M&A boom for Cloud MSPs focused on AWS and Azure

Following on from deals in the space by Accenture, IT Lab, Cognizant and NTT Data in recent weeks, another five cloud deals announced just this week. Just one of the hotspots we’re tracking in the Tech Services space.

(Equiteq’s first Cloud Consulting M&A report was in 2014 – we were excited about 70 globally deals in the whole year, and predicted it as a major trend.)

2nd June – ProArch (Atlanta) Acquires iv4
Read full article here >

3rd June – Netreo Acquires CloudMonix (Azure)
Read full article here > 

3rd June – Navisite acquires Privo  (AWS)
Read full article here > 

3rd June – Deloitte Ireland acquires DNM (next gen AWS)
Read full article here >

3rd June – Effectual acquires Five Talent (DevOps)
Read full article here >

April 2018: Knowledge Economy M&A and Equity Market Update

By Ramone Param, Director, Equiteq

  • Major deals profiled include Infosys’ acquisition of WONGDOODY, HPE’s acquisition of RedPixie and Wavestone’s acquisition of Xceed.
  • The Equiteq Knowledge Economy Share Price Index achieved robust rises over the period.

Infosys deepens its creative agency skills with WONGDOODY

Target: WONGDOODY is a US-based creative agency with studios in Seattle and Los Angeles providing strategy, research, brand and marketing positioning, creative design, advertising and production services across industries.

Buyer: Infosys is a global listed technology services player headquartered in India.

Deal Value: $75.0m

Deal Insight: This transaction exemplifies two important market trends. Firstly, it demonstrates the convergence of creative media with technology and consulting, as large technology players look to broaden their customer-focused advisory skills and take a larger share of the growing digital transformation consulting market. The deal also highlights the demand from the Indian outsourcers for US-based high-margin capabilities that enable them to build skills further up the consulting value chain.

The deal develops Infosys’ global connected network of Digital Studios to help clients respond to digital disruption of their industries. WONGDOODY builds on Infosys’ acquisition of UK-based product design and customer experience innovator Brilliant Basics, which was acquired last year for c.$9.7m.

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Lift & Shift: following the rise to cloud migration

For every consultant who spotted the cloud opportunity and raced to embrace it, there will be another who is still not quite fully convinced.

Clients have spent hundreds of thousands – or even millions – on their on-premise solutions, they are comfortable with their data centres and have established long-term relationships with their maintenance engineers. They’re not ready to give all that up in one go. And, as long they resist a wholesale move to cloud, there’s a role for IT consultants and specialists to offer support for these traditional models.

But the pace of change is quickening; clients have tuned in to piecemeal migration and with software vendor innovation being cloud-focused, the largest traditional consulting firms have seen the writing on the wall, turning to mergers and acquisitions (M&A) as the only credible way of rapidly building their cloud capability.

Shaun Fröhlich is UK managing partner of Incredibleresults, and works with leadership teams to accelerate value growth.

“We are all on a spectrum,” he says. “Many believe the world is changing because of the cloud and it is spurring them on to cash in their chips on their existing business, but there is an almost equal number that remain neutral and see it as an evolution, not reason to trigger a capital event.”

Despite the cloud offering faster, less disruptive deployment and easier global enablement – while cyber-security concerns have increasingly been addressed – migration to the cloud isn’t yet wholesale for most organizations.

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M&A activity appetite in the IT consulting sector

IT Cropped

Our global research into M&A activity across all consulting sectors, found that global deal volumes are just short of a 10-year high in the IT consulting sector, so 2016 is looking very promising for the sale of IT consulting firms. The high volumes have been driven by an increase in North American IT consulting deals in 2015. Deal values remained consistently high and the outlook for the IT consulting industry remains strong as various sectors increase their reliance on technology, such as social media, analytics, mobile and cloud.

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Consulting firm M&A intelligence on cloud-based consulting

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In the last decade cloud computing has become one of the world’s leading transformational technologies. It’s assisted businesses in reducing the total cost of ownership, easing scalability and boosting profitability, amongst other benefits. And in recent years, it has helped consumer technology boom.

Our research shows that cloud-based consulting deals have increased consistently from 2010, with this trend expected to continue in 2015. Within this activity, the sub-sectors of cloud consulting, including software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS) are expected to show similar M&A growth levels as cloud-based consulting. Furthermore, as ‘cloud’ is effectively a delivery mechanism for technology services, areas such as data analytics and cyber security are increasingly being delivered through cloud technologies.

Since 2010 the UK has seen a 67 per cent increase in year-on-year cloud-based consulting mergers and acquisitions*. The USA and Canada have also seen an increase in cloud-based consulting deals, especially the North American market, as it is larger, more established and tends to be a global leader in technology adoption. The chart below highlights the speed of cloud consulting M&A activity in North America and the UK.

year on year consulting

*Compound percentage increase from FY10 to FY14

A key reason for M&A activity in this space includes larger IT firms needing to keep pace with changes in the IT industry. This involves acquiring new skills around cloud-based services and determining how to make these work with traditional in-house or datacentre based IT systems. Furthermore, the acquisition of intellectual property continues to be a key driver of M&As. Cloud-based technologies that can be licensed to consulting/advisory clients provide easily scalable, ongoing revenues off the back of consulting engagements.

Our market data of M&A activity in this space from 2006 is highly illustrative of how the acquisition of cloud consulting firms is taking place across a wide spectrum of industries. In amongst the traditional acquirers such as technology firms, IT and research consultancies and private equity firms, some purchases have come from healthcare, telecom, publishing and industrial firms.

