalization* (2004)

0 20 40 60 80 100 120 IBM HP MS FT ORC L SA P Go o g le USD bn 0 50 100 150 200 250 300 MS FT IBM ORC L SA P HP Go o g le USD bn

Revenues** (2011E) and… …market capitalization** (currently)

0 20 40 60 80 100 120 140 HP _IBM MS F T OR C L Go og le SA P USD bn 0 50 100 150 200 250 MS F T IB M Go og le OR C L SA P HP USD bn

*MSFT: FY05 end June 2005, ORCL: FY05 end May 2005, Source: Bloomberg, Company data, Thomson Datastream, UniCredit Research HP FY04 end October 2004; **MSFT: FY12, ORCL: FY12, HP FY11

How does the technology

stack look today? While several segments of the technology stack have already been oligopolies for some time

(e.g. Database Management Systems) or even a de-facto monopoly (e.g. operating systems and office suites), the degree of concentration is still less pronounced in others, where the Top 3 players often combine a market share of around 50%. The large players in the industry position themselves more and more as technology mega stores and the focus of current consolidation is mainly on those segments that still show a relatively low degree of

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A (SIMPLIFIED) OVERVIEW OF THE SOFTWARE AND IT SERVICES STACK IN 2010

Market Operating Market share

% size* margin Top 3 Top 3 Oracle IBM Microsoft HP SAP

IT Services USD 793bn 5-10 IBM, HP and Fujitsu 15 1.4 7.1 n.a. 4.5 0.8

Storage USD 12.4bn 15-20 EMC, Symantec and IBM 55 0.2 14.8 n.a. 5.7 n.a.

IT operations management USD 15.9bn 15-20 IBM, CA and BMC 43 3.5 19.7 7.2 7.3 n.a.

DBMS USD 23.3bn >50 Oracle, IBM and Microsoft 84 42.9 22.8 18.7 n.a. 3.2***

Operating System USD 30.4bn >70 Microsoft, IBM and HP 90 2.6 7.5 78.6 3.7 n.a.

Middleware USD 17.6bn >20 IBM, Oracle and Microsoft 55 17.0 33.9** 5.0 0.1 1.2

Application Development USD 8.3bn >20 IBM, Microsoft and HP 50 0.6 24.6 15.9 9.8 0.8

Security USD 16.6bn >20 Symantec, McAfee/Intel

and Trend Micro 36 1.8 4.9 2.0 0.3 n.a.

Business Intelligence USD 10.5bn 15-20 SAP, Oracle and SAS Institute 52 15.6 11.6 8.7 n.a. 22.9

ERP USD 21.2bn >25 SAP, Oracle and Sage 44 12.3 n.a. 4.5 n.a. 25.3

ECM USD 3.9bn >20 IBM, Open Text and EMC 48 5.3 18.2 5.9 n.a. n.a.

Desktop (Office Suites) USD 14.2bn >60 Microsoft, Adobe and Apple 99 0.1 0.1 94.0 n.a. n.a.

*Gartner includes in the market definition of software segments the following revenues: new licenses, updates, subscriptions and hosting, technical support, and maintenance **incl. Sterling Commerce

***incl. Sybase Source: Gartner Group (March 2011), UniCredit Research

How did the increasing maturity affect the valuation

compared to the overall market?

Where does the technology sector stand in terms of valuation in comparison to the overall market?

Following the bursting of the tech bubble, the technology sector has witnessed a broad based de-rating across all segments.

■

Although our panel of software vendors (Oracle, SAP, Dassault Systèmes and Software AG) has de-rated over time, it is still enjoying a premium compared to the S&P 500. While SAP enjoyed a premium (1Y fwd P/E) of more than 50% compared to the S&P 500 at the beginning of 2003, the premium has come down to 24% today.

■

In contrast, our panel of IT services vendors (Accenture, Capgemini, Atos and IBM) shows a mixed picture with only two companies (Accenture and IBM) having a premium compared to the S&P 500, while Atos and Capgemini are trading at a discount (1Y fwd P/E).

■

Our panel of hardware vendors (Dell, HP and Acer) is drawing the opposite picture compared to the software panel with the majority of the players trading at a discount compared to the S&P 500 in terms of 1Y fwd P/E multiples: the exception is Acer, which is trading at a premium. However, it is worth mentioning that earnings estimates have been declining since May.

■

Although our two "other technology" companies (Google and Apple) have faced a substantial de-rating over time, both are trading at a premium compared to the S&P 500 today.

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1Y FWD P/E TREND OF TECHNOLOGY STOCKS COMPARED TO THE S&P 500*

Selected software players compared to the S&P 500 Selected IT services players compared to the S&P 500

0 5 10 15 20 25 30 35 40 Ja n-0 3 Ju l-03 Ja n-0 4 Ju l-04 Ja n-0 5 Ju l-05 Ja n-0 6 Ju l-06 Ja n-0 7 Ju l-07 Ja n-0 8 Ju l-08 Ja n-0 9 Ju l-09 Ja n-1 0 Ju l-10 Ja n-1 1 Ju l-11

S&P 500 SAP ORCL DSY SOW

0 5 10 15 20 25 30 35 Ja n-03 Ju l-0 3 Ja n-04 Ju l-0 4 Ja n-05 Ju l-0 5 Ja n-06 Ju l-0 6 Ja n-07 Ju l-0 7 Ja n-08 Ju l-0 8 Ja n-09 Ju l-0 9 Ja n-10 Ju l-1 0 Ja n-11 Ju l-1 1

