M&A to strengthen as IT services players try and differentiate: Study

Nasscom-EY study says overall deal activity may be at record levels over past few quarters after huge drop in Q2FY20. Deal volume and value of $297 bn in 2021 much higher than 2020 level

Acceleration in digital transformation and increase in demand for technologies enabling cloud transformation, cyber security, data analytics and more is driving the IT services industry towards mergers and acquisitions (M&A).

According to a report by Nasscom and EY the overall deal activity is possibly at record levels over the last few quarters following a significant drop in Q2FY20. Deal volume and value of over $297 billion in 2021 is significantly higher than 2020 level.

This is backed by the fact that global technology services spending is projected to be over $1.2trillion in 2022 according to Gartner.

The deal activity has two driving forces; first the IT players are getting aggressive as they look to expand capabilities and address white spaces in their services offerings. Second, PE players are looking to actively build and operate their portfolio companies, and are following a strategic approach to acquire Technology Services providers - leading to increased competition for quality assets globally.

“Strategic acquirers continue to lead deal activity, with activity levels comparable across different strata (large and small companies). The strategic imperatives of growth, differentiation and diversifying delivery footprint has resulted in increased M&A interest in themes such as cloud services, digital engineering, customer experience, and data & analytics, among others,” said the report.

Some of the deals that fall in these categories include Infosys-Simplus, Accenture-Olikka, Tech Mahindra-DigitalOnUs, Infosys-Blue Acorn iCi, Wipro-Rational Interaction, Cognizant-Servian, Accenture-Clarity Insights.

The report also points out that one other reason for the high level of M&A is the need to acquire talent and skills — due to supply-side issues.

Debjani Ghosh, President, NASSCOM, said, “Despite the challenges posed by the ongoing pandemic and looming concerns around a third wave, deal-making in 2021 has shown considerable resilience, with close to 1,200 deals valued at $297 billion+. PE firms have maintained enthusiasm in the Technology Services sector owing to increased tech spending and demand for technologies enabling cloud transformation, workplace digitalization, and collaboration. The deal landscape is expected to grow at an exceptional pace in the coming months.”

The report also stated that the need for M&A as a growth tool will be important going ahead.
 

Some of the large deals that were led by PE players include Carlyle’s acquisition of Hexaware, Baring Private Equity Asia’s acquisition of Virtusa, Blackstone’s buyout of Mphasis. In terms of platform acquisition some of the notable deals include Bain backed Brillio’s bolt on acquisitions of Standav, Cognetik; Advent & Warburg Pincus backed Encora Digital acquisition of Daitan Group, Group Avantica, Sooryen and others. PE investors have a sweet spot for scale to accelerate the path to access the public markets valuations and a number of recent deals appear to be driven by this strategy, said the report.

When it comes to exits, IPO markets are expected to be buoyant over the near term with SPACs becoming a viable path for raising capital and accessing public markets. While the creation of new SPACs has slowed down, there are close to 400 SPACs with over $500 billion in capital available for future deal-making.

The report also pointed out that PE players are adopting shorter time frames for exit and are looking at recapitalization transactions with a 2-3 year period of investments versus the traditional hold period of 4-5 years.