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Information Technology Services Newsletter
October 2016
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| Across all segments, cloud services continue to be popular targets for strategic buyers. Download SlideShare |
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Quarterly M&A Commentary
- IT M&A picked up in Q3 2016, but lags the volume and value experienced in 2015.
- Low GDP growth and "lackluster" IT spend forecasts cast a shadow on organic growth for IT services firms.
- Popular targets during the quarter were systems integrators, managed service providers, security firms, and digital specialists, especially those with deep partner platform expertise (e.g. Microsoft CRM and Salesforce.com).
- Buyers are seeking predictability with managed services and recurring revenues, and growth with cloud services and security offerings.
- Established technology product companies acquired IT services firms, including Salesforce, Konica Minolta, Progress Software, and Teradata.
- Median enterprise value (EV) multiples for publicly traded IT services companies were roughly the same as the prior quarter. In the Systems Integration segment, 1-year growth rates increased from 4.3% to 11.1%, largely resulting from M&A activity. In the Security segment, median LTM EBITDA multiples jumped from 13.5x to 18.5x, however LTM revenue multiples only increased from 1.5x to 1.7x.
Low Economic and Lackluster Industry Growth
The GDP growth rate of 1.4% in the United States
[1]
has been described as anemic. The labor market engine remains in gear, as payroll employment rose by 156,000 while the August total was revised up modestly to 167,000. Given that the employment expansion is now in its seventh year, job gains have moderated compared with the last two years. The unemployment rate edged higher to 5% as more workers stepped into the labor force.
[2]
Described as "lackluster" in Gartner's July report, worldwide IT spending is forecast to be flat in 2016, totaling $3.41 trillion. This is up from last quarter's forecast of down 0.5%. The growth areas were Software (5.8%), IT Services (3.7%) and Data Center Systems / Infrastructure (2.0%), and the declining areas were Devices (-5.3%) and Communications Services (-1.4%).
[3]
Cloud Services are a Bright Spot
The brightest spot in IT services continues to be the massive shift to public cloud platforms. Why? Public cloud computing offers a compelling value proposition:
- On-Demand usage and pricing
- Global reach
- High scalability
- Resource elasticity
- Rapidly growing set of features and services
- Capital cost avoidance
- Access to real-time and continual online application upgrades
- Ability to rapidly deploy new applications
Gartner estimates the worldwide public cloud services market will grow 16.5% in 2016 to $204 billion, up from $175 billion in 2015. Each public cloud segment is expected to have rapid growth over the next 10 years. Software as a Service (SaaS) is expected to grow at a 19% CAGR, Platform as a Service (PaaS) at a 33% CAGR, and Infrastructure as a Service (IaaS) at an 18% CAGR. The big question is not "if" but "when" will 100% of enterprise workloads will run in the public cloud.
[4]
Cloud solutions company BetterCloud recently surveyed 230,000 IT professionals across almost all industries and size regarding their cloud usage. They found that the number of organizations that run 100% of their IT in the cloud is rapidly increasing. Approximately 12% of organizations surveyed run 100% of their IT in the cloud. By 2020, 50% of respondents said they will be moving their IT workloads entirely to the cloud. By 2025, that number will climb past 70%.
[5]
Not surprising, SMBs are moving more rapidly to the cloud than larger organizations. However, public cloud adoption by large organizations is expected to rise dramatically in coming years. JP Morgan recently surveyed 207 CIOs from large companies (with annual budgets of $600 million or more) and found that currently, 16.2% of workloads are running in the public cloud and that by 2020, 41.3% of workloads will run in a public cloud - at least 20% YoY growth in public cloud workloads over the next five years. Other interesting findings were over half of respondents will double software and services development staff, 85% will be focused on new market facing apps and services, and 50% of cloud apps and services are for use cases not served in the client server era.
[6]
IDC predicts that spending on cloud services and IT products will result in 5-10x growth in new apps and services, including Internet of Things (IoT) and cognitive solutions. Penetration of "cloud code" into on premise software will increase adoption of hybrid cloud strategies, and expansion of cloud managed and professional services.
[7]
Public cloud adoption is creating business opportunities for IT services providers who have proven they can help companies harness the power of cloud technologies, implement best practices, deliver innovative design, and manage the cultural shift with high employee engagement.
IoT Growth Creating New Opportunities
The Internet of Things (IoT) refers to the networking of physical objects through the use of embedded sensors, actuators, and other devices that can collect or transmit information about the objects. IoT's promise is that new business value will be created through interpreted and actuated connected "things." IoT spending in 2015 exceeded $1.7 trillion, a 14% jump from 2014, driven by nearly 15 billion devices. By 2020, this will rise to $3 trillion and nearly 30 billion devices.