S&P 500 IBM CAP ACN ATO

Selected hardware players compared to the S&P 500 Selected other tech companies compared to the S&P 500

0 5 10 15 20 25 30 35 Ja n-0 3 Ju l-03 Ja n-0 4 Ju l-04 Ja n-0 5 Ju l-05 Ja n-0 6 Ju l-06 Ja n-0 7 Ju l-07 Ja n-0 8 Ju l-08 Ja n-0 9 Ju l-09 Ja n-1 0 Ju l-10 Ja n-1 1 Ju l-11

S&P 500 DELL HPQ ASK

0 10 20 30 40 50 60 70 80 90 Ja n-03 Jul -0 3 Ja n-04 Jul -0 4 Ja n-05 Jul -0 5 Ja n-06 Jul -0 6 Ja n-07 Jul -0 7 Ja n-08 Jul -0 8 Ja n-09 Jul -0 9 Ja n-10 Jul -1 0 Ja n-11 Jul -1 1

S&P 500 AAPL GOOG

*1Y fwd P/E's on a monthly base as of August 2011 Source: Thomson Datastream, UniCredit Research

A closer look at earnings growth across the technology sector

Given the de-rating of the industry, we think it is worth taking a closer look at the earnings trend of the individual companies and to compare it with the earnings growth of the S&P 500 (1Y fwd earnings growth).

■

The earnings estimates for software companies have shown a higher resilience than the S&P 500 in the last recession, but the majority of the companies did not show the same upside during the cyclical recovery. However, after having returned to a "business as usual" environment, the companies in our software panel show an estimated stronger earnings growth rate than the overall market with the exception of Dassault Systèmes, where consensus expects earnings growth in line with the S&P 500.

■

There is apparently a divide in our panel of IT services vendors in terms of earnings resilience. While both US companies (Accenture and IBM) have shown a more stable earnings growth trend than the S&P 500 in the last recession, earnings growth estimates of the two European players (Capgemini and Atos) had to face almost the same correction as the S&P 500. In the currently normalized economic environment, earnings growth estimates of all IT services companies have broadly converged, with Accenture, Atos and

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■

From our panel of hardware vendors, HP showed the highest resilience in terms of estimated earnings growth rates, given its hybrid business model. Dell and Acer's earnings growth expectations were significantly more cyclical than HP's. From the hardware vendors only Dell is currently expected to deliver higher earnings growth than the S&P 500.

■

The two "other technology" companies (Google and Apple) were not as vulnerable to the downturn than, e.g. the hardware companies or the European IT services players.

1Y FWD EARNINGS GROWTH TREND OF TECHNOLOGY STOCKS COMPARED TO THE S&P 500*

Selected software players compared to the S&P 500 Selected IT services players compared to the S&P 500

-80% -60% -40% -20% 0% 20% 40% 60% Ja n-0 3 Ju l-03 Ja n-0 4 Ju l-04 Ja n-0 5 Ju l-05 Ja n-0 6 Ju l-06 Ja n-0 7 Ju l-07 Ja n-0 8 Ju l-08 Ja n-0 9 Ju l-09 Ja n-1 0 Ju l-10 Ja n-1 1 Ju l-11

S&P 500 SAP ORCL DSY SOW

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Jan -03 Ju l-0 3 Jan -04 Ju l-0 4 Jan -05 Ju l-0 5 Jan -06 Ju l-0 6 Jan -07 Ju l-0 7 Jan -08 Ju l-0 8 Jan -09 Ju l-0 9 Jan -10 Ju l-1 0 Jan -11 Ju l-1 1

S&P 500 IBM CAP ACN ATO

Selected hardware players compared to the S&P 500 Selected other tech companies compared to the S&P 500

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% Ja n-0 3 Ju l-03 Ja n-0 4 Ju l-04 Ja n-0 5 Ju l-05 Ja n-0 6 Ju l-06 Ja n-0 7 Ju l-07 Ja n-0 8 Ju l-08 Ja n-0 9 Ju l-09 Ja n-1 0 Ju l-10 Ja n-1 1 Ju l-11

S&P 500 DELL HPQ ASK

-100% -50% 0% 50% 100% 150% 200% 250% 300% 350% 400% Ja n-03 Jul -0 3 Ja n-04 Jul -0 4 Ja n-05 Jul -0 5 Ja n-06 Jul -0 6 Ja n-07 Jul -0 7 Ja n-08 Jul -0 8 Ja n-09 Jul -0 9 Ja n-10 Jul -1 0 Ja n-11 Jul -1 1

S&P 500 AAPL GOOG

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Software stocks: How the shift of the revenue mix affected

the valuation multiples

The higher share of the recurring revenues is reflected in the multiple contraction of the sector

The higher degree of maturity of the majority of the software stocks is also reflected in the shift of the revenue mix: While the recurring revenues accounted for around 30% of total revenues for many software stocks in 2000, the share of recurring revenues was often around 50% in 2010. On the other hand, the share of the cyclical revenue component, the license revenues, has often fallen from around 40% to below 30% in the same time frame. The increasing share of recurring revenues is further evidence of the higher degree of maturity for the software sector in general. Software stocks have often faced a multiple contraction in sync with the decreasing proportion of license revenues – we believe the reason is that investors increasingly question their valuation as growth stocks.

