The IT Services sector has experienced a significant surge in mergers and acquisitions (M&A) activity in recent years as leading players in the industry seek to consolidate their position and enhance their capabilities. The advent of digital technology has generated substantial demand for advanced and innovative IT solutions, and organizations are increasingly turning to M&A as a means of meeting this demand.
In this article, we look at what has driven the boom in the IT Services M&A landscape over the past years and where the industry heading. We also explore which countries have the highest level of M&A activity, who are the largest buyers, and the valuation multiples used in these transactions.
What are IT Services?
IT Services companies provide information technology support and solutions to individuals and organizations. They offer various services such as software development, network design and management, managed services (MSP), cloud computing, data analytics and storage, remote support, and cybersecurity. Some major players in this industry are EPAM Systems, Tata Consultancy Services (TCS), Infosys, Accenture, Cognizant, and Capgemini.
The IT Services industry has witnessed a sustained growth trajectory in recent years, driven by the persistent demand for technology-enabled solutions. Organizations in various industries are investing in their technology infrastructure to enhance their competitiveness and stay ahead of the curve – a trend that the pandemic has significantly accelerated.
Why IT Services Companies Undertake M&A
IT Services businesses often engage in mergers and acquisitions as a strategic move to broaden their portfolio of services, expand their geographic reach, gain access to niche technologies, and grow the team. The primary objectives that IT Services companies seek to achieve through M&A include:
- Expansion of services and capabilities: By acquiring competitors, an IT Services company can expand its services and capabilities portfolio, offering its clients a more comprehensive range of solutions.
- Geographical expansion: M&A can help IT Services companies expand their reach and enter new geographical markets.
- Unlock synergies: By consolidating operations and resources, an IT services company can achieve economies of scale and cost savings that can improve its competitiveness.
- Growing the team: Through M&A, IT Services companies can rapidly grow the team and acquire top talent.
M&A in IT Services: Data Analysis
We conducted an in-depth analysis of over 7,000 M&A transactions in the IT Services industry that took place between 2015 to 2022. We examined various trends and metrics, including the total number of IT Services deals by geographic region and investor type.
Next, we looked at how the multiples in M&A transactions within the IT Services sector have changed over the past eight years. Roughly 500 transactions have disclosed valuation metrics, such as revenue and EBITDA multiples, giving us ample data to formulate meaningful conclusions and insights.
You can find our detailed analysis of valuation multiples used in M&A transactions and of public IT Services companies here.
Total Number of IT Services M&A Deals
We have seen a steady upward trend in IT Services M&A transactions between 2015 and 2021. Deal volumes increased at an average annual growth rate of 8% during the first seven years, in line with the growing demand for services offered by IT Services companies.
2021 saw a peak in IT Services M&A deals, totaling 1,104 transactions. Tailwinds provided by accelerated digitalization and a favorable macro environment, including ample liquidity and unprecedented business and consumer confidence, played a crucial role in deal volume growth.
However, as the market turned sour in 2022, the number of M&A transactions in the IT Services sector dropped by 16% to 874. The challenging macroeconomic outlook caused buyers to adopt a more conservative strategy, placing a higher premium on cost savings and organic growth rather than expanding through M&A.
Despite the slowdown in 2022, digital transformation remains a high priority for most organizations. Besides stable demand, IT Services also tend to operate with robust fundamentals, including relatively stable revenue growth and margins and asset-light operations. Therefore, we expect continued interest from strategic and financial investors and the M&A activity to resume its upward trend as market conditions improve.
IT Services M&A Transactions by Target’s Country
Europe has emerged as a hub for IT Services transactions, with 3,062 deals taking place over the past eight years. However, it is important to note that these deals were predominantly centered in the major economies of Europe. Nearly 50% of the acquired companies were domiciled in the United Kingdom, France, and Germany. Conversely, 18 European nations had less than ten IT Services M&A transactions between 2015 and 2022.
North America is a close competitor to Europe, with 2,689 M&A deals. The number of IT Services M&A deals in Asia was relatively low, although China’s 419 transactions are noteworthy. With increasing optimism among investors regarding emerging markets, we foresee China’s robust growth continuing and have high expectations for India’s potential.
Strategic vs. Financial Acquisitions
Over the past eight years, strategic investors were the predominant driving force behind M&A activity in the IT Services market, accounting for 75% of the total deals. The industry’s fast-paced growth and the importance of scale have led many buyers to acquire competition.
The most active strategic acquirer was Accenture, with 44 deals – one of the largest player in the IT Services industry. Other notable buyers included Atos (18 deals) and Cognizant (15 deals).
Financial buyers made up 25% of the M&A transactions in the IT Services sector between 2015 and 2022, with much activity from private equity firms. With dry powder at record levels, it is anticipated that financial investors will maintain a robust M&A activity in the IT Services sector in the coming years.
H.I.G. Capital and Enlightenment Capital led the pack of financial investors, each executing 10 IT Services acquisitions over eight years. We also saw strong interest from ABRY Partners (9 deals) and Waterland Private Equity (8 deals).
Valuation Multiples in M&A Transactions
The EBITDA multiple is the most used valuation multiple in IT Services M&A transactions. EBITDA is suitable for IT Services companies as they typically do not require substantial initial investments and are projected to produce positive cash flows in the early stages of their operations.
The EBITDA multiple in our sample was recorded for 307 deals between 2015 and 2022. The median multiple was stable over this period, hovering between 10.0x and 12.5x. We also saw little change in the 1st quartile, indicating that the valuation of the companies with the lowest multiples was relatively stable. The 3rd quartile was quite volatile, however. After more than doubling during 2021’s risk-on environment, it fell sharply in 2022 back to pre-pandemic levels.
The Revenue multiple may serve as a supplementary valuation method when for example, the company lacks normalized profitability levels. While not frequently used with IT Services providers, Revenue multiples can provide valuable insights into the valuation process as they are more commonly disclosed in private transactions.
Based on the 509 deals for which the Revenue multiple was recorded, the median multiple displayed much greater volatility than the EBITDA multiple. The 1st quartile remained relatively stable, while the 3rd quartile exhibited substantial fluctuations, doubling from its 2020 low point to 3.9x by the end of 2022.
Summary of IT Services M&A
As presented in the above sections, the number of mergers and acquisitions in the IT Services sector has exhibited a steady upward trend until the challenging year of 2022. Numerous deals have been closed across different regions, with Europe leading the pack. Most of the transactions were strategic, but financial investors, private equity in particular, were also drawn in by the sector’s attractiveness. Many strategic investors are also commonly backed by private equity funds that help finance the acquisition.
The median EBITDA valuation multiple employed in M&A transactions remained consistent. However, notable fluctuations were observed in the third quartile and beyond. Conversely, the median Revenue multiple has been progressively increasing since 2020. This indicates improvement in the acquired companies’ profitability as sales dropped by EBITDA remained constant.
The sustained demand from end customers for IT Services is a vital driver of continued growth. With the industry still fragmented, it is expected that the frequency of IT Services deals will remain at high levels
About Aventis Advisors
Aventis Advisors is an M&A advisor focusing on technology and growth companies. We believe the world would be better off with fewer (but better quality) M&A deals done at the right moment for the company. Our goal is to provide honest, insight-driven advice, clearly laying out all the options for our clients – including the one to keep the status quo.
Get in touch with us to discuss how we can help you in a sale or acquisition of an IT services business.