[8]
Mobile phones continue to be the largest category of connected devices, but in 2018 they are expected to be surpassed by other IoT devices, which includes connected cars, machines, utility meters, remote metering and consumer electronics. New use cases will drive IoT sensors and devices to exceed mobile phones as the largest category of connected devices in 2018, growing at a 23% CAGR from 2015 to 2021.
[9]
Security Services for Networks, Things and Data
Growth of public cloud platforms and connecting things to the internet has resulted in a massive amount of data in the digital universe. Global data growth has been rising (+50% CAGR) rapidly since 2010, while data infrastructure costs have been falling (-20% CAGR) fast. While there is heightened need for infrastructure centric security and management, there is also increasing demand for data-centric security and management. Managed services opportunities are emerging to secure data with centralized control and protection policy across clouds, users, devices and machines. Those companies building growing service offerings around security are attractive targets for acquisition.
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Notable Transactions
September 2016
Payment Software Company, Inc. acquired by NCC Group
Security
NCC Group plc (LSE: NCC) an independent global cybersecurity and risk mitigation firm, has acquired Payment Software Company Inc. ("PSC") for a maximum consideration of $18.75m in cash. PSC is a leading provider of cybersecurity, payment and compliance-related consulting services to the global payments industry as well as the financial and retail sectors. PSC works with a broad range of blue chip clients including major financial institutions and other businesses across the payment sector. PSC is based in Silicon Valley, with presence in 29 states in the US. Total consideration of up to $18.75m - initial payment of $15m (subject to completion adjustments), with two further payments of up to $1.875m each, over the next two years dependent on performance related targets. In the year to 31 December 2015, PSC generated adjusted EBITDA of $1.6m on revenue of $9.5m, with approximately 85% of the revenue annually repeating.
September 2016
Kurt Salmon acquired by Accenture
Consulting
Continuing with its strategy of growing through acquisitions, Accenture announced that it has entered into an agreement to acquire Kurt Salmon - a strategy consulting firm - that mainly focuses on the retail industry. Founded in 1935, Kurt Salmon specializes in providing operational strategy consulting, which includes merchandising, logistic and supply chain operations, product development, omni-channel retail strategy, corporate strategy and due diligence. The company has over 260 employees throughout its offices in the US, Germany, UK, Japan and China. Accenture intends to integrate Kurt Salmon's business into its Accenture Strategy division and expects the target company's employees to join the integrating division upon successful completion of the acquisition.
September 2016
Anthelio acquired by Atos
Integration
Atos further strengthened its digital health services portfolio in the fast-growing US healthcare market by acquiring Anthelio, a recognized industry leader in the healthcare market with a full suite of healthcare IT services, IP based revenue cycle management services, and state-of-the-art patient engagement solutions. Anthelio expands the footprint of Atos' North American operations with the addition of more than 1,700 Anthelio employees of which 1,300 are in the US, and doubles Atos' existing $200m of revenue in healthcare services in North America and adds $600m of backlog. Following this acquisition, Atos expects to generate $2.5 billion of revenue in North America, its largest geography.
August 2016
Systems Maintenance Services acquired by Partners Group
Managed Services
Partners Group, a global private markets investment manager, has agreed to acquire global IT support services provider Systems Maintenance Services ("SMS"). SMS is being sold by funds affiliated with Thomas H. Lee Partners, L.P. ("THL") and Summit Partners ("Summit"). Founded in 1981, US-based SMS is headquartered in Charlotte, North Carolina, and provides IT infrastructure services to a client base of more than 3,000 businesses. SMS is the global market leader in third-party maintenance services, which it offers in conjunction with its full suite of IT system support services. SMS has over 900 engineers on its staff and serves clients through more than 100 service centers across North America, Europe and Asia-Pacific, covering equipment from all the major IT original equipment manufacturers. In 2015, SMS recorded revenues of approximately $245m.
July 2016
Big Data Partnership acquired by Teradata
Consulting
Teradata (NYSE: TDC), the big data analytics company, announced that it has purchased Big Data Partnership, a leading EMEA-based services provider of big data solutions and training. Big Data Partnership has deep expertise in disruptive technologies, including Apache Hadoop, and helps its clients discover how to become more data driven and data savvy through data science and the adoption of the latest big data technologies.
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IT Services Performance Index
Cherry Tree monitors the IT services market, including deal rationale, volume and multiples. The IT Services Performance Index is a group of 57 publicly traded companies representing each of the market segments.
Over the past twelve months, publicly traded IT services firms in Cherry Tree's IT services index have generally performed in line with S&P 500.