SOFTWARE STOCKS: MULTIPLE CONTRACTION WITH A RISING SHARE OF RECURRING REVENUES*

SAP: 1Y fwd P/E and revenue mix Oracle: 1Y fwd P/E and revenue mix

0 5 10 15 20 25 30 35 40 Ja n-0 2 Ju l-02 Ja n-0 3 Ju l-03 Ja n-0 4 Ju l-04 Ja n-0 5 Ju l-05 Ja n-0 6 Ju l-06 Ja n-0 7 Ju l-07 Ja n-0 8 Ju l-08 Ja n-0 9 Ju l-09 Ja n-1 0 Ju l-10 Ja n-1 1 Ju l-11 20% 30% 40% 50% 60% 1Y fwd P/E License share (rs) Maintenance share (rs)

0 5 10 15 20 25 30 35 40 Jan-02 Ju l-02 Jan-03 Ju l-03 Jan-04 Ju l-04 Jan-05 Ju l-05 Jan-06 Ju l-06 Jan-07 Ju l-07 Jan-08 Ju l-08 Jan-09 Ju l-09 Jan-10 Ju l-10 Jan-11 Ju l-11 20% 30% 40% 50% 60% 1Y fwd P/E License share (rs) Maintenance share (rs)

Software AG: 1Y fwd P/E and revenue mix Temenos: 1Y fwd P/E and revenue mix

0 5 10 15 20 25 30 35 40 Ja n-0 2 Ju l-02 Ja n-0 3 Ju l-03 Ja n-0 4 Ju l-04 Ja n-0 5 Ju l-05 Ja n-0 6 Ju l-06 Ja n-0 7 Ju l-07 Ja n-0 8 Ju l-08 Ja n-0 9 Ju l-09 Ja n-1 0 Ju l-10 Ja n-1 1 Ju l-11 20% 25% 30% 35% 40% 45% 50% 1Y fwd P/E License share (rs) Maintenance share (rs)

0 5 10 15 20 25 30 35 40 45 50 Ja n-0 2 Jul -02 Ja n-0 3 Jul -03 Ja n-0 4 Jul -04 Ja n-0 5 Jul -05 Ja n-0 6 Jul -06 Ja n-0 7 Jul -07 Ja n-0 8 Jul -08 Ja n-0 9 Jul -09 Ja n-1 0 Jul -10 Ja n-1 1 Jul -11 20% 30% 40% 50% 60% 70% 80% 1Y fwd P/E License share (rs) Maintenance share (rs)

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Comparison with the earnings growth and valuation of other sectors

A comparison with the valuation and earnings growth of other sectors

Given the convergence of the multiples of tech companies with the S&P 500, we think it is worth analyzing in more detail the performance of tech companies together with other stocks labeled as "cyclicals" and/or "defensives".

■

The cyclicals: We have chosen BMW and BASF as two examples for stocks labeled as

cyclicals and compared their 1Y fwd P/E and earnings growth trend with SAP as an example for a tech stock. Our long term 1Y fwd P/E comparison shows that SAP enjoyed a substantial premium compared to the two cyclicals, but that the premium eroded following the bursting of the tech bubble. Following bursting of the tech bubble, the amplitude of SAP's earnings growth expectations have decreased and earnings growth expectations were significantly more stable than those of the cyclicals, due to the increased share of recurring revenues, in our view.

■

The defensives: We have chosen Nestlé, Coca Cola and Johnson & Johnson as proxies for the defensive names. The 1Y fwd P/E trend of SAP compared to the defensives shows a similar pattern to the cyclicals. However, SAP is trading at the same multiple level as Nestlé and Coca Cola today. An aspect worth highlighting is that earnings growth estimates for SAP at the beginning of the economic recovery following the 2001-2003 recession were above the defensives until mid-2006. Afterwards expectations for SAP and, for example, Nestlé and Coca Cola followed the same trend. Hence, SAP (we believe due to the higher share of recurring revenues compared to total revenues than in the 2001-2003 downturn) has shown defensive characteristics compared to cyclical stocks. However, consensus expectations for SAP's earnings growth are currently well above the expectations for the defensives.

SAP IN COMPARISON TO STOCKS LABELED AS TRADITIONAL CYCLICALS AND DEFENSIVES*

1Y fwd P/E of selected cyclicals… … and expected earnings growth (1Y fwd)

0 10 20 30 40 50 60 70 80 90 100 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 BMW SAP BASF -100% -50% 0% 50% 100% 150% 200% 250% 300% Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 BMW SAP BASF

1Y fwd P/E of selected defensives… … and expected earnings growth (1Y fwd)

0 10 20 30 40 50 60 70 80 90 100 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 SAP NESN KO JNJ -40% -20% 0% 20% 40% 60% 80% 100% Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 SAP NESN KO JNJ

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La soupe: A closer look at the different segments

of the technology sector

The hardware players: trying to re-invent themselves

Stuck in the low end of

the market and destined to move upstream

Pure play hardware players like Acer and Lenovo are facing tough times in the low-margin hardware market. According to Gartner Group, HP was the clear market leader in the global PC market, based on shipments, with a market share of around 18% (2010), followed by Acer with 13% and Dell with 12%. In contrast, all the remaining players each held a market share of less than 10%. While companies with a hybrid business model (hardware plus IT services and/or software) like HP and Dell were able to raise their operating margins above the 5% threshold, pure play hardware players like Acer and Lenovo had to cope with low single-digit operating margins. Given the high cyclicality of the hardware business and the relatively low operating margins, we believe that pure play hardware players have to continue to move upstream into the higher margin market segments like IT services and software. IBM was the first hardware company with a leading market position to realize the dilemma of having a stronghold in the low margin hardware segment and started the transformation of its business model in the early 1990s. In contrast, HP started to make a stronger move into the (high-margin) software segment in 2005 and in IT services in 2008 with the acquisition of EDS.

