IT and Business Services M&A Wars: PE vs. Consolidators vs. Pivoters

It may be one of the oldest and least glamorous segments of the IT industry, but the pressure amongst customers to reduce capital expenditure and increase operational efficiencies by using the latest technology and outsourcing is keeping companies in the IT & Business Services sector in strong demand as acquisition targets.

Multiples are currently pushing towards the high end of their range as the sector has achieved steady growth over the last six and a half years. Overall median disclosed deal value almost doubled, rising to $43 million from $23 million in 2H 2018, and the total disclosed deal value reached a whopping $97 billion – the highest total on record.

This upward movement may be, at least partially, explained by increased interest from private equity buyers, which have come relatively late to investing in IT, perceiving value in the sector and risk levels reduced to their taste. PE represented 13 per cent of acquirers in 1H 2019.

Several larger transactions were made by American private equity firms seeking to exit an overcrowded domestic investment environment and apply their expertise to growing companies across Europe and Asia. These deals include the $150 million acquisition of Singaporean manufacturing services company PCI by the California-based Platinum Equity, and the $560 million purchase of leading Scandinavian solutions provider EG A/S by financial buyer, Francisco Partners.

What is particularly interesting, however, has been the emergence of two distinct characteristics of the strategic buyers competing for the best deals - these Hampleton terms "consolidators" or "pivoters" - and the further pressure this has put into the market.

In keeping with the trend of recent years, the most prolific acquirers of 1H 2019 were multinational professional services companies Accenture, Deloitte, Capgemini and DXC technologies, with 32, 15, and 11 a piece deals for the latter two acquisators, over the trailing 30-month period.

These consulting and integration firms all continued to consolidate, strengthening expertise, taking out competition and acquiring more products and services to sell to their existing client bases. Using M&A enables them to expand at a much greater rate than they would if they relied on internal resources and organic growth alone and so they are able to dominate or achieve significant presence in marketplaces in advance of their competition.

Continuing to consolidate and remaining the world’s largest IT consulting firm ahead of Capgemini, Accenture made a total of 13 acquisitions in 1H 2019, thought to total roughly $515 million in value.

Many of these deals are part of the strategy to move deeper into growth areas where Accenture already has considerable expertise such as cloud computing and cybersecurity, as illustrated by the acquisition of Zielpuls, a German tech consultancy focused on smart products and services, now a part of Accenture’s Industry X.0  digital transformation framework.

In contrast, specialist, Dublin-based Keywords Studios, best known for supplying technical services to the likes of Sega and Nintendo also continued on a path of consolidating the services it offers to its clients, making 14 buys with three large acquisitions including the cloud-based social media management platform GetSocial, as part of a drive to more effectively serve the increasingly dynamic computer gaming industry vertical market.

The rise of the pivoters is characteristic of the conditions in very fast-moving technology-based markets where disruption occurs quickly and for those that fail to keep up with the pace corporate death can soon follow.

The classic evidence of this is where a "paradigm" shift alters the fundamental driver of a marketplace – for instance, the means of information dissemination moving from publishers and print to online social media and the internet, or where hardware becomes an ever lower margin commodity and value increasingly derives from added value services.

Within the top eight highest acquisators in IT and business services, there are two clear Pivoters dealing with these changes. Pivoter Dentsu Aegis Network tied with consolidator Accenture to lead the pack with 32 acquisitions over the 30-month trailing period as it continued to use technology M&A to drive its evolution away from its advertising and communications agency past to a global digital marketing services future.

Unsurprisingly, such acquisitions included three digital marketing services companies: London-based David Wood & Associates Ltd., San Francisco-based Swirl Inc. and Jakarta-headquartered PT Valuklik.

KonicaMinolta too, with 12 acquisitions, proved its ability to use the M&A market move from horizonal market hardware provision and support to a vertically-oriented business services-based revenue base. For instance, acquiring Scottsdale, Arizona-based MWA Intelligence Inc. for its SAP VAR services, Boston-headquartered Invicro LLC for its medical imaging analysis software development services and Chatsworth, California-based Document Scanning Systems and Imaging Inc. for its document imaging VAR & services.

Hampleton believes this combination of competition between consolidators, pivoters and private equity looks set to continue, creating a strongly competitive environment for the best assets in IT and Business Services going forward – all of which is good news for those wishing to exit in the IT and Business services segment.