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Q3 2016 Select Transactions
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Date
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Target
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Acquirer
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Segment
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Target Description
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Link
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09/29/16
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Payment Software Company
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NCC Group (LSE:NCC)
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Security
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Provides cyber security, payment, and compliance consulting services.
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09/29/16
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Promontory Financial Group
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IBM (NYSE:IBM)
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Consulting
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Provides strategy, risk management, and regulatory compliance consulting services that focus primarily on the financial services industry.
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09/27/16
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CADD Edge
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TriMech
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Integration
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Reseller of product design software.
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09/26/16
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DayNine Consulting
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Accenture (NYSE:ACN)
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Consulting
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Provides implementation services for Workday, a provider of enterprise cloud applications for finance and human resources.
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09/26/16
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Red Stack Technology
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Data Intensity
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Consulting
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Provides design and implementation of software, hardware, consulting, and managed services across the Oracle technology stack.
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09/22/16
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Kurt Salmon
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Accenture (NYSE:ACN)
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Consulting
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Provides operational strategy consulting, which includes merchandising, logistic and supply chain operations, product development, omni-channel retail strategy, corporate strategy and due diligence
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09/22/16
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Quality Associates
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Konica Minolta Business Solutions
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Outsourcing
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Provides enterprise-class services and customized solutions for content management, document imaging solutions and BPO scanning.
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09/21/16
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Altuscio Networks
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Konica Minolta Business Solutions
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Integration
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Provides integration of cloud, IT security and the management of IT systems.
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09/21/16
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Ross Technologies
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Assured Information Security
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Security
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Provides cybersecurity services to the DoD and commercial clients in the Washington DC area.
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09/20/16
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System One
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Thomas H. Lee Partners
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Staffing
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Provides staffing and technical support services to clients in energy, engineering, information technology, commercial, and scientific sectors
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09/19/16
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Maverick Solutions
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GP Strategies (NYSE:GPX)
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Training
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Provides Oracle ERP training services.
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09/19/16
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Avnet Technology Solutions Business
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Tech Data (NasdaqGS:TECD)
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Integration
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Provides value-added distribution of technology solutions, services, software, and hardware.
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09/16/16
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Com-Com
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Park Place Technologies
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Integration
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Provides a wide range of IT cost containment solutions, specializing in post warranty hardware maintenance and extending the life cycle of assets with 'End-of-Life' (EOL) maintenance support.
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09/15/16
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R2integrated
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Baird Capital
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Digital
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Provides full-service digital agency services using marketing cloud technology combined with brand expression and demand generation for a nationwide client base of mid-market and enterprise level brands.
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09/15/16
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TCP Cloud
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Mirantis
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Managed Services
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Provides managed services for OpenStack, OpenContrail and Kubernetes.
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09/14/16
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Next Wave Health Advisors
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The Huntzinger Management Group
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Consulting
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Provides strategy and management consulting in the area of healthcare information technology.
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09/14/16
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Intermedia
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Madison Dearborn Partners
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Integration
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Provides cloud business applications and is the world's largest independent provider of cloud Microsoft® Exchange email.
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09/13/16
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Gravitytank
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salesforce.com (NYSE:CRM)
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Digital
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Provides design, research and strategy to help Salesforce customers.
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09/13/16
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Attenda
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Ensono
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Managed Services
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Provides managed services, outsourcing and consulting for business-critical applications across hybrid locations.
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09/12/16
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Anthelio Healthcare Solutions
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Atos (ENXTPA:ATO)
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Integration
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Provides healthcare IT services, IP based revenue cycle management services, and state-of-the-art patient engagement solutions.
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09/12/16
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QualiTest
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Marlin Equity Partners
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Outsourcing
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Provides quality assurance (QA) and software testing services for large and small organizations in the United States and internationally.
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09/09/16
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Flipside
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Weber Shandwick
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Digital
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Designs and develops mobile apps and digital experiences, and does strategic business and technology planning, social media management, and mobile-centric marketing communications.
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09/06/16
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BlueStaff, Technology Division
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BlueLine Associates
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Staffing
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Provides staffing and managed services for technology, professional, and executive positions.
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09/06/16
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IQR Consulting
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EXL (NasdaqGS:EXLS)
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Consulting
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Provides data analytics and strategic consulting services to banks, credit unions, and casinos.
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09/02/16
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SilverRhino
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InfoTeK
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Security
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Provides IT security and technology services to the transportation security administration, Department of Homeland Security, Department of the Defense, and other federal agencies, as well as commercial clients.