A SNAPSHOT OF THE HARDWARE PLAYERS

Worldwide market shares of PC makers (2010; 351mn units) Operating margins (reported) in the industry

HP 17.9% Dell 12.0% Acer 13.0% Lenovo 9.7% Asus 5.4% Toshiba 5.4% Others 36.7% -2% 0% 2% 4% 6% 8% 10% 2003 2004 2005 2006 2007 2008 2009 2010

Acer Dell HP Lenovo

Source: Company data, Gartner, UniCredit Research

Other market trends add to the tough times for traditional hardware players

The cyclicality and the low margin nature of the hardware business are well known. However, there are some other fundamental market trends adding to the pressure for hardware players:

■

The trend towards technology megastores: We have already described the

phenomenon of the increasing vertical integration of the industry. Following IBM's transformation into a technology megastore (despite the mantra of remaining mainly applications neutral), Oracle was the first player to realize this structural change in the industry and is still one of the driving forces behind the industry's consolidation. While the majority of its acquisitions have focused on expanding the software product portfolio, the acquisition of Sun Microsystems (completed in January 2010) provided the market entry in the server and storage market, where Oracle is now competing with traditional hardware

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■

Increasing market acceptance of alternative products that are substituting the traditional PC: In the last couple of years new products like tablets, smartphones and other mobile devices have enjoyed an increasing popularity. This market trend will especially eat into the established PC makers market share at the low end of the market, where consumers are mainly substituting traditional PCs with tablets and/or other devices with similar characteristics. This explains, among other reasons, why HP acquired smartphone producer Palm in 2010 for USD 1.2bn.

■

Cloud computing: Cloud computing is currently one of the buzz words in the industry.

There is one substantial aspect attached to the cloud computing trend that impacts traditional hardware players, especially in the corporate segment. They are facing increasing competition from companies like Amazon, AT&T, Microsoft and Rackspace Hosting, that offers corporate clients the ability to store and process data in their server farms/data centers. Depending on customer adoption this could eat into server sales of traditional hardware companies like Dell and/or HP. This explains cloud-related acquisitions by Dell, that acquired data-storage company EqualLogic in 2007 for USD 1.4bn, cloud-integration company Boomi and medical-archiving company InSite One, both announced in 2010, whereas HP, after a bidding war with Dell, acquired data-storage company 3PAR for USD 2.4bn in 2010.

The hunt for margins

and defensiveness The strategic redirection of many hardware players to higher margin market segments like IT

services and software can be described as the "hunt for margins and defensiveness". Taking IBM as an example: The company divested its Global Network business to AT&T in 1999 and reduced its internal DRAM capacity in the same year via joint ventures with Infineon and Toshiba. The Hard Disk Drive (HDD) business was sold to Toshiba in 2002 and the PC business to Lenovo in 2005. As a consequence, hardware revenues declined from USD 36.2bn (46% of total revenues) in 1997 to USD 18.0bn (18% of total revenues) in 2010, while the share of the more defensive IT services and software revenues increased in the same time frame from 49% to 79%. Alongside IBM, there are two other players in HP and Dell with their roots in the hardware segment, currently on their way to lowering their dependence on hardware and to move more strongly into software and/or IT services to raise their operating margins and to become more defensive in their revenue mix.

Hewlett Packard: How much of SAP will Léo Apotheker bring to HP?

HP: following in

the footsteps of IBM Comparable to IBM, the roots of Hewlett-Packard (HP) are also in the hardware segment.

In the early 2000s, HP was still focusing on increasing its footprint in the hardware segment. The acquisition of Compaq in FY02 initially provided the new entity the number one position in the global PC market. The acquisition of Compaq was a horizontal move. While IBM started the transformation of its business model in the early 1990s, HP followed approximately a decade later with the stronger move into the software segment coinciding with Mark Hurd joining the company in early 2005 as new CEO and becoming chairman of the board of directors in September 2006. Under his leadership, HP also made a stronger move into the IT services segment with the acquisition of EDS in FY08. Since then, HP has been among the Top 3 players in the global IT services market. In November 2009, HP acquired 3Com to strengthen its enterprise storage and servers segment (ESS) and smartphone producer Palm in April 2010. In August 2010, Mark Hurd left HP and joined Oracle in September 2010. Shortly after his departure, HP continued to execute its acquisition strategy with the acquisition of 3PAR (after a bidding war with Dell) to expand its product offering in the ESS segment and ArcSight (security and compliance management) to strengthen its software segment, both in September. End of September 2010, HP announced former SAP CEO Léo Apotheker as Mark Hurd's successor. Given Apotheker's longstanding track record in the software sector, the market is speculating on a further strengthening of the software segment under his helm. On 18 August, Hewlett-Packard announced that it intends to acquire UK-based Enterprise Information Management software company Autonomy for USD 11.7bn and that it considers a spin off of its PC business. Both moves underpin our view that HP is following in the footsteps of IBM.

