IT Services M&A trends

By Ramone Param, Associate Director, Equiteq.

We recently ran a series of webinars exploring the themes within our Global Consulting M&A report 2017, which reviews the key M&A and equity market trends within the consulting industry across five of Equiteq’s industry specialisms: Management Consulting, Media agencies, Engineering consulting, IT services and HR

In this week’s blog, we outline some of the key topics discussed in our IT Services webinar, which provides vital insight for IT Services firm owners considering selling, including average deal size and valuation multiples, drivers for deal activity, top buyers and M&A activity by region.

An excellent year for IT Services

Last year was a very strong year for IT services. Deal volume rose by 9% over the year to reach a 10-year high. Although median deal sizes fell by 46%, overall transaction values were up over the year, supported by a number of mega deals in the industry.

This strong growth in M&A deal flow occurred despite slower economic growth in 2016 and an unsettled political environment following the UK’s Brexit vote and the US presidential election.

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There was particularly strong deal flow among larger legacy players that were being disrupted by the increased adoption of cloud computing solutions across industries. This disruption is leading to a lot of reorganization and streamlining among legacy technology players. This was evident in the larger deals seen across the industry in 2016, including notably the NTT acquisition of Perot Systems from Dell, which was part of a reorganization by Dell ahead of its industry-record buy of EMC for $67bn.

As a result of these trends, there was strong demand for cloud consulting capabilities. In addition, corporate executives and organizations within the public sector are becoming increasingly concerned about the threat of cyber-attacks, driving demand for acquisitions in the cyber security consulting sector. Deal flow across the sector was also supported by converging buyer demands with a large number of IT Services buyers acquiring into Management Consulting and Media agencies. This worked both ways, with significant demand amongst Management Consulting and Media businesses for IT Services firms.

Average transaction sizes

The average deal size over the year rose to $121m, driven by milestone deals such as Perot Systems. The median deal size, however, was significantly smaller at under $7m. This suggests there is significant appetite among smaller and mid-market consulting firms for bolt on acquisitions that bring niche capabilities into their businesses.

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Regional trends

Over 80% of deals were focused on North America and Europe. This was followed by 15% of deals occurring in Asia-Pacific and Australasia.

Deal volumes in North America declined as a result of slower activity in the second and third quarter of the year in the run up to the presidential election. There was, however, a recovery in activity in the final quarter after the election results were announced.

In Europe, despite political volatility arising from the UK’s Brexit vote, M&A volumes in the UK and the rest of Europe were strong.

In Asia-Pacific there was also an overall strong performance but the number of deals closed in Australia fell. However, there was a substantial increase in the size of transactions in Australia, which indicates that buyers are acquiring less but are focused on larger deals as the market is maturing.

Valuation multiples

Valuation multiples for IT Services M&A have been robust over the last few years. In 2016, the average last full year revenue multiple for a deal was 1.1 times revenue and the last full year EBITDA multiple was 8.0 times. It should be noted these figures are reported and unadjusted historic metrics and vary between transactions.

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Top buyers

Serial strategic and financial buyers continue to remain active in the IT Services sector. In 2016, 35% of all deals were by serial buyers, which while slightly down on 39% in 2015, accounts for a significant proportion of deals.

Top strategic buyers included the likes of Accenture, Deloitte and GFI, with Accenture the most acquisitive buyer in the sector. Accenture has been particularly focused on acquiring niche capabilities related to disruptive technologies as well as broadening its capabilities into areas like strategy, advertising and media.

Other highly acquisitive businesses included Deloitte – which invested across the knowledge-intensive services sector – as well as PwC, which made a number of acquisitions over the last year, although slowed its deal flow in the US, which has been a notable trend since the company’s acquisition of Booz & Company in 2014.

Private equity

Private equity accounted for a substantial amount of deal activity across the consulting sector. In the IT Services sector, private equity accounted for 6% of all deals, up substantially on 4.6% in 2015.

This strong activity from private equity was despite the competitive pressure they face from listed strategic buyers and also accounting networks that are increasingly acquiring in to the industry.

M&A Activity in H1 2017

In the first half of 2017, deal activity remains robust and growing in the IT Services segment. Accenture has made notable acquisitions in spaces like intelligent automation, Salesforce consulting, and agile transformation and has announced a $1.8b acquisition plan for the current financial year. HTC Global announced its winning bid for Ciber’s North American and Indian assets, and Clayton, Dubilier & Rice announced that it will acquire a majority stake in Capco. DXC Technology also acquired Tribridge, a leading consulting firm in the Microsoft Dynamics space. As we go to press, The Times of India has reported that four prolific acquirers are bidding for digital consulting business LiquidHub.

Outlook

The disruptive impact of new cloud-based solutions on company’s business and operating models, makes cloud computing and cyber security critical investment priorities. This will continue to underpin strong demand for relevant M&A opportunities from buyers across industries.

The current market conditions continue to remain favorable for sellers of sale ready consulting businesses. If you would like to discuss your strategic options in more detail, please get in touch.

To listen to the full recording of this webinar, please click here. To view other webinars from Equiteq, please click here.

If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.

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