Global M&A Trends in H2 2019 – IT services

Global M&A trends

In this blog, we shall discuss on the global M&A trends, how the M&A activity has been so far till H2 2019, what has changed and what new trends has emerged.The scope of this article is limited to IT services industry.
Enterprises globally are reducing their capital expenditures by modernizing their existing infrastructure and moving it to cloud.In addition, they are interested in adopting automation and other emerging technologies to improve operational efficiencies.
Inspite of an impending global economic slowdown, growth in IT services will continue to be high because enterprises are interested to gain improvements in the existing communications, system integration and IT by adding AI, Cloud and Analytics capabilities. Hence as the spending levels increase, the IT services industry is expected to continue its robust growth.
Cloud emerged as biggest driver of spending with many companies looking to scale their capabilities and expand their geographical reach.
The disruption of IoT, Big Data, virtualization and robotics are fueling spending in IT as enterprises look to integrate these technologies in their existing processes to improve productivity.
Cybersecurity emerges as another big area for IT spending as organizations are increasingly vulnerable to security threats.
A shortage of skills in the emerging technologies along with the increased focus to improve Operational efficiency and reduce costs are resulting in companies looking at IT partners to outsource their non-core activities.

Global M&A Trends summary

• H1 2019 witnessed lower transactions (370) compared to H2 2018 (432), but showed higher EBITDA multiple of 10.1x in H1 2019 as against 9.9x in H2 2018.The revenue multiples also increased to 1.2x.
• The IT services continued to see large acquisitions and higher value.This is partly due to higher demand from Private equity buyers who comprised of 13% of total acquisitions.The demand from PE firms is due to the cheaper credit available because of low interest rates.
• US based PE firms are looking to exit their portfolio investments in US and reinvest in emerging economies of Asia and Europe.

Global M&A trends – Top Acquirers in IT services

• Accenture continues to be the leading acquirer in IT services followed by Digital Marketing services firm Dentsu Aegis.Deloitte features in the top 3 as the firm is making huge investments in Digital business.
• Accenture made 13 acquisitions in H1 2019 as the firm is looking to deepen its expertise in Cloud, Cybersecurity by acquiring companies focused on the above emerging technologies.

Top Global M&A trends in IT services

Inspite of the lower transaction volume, the high deal size and the EBITDA multiples point out the strength of IT services industry even in this challenging economic landscape.

Global M&A trends 1 – Outsourcing boom to continue

• Due to the increasing pressure on the enterprises to reduce costs and improve operational efficiencies, companies are focusing more toward outsourcing.
• In addition, firms are embracing newer technologies like AI and automation to improve productivity.
• Rising trends in acquisitions are seen in Call center outsourcing on the back of emerging technologies like Chatbots which are improving the productivity of the call efficiency and accuracy.
• Cloud computing have improved the efficiency of administrative outsourcing leading to spate of acquisitions of firms offering outsourced HR, Logistics and Administration.

Global M&A trends 2 – Focus on Cybersecurity

• As companies move toward cloud and employ Big Data, they are getting vulnerable to new attacks of cyber attack and data theft.
• This is giving rise to more acquisitions of Cybersecurity firms as large enterprises look to build strong Cybersecurity practices to advise companies.
• Accenture acquired ‘deja vu’ to access its expertise in protecting connected devices and IoT network against security threats.
• The big 4 accounting firms are also acquiring security companies to strengthen their advisory businesses.KPMG recently acquired Swedish firm Everdon to shore up its Cybersecurity advisory arm.

Global M&A trends 3 – Large appetite for IT consulting

• IT consulting constitutes 20% of the global consulting business in 2019 and is estimated to be worth of ~48 billion.With emergence of new technologies like Cloud, AI, IoT and robotics – the IT consulting is going to witness higher demand in the coming years.
• Private equity firms and Strategic buyers are equally contributing to the rise in acquisitions of IT consulting businesses.

Global M&A trends 4 – Payment outsourcing booms

• Payments and Transactions processing businesses have seen large acquisitions recently as bigger companies combine together to share skillsets and save costs.
• When paypal and Monzo are offering new payment solutions, traditional businesses including banks are still relying on cumbersome transaction processes.Hence banks are outsourcing payment processing to reduce costs and increase efficiency by focusing more time on value added activities.
• According to McKinsey, Transaction processing is a hot market with more than $3 trillion value in revenues by 2023.This is due to higher transactions in online and more payments happening through digital instead of cash.
• FIS acquired Worldpay for $44 billion.The deal provides huge cost synergies that can help the companies to focus the cost savings on growing their digital payments businesses.
• Fiserv bought First Data for $22 billion to expand its digital banking portfolio business including e-commerce and integrated payments.

Conclusion

• There is a high possibility that most of the geographies will be entering into recession next year.This can result in cut on IT spending on speculative investments on projects that enterprises were running previously.
• However firms will continue to focus their spending on areas which would reduce costs and improve efficiencies of internal processes, digital commerce, supply chain etc.
• Due to the economic slowdown, the valution multiples will come down but this will not impact the growth of IT services market.
• Due to the softening of valuations, we will continue to witness higher M&A activity in regions like Nordics, Benelux, DACH and UK due to sector consolidation.