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SELECTED ACQUISITIONS OF HEWLETT-PACKARD SINCE FY02

USD FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Sales (USD mn) 56,588 73,061 79,905 86,696 91,658 104,286 118,364 114,552 126,033

Operating margin (%)* -1.8 6.2 6.3 6.4 8.0 9.2 10.0 11.0 11.4

Acquisition and

acquisition price Compaq24.2bn

Indigo ca. 719mn Synstar ca. 343mn Triaton ca. 464mn Peregrine

ca. 538mn Mercuryca. 4.9bn

Opsware ca. 1.7bn EDS ca. 13.0bn Exstream Software ca. 720mn 3Com ca. 2.7bn Palm ca. 1.2bn 3PAR ca. 2.4bn ArcSight ca. 1.5bn *Non-GAAP since FY03 Source: Hewlett-Packard, UniCredit Research

A stronger move into the higher margin software & IT services segment from 2005 on

HP started the transformation of its business model from a hardware focused company (the share of revenues of the hardware-related segments was around 78% in FY04) to a more software and IT service driven company in 2005 when Mark Hurd became the leader of the company. The acquisition of EDS in 2008 propelled HP to among the top 3 players in the global IT services market. At the end of 2010, Léo Apotheker followed Mark Hurd and we believe that he will continue the evolution of HP to a more software and IT services-driven business model. The announcement of the acquisition offer for Autonomy on 18 August indicates that HP is moving in this direction. In FY10, the share of the hardware-related segments was around 66%. Based on this strategic shift the company managed to generate an EPS CAGR of 21% in 2004-2010, while revenues grew just 8% in the same time frame. However, it is worth noting that the company reduced its guidance for the current fiscal year in the last three quarters, among other reasons due to difficulties in its services unit. From an outside perspective it looks like HP is currently in a transition and consolidation phase after the change in CEO, but also suffering from the tougher economic environment.

KEY DATA OF HEWLETT-PACKARD'S BUSINESS MODEL TRANSFORMATION

Revenue and earnings trend of Hewlett-Packard (FY98-FY10) Stronger focus on software since 2005*

3. 25 1. 49 3. 69 3. 14 2. 68 2. 18 0. 82 1. 15 0. 83 -0.36 0. 35 1.73 1. 26 0 20 40 60 80 100 120 140 FY9 8 FY9 9 FY0 0 FY0 1 FY0 2 FY0 3 FY0 4 FY0 5 FY0 6 FY0 7 FY0 8 FY0 9 FY1 0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 Revenues EPS (rs) USD bn USD 0 100 200 300 400 500 600 700 800 900 1,000 1Q 03 3Q 03 1Q 04 3Q 04 1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 USD mn -40% -30% -20% -10% 0% 10% 20% 30% 40% Revenues Operating margin (rs) The software segment shifted in the strategic

focus of HP in the middle of 2005

*HP reclassified segment revenues and transferred communications and media solutions Source: Hewlett-Packard, UniCredit Research from the Software segment to the Services segment starting in 4Q10 (its 1Q11)

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The M&A activity has led to a growing importance of the software and services segment since 2005

The acquisitions made under Mark Hurd's helm from 2005-10 had a significant impact in the mix of the operating profit of the group: While the IPG division (Imaging and Printing) accounted for more than 70% of HP's operating profit in 2004, it contributed only around 28% to the group's operating profit in 2010. In contrast, the software segment (operating loss of USD 145mn in 2004) and the services segment (25% of the group's operating profit in 2004), had a significantly higher impact on the group's operating profit with an operating profit share of 4% and 35%, respectively.

KEY DATA OF HEWLETT-PACKARD'S BUSINESS MODEL TRANSFORMATION: SEGMENT PROFITABILITY

Operating profit shares of HP's divisions in 2004 Operating profit shares of HP's divisions in 2010

-0.5 0.5 1.5 2.5 3.5 4.5 ESS Se rv ic e s Softwar e PS G IPG FS CI USD bn -0.5 0.5 1.5 2.5 3.5 4.5 5.5 6.5 ESS Se rv ic e s Softwar e PS G IPG FS CI USD bn

Source: Hewlett-Packard, UniCredit Research

Likely one of the driving forces

of the consolidation We believe that HP will follow IBM's path to lower its dependency on the hardware segment,

although IBM had a significantly lower share of revenue from hardware than HP when it started its business model transformation: The share of revenue related to hardware was around 57% of total revenue in the early 1990s. As a result of the strengthening of the IT services and software segments, the share of hardware revenues declined to around 18% in 2010. However, the revenue mix of Hewlett-Packard is still dominated by hardware-related revenue today, as described earlier. Following the stronger move into the IT services sector in 2008, we believe that HP is likely to look for larger acquisition targets in the software sector under Apotheker's helm and hence expect HP to be one of the driving forces of the consolidation of the industry going forward. Overall, HP was successful in increasing its operating margin from around 6% in FY03 to around 11% in FY10. To give the margin a further lift, we believe that some larger acquisitions in the software segment are necessary. Since 2006, HP was able to generate OCF of at least USD 10bn. However, at the end of 3Q FY11, net debt was around USD 11bn.