As the interest in the industry continues to grow, it remains to be seen where the future M&A activity is going to be focused in the cloud computing industry. Currently consultancies offering cloud-based software, cyber security and cloud infrastructure solutions are showing the greatest demand. Certainly SaaS, PaaS and IaaS have garnered a lot of interest in the market.

Cloud has been a major driver of innovation across the industry in recent years and this is expected to continue for some time. Cloud technology has helped drive the success of some of the largest firms on the planet, including Apple and Amazon, so it is very possible that this could create large deals for brilliant cloud businesses.

While still in relative infancy, large global IT consulting and other advisory businesses are starting to seriously focus on cloud. This opens up consolidation opportunities for advisory businesses in this space and we expect to see many more consulting deals involving these technologies as it becomes more mainstream in the IT industry.

If you would like a copy of our cloud-based consulting report please contact us at info@equiteq.com.

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Survivability of IT consulting firms

Survivability of IT firms cropped

There are huge opportunities for IT consulting firms, which is reflective of the dynamic nature of the IT industry and the current heat in the market. However, the opportunities are not without risks associated with advising in a fast-paced market. Consulting in a hot sector like IT means that competition is stiff and firms need to keep up to date with and adapt to changing technology trends. The rewards are great indeed for those that can navigate their firm to remain successful as the industry changes. How do firms ride the wave to ensure they stay relevant and grow real value? The answer is not the same for all, but an understanding of how these changes impact the ‘saleability’ of a firm is important.

The rapid changes transforming the sector are giving rise to three particular areas of interest to buyers.

1. Cloud

What’s happening?

Cloud offers a new and attractive delivery model for IT. Companies that adopt cloud-based software or platform delivery minimize the upfront infrastructure and ongoing IT staff costs, and can also improve the scalability issues typically associated with IT. Buying IT as a service can be cost and cash flow efficient, and it offers the flexibility to scale up or down according to requirements.

What does this mean for consulting firms?

Cloud creates a new context for IT delivery, and this brings with it new challenges to common IT issues of integration, data management and scalability. It will be critical for IT consultants to keep updated on new architecture models and best practice changes as technologies mature. As cloud based software, infrastructure and platform vendors take stage in the market, IT consultants will need to either place bets on winning technologies or keep up to date with a wide variety of vendors to be able to advise on the pros and cons of each. Whilst IT has always been a dynamic industry, the industry changing nature of cloud as an IT delivery model requires IT consultants to step up the pace of their research, and to develop or strengthen their strategic partnerships, in order to remain relevant in this space.

2. Cyber security

What’s happening?

IT security has been an issue since the birth of the IT industry. However, the implication of computing, data and channels of business moving online results in new and heightened threats to business operations and data security. Cyber or online security attacks that disrupt operations or result in a loss of data can have huge repercussions on a business, as this can immediately affect a company’s brand and the perception of its customers. As such, cyber security has become a significant issue that all companies now need to manage in line with their online presence.

What does this mean for consulting firms?

Cyber security is a highly specialized topic that requires deep domain knowledge. It’s also fast moving as new threats constantly evolve. Consultants must be confident that they have the skills, knowledge and intelligence to be effective in this challenging environment. In some cases, traditional IT security approaches are still relevant, but new cyber security models will also need to be applied to effectively address the different nature of threats. Keeping updated with new security standards and the latest research will be an important new driver for IT consultancies to remain updated.

3. Data analytics

What’s happening?

As companies become increasingly more dependent on IT, so too does the volumes of data they amass through their use of IT systems. The intuition is that having a lot of data should be useful, however extracting insights from the analysis of this data requires highly specialized expertise. Data is like a new goldmine. Mining it effectively is the new challenge. Consulting firms that can help organizations put the data they have to use are therefore in very high demand.

What does this mean for consulting firms?

Analytics is an area where everyone knows it is useful, but very few know how to do it properly. Consulting firms must be able to find new ways to collect, store, and structure, analyse and report on data stored to get the most out of it. However, not all IT consultancies that have expertise in traditional IT areas of data management and business intelligence are able to address all of the complexity that data analytics typically involves and the predictive insights that can come from it. So IT consultancies need to keep pace, but they must build the skill before they can sell it. Research and thought leadership papers can be a great way to start. Building partnerships with key vendors that specialize in analytics can also be helpful in landing those first few projects.

Even if keeping up with IT industry changes, the fundamentals of selling an IT consulting firm remain unchanged.

As the IT market matures so too does the requirement for consulting firms to have deep domain knowledge and specialized skillsets. Evolving IT areas like those above still require deep expertise in order to stand out from the crowd to be attractive to buyers.

Demonstrating you have securely imbedded your intellectual property (IP) internally, is essential. If your firm’s knowledge, experience, tools and techniques exist solely in the minds of individuals within your firm, those assets may walk out the door!

Finally, consultant loyalty remains key. IT consulting skills change at a rapid pace in line with the industry. If your IT consultant’s skills and knowledge is in demand, so too is your firm’s services, but retaining talent is also a key challenge. Taking measures to ensure you attract, develop and motivate the best quality staff is a necessary investment in time and resource. Consider linking some compensation to profit growth and ensure any knowledge gained through contract professionals is retained with your staff. If you’re entering into an M&A process, we recommend you read our recent blog on effective communication in an M&A deal in order to keep your people onside and engaged.

The IT sector is an exciting sector to work in. No doubt the landscape will look very different again in 5 years time, but the principles of building a consulting firm of value are likely to still be true. Read our 8 Levers of Equity Value to find out more.