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08/31/16
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Ignia
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Insight Enterprises (NasdaqGS:NSIT)
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Consulting
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Provides content and collaboration, enterprise workflow, business intelligence, mobility, business applications and agile ALM services using Microsoft technologies including SharePoint, Office 365, Dynamics CRM, SQL Server, Azure and Windows 8 Apps
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08/26/16
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Rackspace (NYSE:RAX)
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Apollo Global Management
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TEBS
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Provides managed cloud services across two primary form factors: dedicated cloud and private clouds, and managed public clouds
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08/24/16
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Lift Science
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Shaw + Scott
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Digital
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Provides technical consulting, software solutions, connectors for marketing automation platforms, and data science expertise.
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08/22/16
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Create Digital
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AuthX Consulting
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Digital
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Provides creative and digital marketing solutions.
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08/19/16
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Extensys, Internet of Things Division
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CompuCom
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Integration
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Extensys, Internet of Things provides Internet of Things and managed IT services.
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08/19/16
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block Business Solutions
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Stratix Systems
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Integration
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Provides business and technology solutions for large and small businesses primarily in South Central Pennsylvania.
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08/18/16
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PayStream Advisors
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Levvel
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Consulting
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Provides research and consulting on office process automation for finance and procurement professionals.
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08/17/16
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Blisstering Solutions
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Iksula
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SDO
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Provides development of multi-channel solutions integrating mobile, Web, voice, SMS/text, and social media.
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08/17/16
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Adapt
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Datapipe
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Managed Services
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Provides managed infrastructure and cloud integration services to businesses.
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08/09/16
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Analytic Strategies
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PlanetRisk
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Consulting
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Provides operations research and systems analysis consulting company.
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08/05/16
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Educuity
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Certica Solutions
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Integration
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Provides technology planning, design, development, integration, and deployment services for education organizations.
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08/05/16
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Systems Maintenance Services
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Partners Group (SWX:PGHN)
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Managed Services
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Provides managed IT asset lifecycle support services worldwide.
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08/04/16
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Acxiom Impact
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Zeta Interactive
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Digital
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Provides data-driven, one-to-one email, and cross-channel marketing solutions for enterprise marketers globally.
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08/04/16
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IMT Corporation
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Mission Essential
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Consulting
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Provides information management system engineering, software development, information assurance, and system sustainment solutions and services.
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08/03/16
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CloudStrategies Group
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BCM One
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Consulting
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Provides cloud computing professional services using Microsoft suite of cloud services including Office 365, Skype for Business and Azure.
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08/02/16
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iStrategyLabs
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J. Walter Thompson Company
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Digital
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Provides design and build services for Web and mobile, invents digital and physical experiences for brands, and produces commercials and short films.
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08/02/16
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PMX Agency
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The Stagwell Group
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Digital
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Provides digital marketing services, including
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08/02/16
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Society Consulting
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Ernst & Young
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Consulting
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Provides consulting services with an expertise in big data and analytics.
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08/01/16
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Spring Lake Consulting
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Mitchell Martin
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Staffing
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Specializes in the placement of Information Technology professionals and business domain experts in banking, hedge fund and insurance industry verticals.
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07/31/16
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OneBit Software
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Progress Software (NasdaqGS:PRGS)
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Consulting
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Provides software engineering and services; with this transaction now form the nucleus of Progress' new DigitalFactory Center of Excellence.
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07/28/16
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Constellation, Health Information Technology Business
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JDL Technologies
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Consulting
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Provides HIPAA compliance services, health care technology consulting and solutions.
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07/28/16
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inhouseIT
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Cal Net Technology Group
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Managed Services
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Provides information technology consulting and managed services to companies in the Orange County, California.
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07/28/16
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Idea Couture
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Cognizant (NasdaqGS:CTSH)
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Digital
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Provides digital innovation, strategy, design and technology services.
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07/27/16
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Intercom Consulting & Federal Systems
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Belcan
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Integration
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Provides secure, enterprise-level IT solutions that support and protect mission-essential assets and operations for the US Federal government through four primary capabilities: cyber security, enterprise management, systems engineering and architecture, and network engineering.
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07/26/16
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Standing Dog
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Wpromote
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Digital
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Provides search engine marketing, SEO, social media and paid media.
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07/26/16
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Healthcare Services Management
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Huron Consulting Group (NasdaqGS:HURN)
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Consulting
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Provides healthcare information technology and project management consulting services to the healthcare market in the United States.
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07/25/16
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Big Data Partnership
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Teradata (NYSE:TDC)
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Consulting
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Provides big data consulting, data science, big data engineering, training, and support services to various industries.