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HEWLETT-PACKARD'S BUSINESS TRANSFORMATION IN FIGURES*

Share of Hewlett-Packard's revenues in 2004: absolute... …and relative**

-5 0 5 10 15 20 25 30 ESS Se rv ic e s Softwar e PS G IPG FS CI Other s USD bn Services 17% Software 1% PSG 30% IPG 30% ESS 19% CI 1% FS 2%

Share of Hewlett-Packard's revenues in 2010: absolute... …and relative**

-5 0 5 10 15 20 25 30 35 40 45 ES S Se rv ic e s Softwar e PS G IPG FS CI Other s USD bn Services 27% Software 3% PSG 32% IPG 20% ESS 15% CI 1% FS 2%

*ESS (Enterprise Storage and Servers), PSG (Personal Systems Group), Source: Company data, UniCredit Research IPG (Imaging and Printing Group), FS (Financial Services), CI (Corporate Investments)

**excl. Others

An expansion of the software segment could deliver further margin upside

1Y fwd EPS estimates corrected from their peak to their trough in the 2001-2003 recession by 12%. At 7%, the downside was less pronounced in the 2008-2009 recession We believe that – besides profitability improvements in the ESS segment – the higher EPS resilience is due to the shift of the business model to the relatively high-margin software & IT services segments: the revenue share of the software & IT services segment increased from 18% in 2003 to 31% in 2010. We see further margin upside, mainly if HP expands the share of the highly profitable software segment by acquisitions.

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THE GROWING SHARE OF SOFTWARE & IT SERVICES REVENUES HELPED HP TO RAISE ITS MARGIN OVER TIME*

1Y fwd P/E and EPS trend

1Y fwd EPS, operating margin and software & IT services share of revenues trend 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Ja n-0 0 Ja n-0 1 Ja n-0 2 Ja n-0 3 Ja n-0 4 Ja n-0 5 Ja n-0 6 Ja n-0 7 Ja n-0 8 Ja n-0 9 Ja n-1 0 Ja n-1 1 0 5 10 15 20 25 30 35 1Y fwd EPS 1Y fwd P/E (rs) USD Downside to 1Y fwd EPS from peak to trough: 12%

Downside to 1Y fwd EPS from peak to trough: 7%

0.0 1.0 2.0 3.0 4.0 5.0 6.0 Jan-0 3 Jul -03 Jan-0 4 Jul -04 Jan-0 5 Jul -05 Jan-0 6 Jul -06 Jan-0 7 Jul -07 Jan-0 8 Jul -08 Jan-0 9 Jul -09 Jan-1 0 Jul -10 Jan-1 1 Jul -11 0% 5% 10% 15% 20% 25% 30% 35% 40% 1Y fwd EPS

Software & IT services share (rs) Operating margin (rs) USD

*1Y fwd P/E and EPS growth on a monthly base as of August 2011 Source: Hewlett-Packard, Thomson Datastream, UniCredit Research

Dell: Too late to follow IBM and HP?

A closer look at Dell _{Dell joined the vertical integration trend relatively late with the acquisition of IT service}

company Perot Systems for USD 3.6bn in 2009, which brought Dell to among the top 20 in the global IT services market. Further large acquisitions of Dell include IP storage-area network (SAN) vendor EqualLogic for ca. USD 1.4bn in 2008 and Compellent, focused on virtualized storage solutions, for ca. USD 800mn in 2011. The company lost a bidding war with HP for the data-storage provider 3PAR in 2010.

SELECTED ACQUISITIONS OF DELL SINCE FY 2005

USD FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E*

Sales (USD mn) 49.121 55,788 57,420 61,133 61,101 52,902 61,494 62,996

Operating margin (%) 8.9 7.8 5.3 5.6 5.2 4.1 5.6 7.8

Acquisition and

acquisition price EqualLogicca. 1.4bn MessageOneca. 155mn Perot Systemsca. 3.6bn Compellentca. 800mn

*Bloomberg consensus as of 19 August Source: Dell, UniCredit Research

Vulnerable to the

economic cycles Hardware is the most cyclical segment within our technology universe, while software and IT

services have shown a higher resilience in the last two downturns. With services revenues accounting only for 12% of total revenues in FY 2011, the majority of Dell's revenue is still tied to the hardware business with its existing margin pressure. Hence, Dell has had to face significant earnings declines in the last two recessions. The overall revenues CAGR (FY 2003-2011) was 11%, while (GAAP) operating income reported a CAGR of 2% in the same time frame. The question remains as to whether Dell will also follow the strategy of IBM and HP, to make an even stronger move into the less cyclical and higher margin software and IT services businesses.

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REVENUE AND EARNINGS* TREND OF DELL FY 1997-2011 1. 1 4 0. 3 2 1. 3 5 0. 73 1.2 5 1. 3 1 1.4 7 1. 1 8 1. 0 1 0. 8 0 0. 4 6 0.7 9 0.6 1 0.5 3 0. 1 7 0 10 20 30 40 50 60 70 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 Revenues EPS (rs) USD bn USD

*GAAP Source: Dell, UniCredit Research

Still a hardware company _{Hardware-related revenues still accounted for around 88% of Dell's total revenues in FY11}

(software and peripherals include third-party software products incl. operating systems and anti-virus software as well as Dell-branded printers and third-party peripheral products like keyboards and mice). Even the services segment includes hardware-related services like support services and configuration services.

DELL: OPERATING KEY DATA

Revenues trend since FY* 2000 Operating income** and operating cash flow trend since FY* 2000

0 10 20 30 40 50 60 70 FY9 7 FY9 8 FY9 9 FY0 0 FY0 1 FY0 2 FY0 3 FY0 4 FY0 5 FY0 6 FY0 7 FY0 8 FY0 9 FY1 0 FY1 1 USD bn -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Revenues yoy (rs) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 FY9 7 FY9 8 FY9 9 FY0 0 FY0 1 FY0 2 FY0 3 FY0 4 FY0 5 FY0 6 FY0 7 FY0 8 FY0 9 FY1 0 FY1 1 0% 5% 10% 15% 20% Operating income

Operating cash flow Operating margin (rs) OCF as a % of revenues (rs) USD bn

Revenue mix of Dell FY* 1999 Revenue mix of Dell FY* 2011

Enterprise Systems 12% Notebook computers Other 7% Desktop Services 12% Client 55% Enterprise Solutions 16%

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A volatile EPS trend _{Following the 2001-03 recession, Dell's 1Y fwd EPS estimates were rising until the end of 2005.}

However, when Michael Dell stepped down as CEO from the company he founded in July 2004, the operating trend of the company deteriorated, according to press reports among other reasons due to a loss of reputation for quality of customer service and market share losses to Hewlett-Packard. At the beginning of 2007, Michael Dell returned as CEO and earnings estimates rose again, in sync with a stabilizing operating margin until the recession following the Lehman bankruptcy in 2008 hit. In the meantime, the operating margin is recovering again as well as earnings estimates. However, Dell is still trading well below its multiples prior to 2008.

MULTIPLE CONTRACTION AND EPS VOLATILITY*

1Y fwd P/E and EPS trend 1Y fwd EPS and operating margin trend

0.0 0.5 1.0 1.5 2.0 2.5 Ja n-0 0 Ja n-0 1 Ja n-0 2 Ja n-0 3 Ja n-0 4 Ja n-0 5 Ja n-0 6 Ja n-0 7 Ja n-0 8 Ja n-0 9 Ja n-1 0 Ja n-1 1 0 10 20 30 40 50 60 1Y fwd EPS 1Y fwd P/E (rs) USD 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Ja n-03 Jul -03 Ja n-04 Jul -04 Ja n-05 Jul -05 Ja n-06 Jul -06 Ja n-07 Jul -07 Ja n-08 Jul -08 Ja n-09 Jul -09 Ja n-10 Jul -10 Ja n-11 Jul -11 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1Y fwd EPS Operating margin (rs) USD

*1Y fwd P/E and EPS growth on a monthly basis as of August 2011 Source: Dell, Thomson Datastream, UniCredit Research

IT services: Global market overview

Mid single-digit market growth

rate expected, globally While Gartner Group forecasts growth rates in the mid to high single-digit territory for the

majority of the traditional segments of the software stack, the global IT services sector is expected to grow only in the mid single digits (CAGR 2010-2015E). The more mature regions like North America, Western Europe and Japan have an inferior growth profile compared to less saturated regions like Latin America, Eastern Europe, Middle East & Africa and APA. IT services companies with a high exposure to the relatively mature markets will find it hard to achieve above-market-average growth rates.

EXPECTED MARKET GROWTH RATES IN THE IT SERVICES SECTOR

End-User Spending (USD mn) CAGR

Region 2010 2015E 2010-15E

North America 323,555 403,520 4.5

Latin America 28,460 47,084 10.6

Western Europe 232,138 284,610 4.2

Eastern Europe 11,897 15,927 6.0

Middle East & Africa 15,452 21,442 6.8

APA 69,408 109,025 9.5

Japan 112,046 122,430 1.8

Total 792,955 1,004,038 4.8

Source: Gartner Group (June 2011), UniCredit Research

The global IT services market is less concentrated than the global software market

The top 5 players of the global software market combined a market share of around 50% in 2010, according to Gartner Group. In contrast, the top 5 players of the global IT services market combined a market share of around 19% in the same year. Microsoft, as the largest software vendor globally, had a market share of around 22%, while IBM as the largest IT services player worldwide held a market share of around 7% and the number six in the global IT Services market, Lockheed Martin, already had a market share of below 2% in 2010.

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We expect that the consolidation of the global IT services market will continue. Large scale acquisitions (e.g. ACS by Xerox or Perot Systems by Dell) will likely be driven by hardware-oriented players trying to lower their dependency on their highly cyclical and in general commoditized low-margin core business. In addition, we can imagine ongoing outsourcing-style deals, where IT services players acquire the in-house IT departments of large enterprises (e.g. the acquisition of Gedas by T-Systems in 2006). Medium-sized acquisitions are likely to be pursued by larger players to expand their regional footprints (e.g. the acquisition of CPM Braxis by Capgemini in 2010).