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07/25/16
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Art of BI
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Datavail
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Consulting
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Provides software and consulting on Oracle analytics with OBIEE and Hyperion.
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07/21/16
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Verrex
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Five Crowns Capital
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Integration
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Provides video conferencing, presentation, and collaboration solutions.
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07/20/16
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Lohika
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Altran (ENXTPA:ALT)
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SDO
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Provides software engineering to accelerate the development of software and SaaS products from established companies such as Microsoft, Cisco and HP Enterprise, to fast growing start-ups, including AudienceScience, BuzzFeed, Twilio and Okta.
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07/20/16
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Capscient
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PCB Apps
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Consulting
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Provides enterprise business applications services focused on Oracle-JD Edwards applications on premise and ERP Cloud applications.
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07/18/16
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INSYS Group
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Luxoft (NYSE:LXFT)
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Consulting
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Provides big data and data analytics, business and industry consulting, business intelligence and data warehouse, digital marketing, enterprise information management, financial regulation, IT security, and quality assurance and testing services.
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07/14/16
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Allied InfoSecurity
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Delta Risk
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Security
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Provides security-related professional services for businesses to improve and manage information security programs, mitigate risk, and respond to regulatory and marketplace demands.
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07/13/16
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BPM Northwest
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ProKarma
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Consulting
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Provides specialization in on premise and cloud based data integration and analytics solutions.
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07/13/16
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DataBank
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Digital Bridge
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Outsourcing
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Provides enterprise-class data center solutions including colocation, managed services, as well as cloud and network services.
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07/12/16
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GHI Technologies
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StayinFront
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Integration
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Develops and deploys Data Management (Business Intelligence) and CRM solutions for the pharmaceutical, manufacturing, insurance, transportation, property management, distribution and retail industries.
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07/12/16
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Kurt Salmon Healthcare Consulting Business
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ECG Management Consultants
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Consulting
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Provides strategy, facility and capital assets planning, and information technology advisory services to healthcare providers.
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07/12/16
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A+ Imaging Systems
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Loffler Companies
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Integration
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Distributes digital copiers, printers, scanners, and fax machines in Southeastern Minnesota and Western Wisconsin.
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07/11/16
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Minacs
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SYNNEX (NYSE:SNX)
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Integration
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Provides business and technology systems integration and outsourcing services.
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07/08/16
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Bloom Consulting Application Development Division
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Sparkhound
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Consulting
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Provides application software development of Microsoft Azure-driven Windows 10 solutions.
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07/06/16
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Client Strategy Group
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Columbus (CPSE:COLUM)
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Consulting
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Provides Microsoft Dynamics AX ERP consulting, software performance tuning and implementation turnaround services.
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07/05/16
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Datacenter101
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Lightower Fiber Networks
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Outsourcing
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Provides colocation services to small, medium, and large sized businesses in the United States.
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07/05/16
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Modular Document Solutions
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DEX Imaging
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Integration
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Operates as a system integrator that supplies technology office solutions.
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Cherry Tree is a private investment banking firm headquartered in Minneapolis. Our firm specializes in serving middle market companies and their owners, whether private, public, or divisions of larger corporations.
Led by IT industry veterans, our team will work with you to evaluate your company's strategic alternatives and determine how trends in IT services affect your prospects.
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Important Disclosures
The information included in this publication has been obtained from public sources, and is not based upon private or confidential Cherry Tree information. Cherry Tree gathers its data from sources it considers reliable. However, it does not guarantee the accuracy or completeness of the information provided within this publication. Any opinions presented reflect the current judgment of the authors and are subject to change. Cherry Tree makes no warranties, expressed or implied, regarding the accuracy of this information or any opinions expressed by the authors. Officers, directors, partners of Cherry Tree and Cherry Tree proprietary investment funds may have positions in the securities of the companies discussed, and certain affiliates of Cherry Tree may recommend to specific clients the purchase and sale of securities discussed in the publication. This publication does not constitute a recommendation with respect to the securities of any company discussed herein, and it should not be construed as such. Cherry Tree or its affiliates may from time to time provide investment banking or related services to these companies. Like all Cherry Tree employees, the authors of this publication receive compensation that is affected by overall firm profitability. We undertake no obligation to update any information in this publication.
The IT Services Performance Index is a hypothetical index, and does not reflect an actual investment portfolio. Comparisons between the IT Services Index and other indices are for illustrative purposes only. Correlations in performance information for the IT Services Performance Index and other indices should not be relied upon as indicative of risks involved in owning or holding a portfolio of securities similar to the IT Performance Services Index. Past performance should not be relied upon as indicative of future performance.
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Cherry Tree & Associates, LLC | 952.893.9012 |
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