THE GLOBAL IT SERVICES MARKET (USD MN): THE TOP 50 PLAYERS AND THEIR MARKET SHARE

2009 2010 Share 2009 (%) Share 2010 (%) Growth 2010 (%)

IBM 55,000 56,424 7.2 7.1 2.6 HP 35,252 35,346 4.6 4.5 0.3 Fujitsu 23,304 24,117 3.0 3.0 3.5 Accenture 20,939 22,212 2.7 2.8 6.1 CSC 16,004 16,106 2.1 2.0 0.6 Lockheed Martin 13,102 13,586 1.7 1.7 3.7 Xerox 5,709 12,070 0.7 1.5 111.4 NTT Data 11,111 12,063 1.4 1.5 8.6 NEC 11,372 11,719 1.5 1.5 3.1 Capgemini 11,634 11,525 1.5 1.5 -0.9 Ericsson 10,350 11,123 1.3 1.4 7.5 SAIC 10,845 11,117 1.4 1.4 2.5 Hitachi 10,545 11,017 1.4 1.4 4.5 Oracle 7,728 10,769 1.0 1.4 39.3

Automatic Data Processing 8,764 9,269 1.1 1.2 5.8

Northrop Grumman 9,202 9,170 1.2 1.2 -0.3

T-Systems 8,576 8,403 1.1 1.1 -2.0

BT 8,285 8,045 1.1 1.0 -2.9

Dell 7,500 7,673 1.0 1.0 2.3

Deloitte 7,201 7,499 0.9 0.9 4.1

Tata Consultancy Services 5,917 6,980 0.8 0.9 18.0

Atos 7,125 6,653 0.9 0.8 -6.6

Cisco 6,398 6,581 0.8 0.8 2.9

First Data 5,789 6,181 0.8 0.8 6.8

SAP 5,656 6,057 0.7 0.8 7.1

Logica 5,775 5,713 0.8 0.7 -1.1

Siemens IT Solutions and Services (acquired by Atos) 6,150 5,412 0.8 0.7 -12.0

Infosys Technologies 4,444 5,329 0.6 0.7 19.9

FIS 4,983 5,205 0.6 0.7 4.4

Alcatel-Lucent 4,886 4,960 0.6 0.6 1.5

Wipro 4,084 4,752 0.5 0.6 16.4

AT&T 4,613 4,723 0.6 0.6 2.4

SunGard Data Systems 4,844 4,485 0.6 0.6 -7.4

Cognizant 3,146 4,408 0.4 0.6 40.1 Capita Group 4,192 4,240 0.5 0.5 1.2 EMC 3,366 3,998 0.4 0.5 18.8 PricewaterhouseCoopers 3,482 3,850 0.5 0.5 10.6 CGI Group 3,275 3,824 0.4 0.5 16.8 Samsung SDS 2,355 3,748 0.3 0.5 59.2

Nokia Siemens Networks 3,592 3,588 0.5 0.5 -0.1

Unisys 3,825 3,458 0.5 0.4 -9.6 Fiserv 3,329 3,415 0.4 0.4 2.6 Nomura Research 3,052 3,181 0.4 0.4 4.2 Microsoft 3,024 3,035 0.4 0.4 0.4 IT Holdings 3,014 3,025 0.4 0.4 0.4 Amdocs 2,719 2,926 0.4 0.4 7.6 HCL Technologies 2,186 2,770 0.3 0.3 26.7 Teleperformance 2,568 2,728 0.3 0.3 6.2

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IT services spending by region

and by vertical North America, with a regional market share of around 40% in 2010, was the most important

regional IT services market, followed by Western Europe (29%) and Japan (14%). The financial services industry is the most important vertical for IT services companies with a share of around 23% of total IT spending in 2010. Communications, Media & Services follows in second place with a share of 22% and Government with 19%.

REGIONAL OVERVIEW AND VERTICAL IT SERVICES BREAKDOWN IN 2010 (MARKET SIZE: USD 793BN)

Spending by region (2010) Spending by vertical (2010)

North America 40% Latin America 4% Japan 14% Asia/Pacific 9% Western Europe 29% Eastern Europe 2%

Middle East and Africa

2% Banking & _Securities

17% Education 1% Government 19% Retail 6% Utilities 4% Communications, Media & Services

22% Transportation 4% Insurance 6% Healthcare Providers 3% Manufacturing & Natural Resources 16% Wholesale trade 2%

Source: Gartner Group (March 2011), UniCredit Research

The traditional IT services players:

Part 1 – competitive advantage "America"

High top-line growth

supported by stronger revenue growth from top clients and presumably better access to new technology

In addition to the early move towards offshoring and labor arbitrage, we believe there are three main advantages for the US-based IT service players, Accenture in particular, over their European counterparts: firstly, their most important clients often expose a higher growth rate than the top clients of the European players; secondly, we believe the US based players have better access to new technology or at least a high credibility for having a close proximity to the leading software and hardware manufacturers and thirdly, from a margin perspective, less rigid labor laws than in Europe allow for more flexible workforce adjustments in times of economic downturn and hence enable a higher margin stability as the following chart shows:

PROFITABILITY AND OFFSHORING IN COMPARISON

Operating margins (pro forma) Ratio of headcount located offshore (FY10)

-5% 0% 5% 10% 15% 20% 25% 30% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Atos Capgemini Logica

Indra Sistemas Wipro Accenture

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Indr a Si stem as At o s Logi ca Capgem in i A ccentur e IBM Gl obal Ser vices Cogni zant Wip ro