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Current Condition of Mergers and Acquisitions in the Outsourced IT Services Markets
Jonathan Simnett, Director/Sector Principal, Hampleton Partners
In recent years, organisations – be they start-ups, scale-ups, publicly-listed, governmental agencies and healthcare providers – have been forced to increasingly digitise their products, processes and services.
COVID-19, and the lockdown measures necessary to control the spread of the pandemic around the world, have accelerated this momentum. This, in turn, has had a profound impact both on those tasked with providing the infrastructure and services that support this transition, and on the valuations of their companies in the IT and Business Services sector.
As a specialist technology M&A advisory company, Hampleton Partners closely follows and tracks valuations in this area. We think of IT and Business Services as being composed of three distinct segments: Outsourced Services - comprising transaction processing, BPO, software development, staffing, contract manufacturing & design, customer care; Tech Services and Support - encompassing tech & management consulting, web & email marketing measurement and design; and Integration Services - which covers integration of networks, telecoms, systems and security.
Answering a growing need
At the simplest level,COVID-19, and the lockdown measures imposed, has meant the bulk of employees that can work from home have been required to work there. This, in turn, has challenged IT departments to provide enhanced, more flexible, and advanced capabilities, whether in-house or outsourced to address a broader spread of requirements as organisations adjust to operating in changed and uncertain circumstances.
For instance, given the new demands on IT infrastructures, IT services firms and departments have had to ensure that they are able to work with virtualisation tools and enable integration with other systems, softwares and platforms. They are also being driven to work with, and integrate, the cloud for efficiency in remote working and to maximise corporate agility with video conferencing and desktop virtualisation software for the cloud, facilities that have keeping many organisations functioning.
Furthermore, the need for rapid and widespread implementation of capabilities in analytics or digital marketing – especially given the rise of digital commerce to compensate for the COVID-19-driven crisis in brick-and-mortar retail – has pushed businesses to seek out assistance from IT and marketing services firms. Effective CRM integration with other systems and software is more crucial than ever for businesses who rely on customer retention.
In this environment, Outsourced Services companies, which offer services ranging from payment processing to software development, continue to enjoy strong growth on the back the ever-present need to increase connectivity, agility and reduce costs.
Volumes and valuations dip
You might think all of these would be welcome developments for anyone considering selling their IT and Business Services firm. But, curiously, given the demand for services across the sector, in the first half of 2020, transaction volume dipped to 378 deals, compared to the 416 deals recorded in the second half of 2019.
This dip may be due to a drop off in intercontinental deals in Q2 2020 due to pandemic-related challenges in completing transactions and as some companies - very temporarily it turned out as the summer progressed– had held fire on investing.
As a result, some valuation multiples came in lower across the sector with the result that the trailing 30-month median EBITDA multiple dropped to 9x – the lowest in four years – while the revenue multiple remained stable at 1.2x.
Outsourced services most in demand
The good news for those working in companies in IT Outsourced Services, though, is that this segment, which constitute 33 per cent of deals, continued to attract the highest valuations - 9.7x trailing 30-month median EBITDA and 1.3x EV/S multiple in 1H2020- and saw a total of 120 transactions, fractionally down from 129 deals in 2H2019. The segment also saw a significant number of large deals, particularly involving payment processing firms and outsourced software development.
Fiserv raises the game in payment processing
In March 2020, Fiserv acquired MerchantPro, a provider of transaction processing services and point of sale (POS) systems. Headquartered in New York state, MerchantPro Express is an Independent Sales Organization (ISO) that provides state-of-the-art processing services, advanced POS equipment and merchant cash advances to businesses across the US.
MerchantPro leverages technology, analytics and consulting to grow its clients’ business by providing a wide variety of value-added services to drive down processing costs. The deal sought to bring together market-leading payment solutions from Fiserv, including CoPilot, CardPointe and Clover, with the proven and sophisticated onboarding and service of MerchantPro Express.
Magic Software Enterprises invests in outsourced software development
Another interesting deal occurred in June when publicly traded company, Magic Software Enterprises, an Israeli low-code integration and application development SaaS provider, acquired Dutch companies Magic-Hands and Knowledge & Solutions Software B.V – two software development firms based on the MAGIC programming language.
Magic Software Enterprises, a global provider of end-to-end low code integration and application development platforms solutions and IT consulting services, thus expanded its footprint in the Western Europe market. The collaboration between Magic Software, Magic-Hands and Knowledge & Solutions Software will increase development power across Europe as Magic-Hands’ team develop, manage, and deliver software solutions. Different types of software include Magic4Business (the finance and billing solution) and Magic4Trade (for supply chain businesses and custom-made software solutions).
So, from a mergers and acquisitions perspective, the IT and Business Services sector is in a paradoxical position. While the pandemic initially caused lower deal volumes and valuations, some areas in IT are evidently poised to benefit from the shift to online. Also, from other changes in organisations’ use of technology this year and beyond and from a rebound in stock market indices and investor appetite. After all, the industry deal drivers remain the same: digital transformation and continued transition to the cloud drive demand for IT services and resources and there remains a massive amount of unspent investments funds waiting to be deployed by both strategic and financial buyers.
So as a CIO - whether a founder, shareholder or employee with options working in IT and Business Services and, particularly, Outsourced Services, the outlook for successful exits looks good. Hampleton anticipates M&A activity in the sector to remain stable for the rest of this year and to accelerate in 2021 as market dynamics continue to drive larger service companies to acquire high quality and specialised capabilities.
Jonathan Simnett, director, Hampleton Partners
Hampleton partners is a London-based specialist technology mergers and acquisitions advisory firm whose directors have completed over 100 transactions in IT and Business Services and other technology sectors.
Jonathan Simnett biog
Jonathan has been involved in the technology space for just under four decades, both building, turning around and exiting business and helping management and their investors in fast growth technology segments to grow, manage change, enter markets, transfer technologies, acquire, merge and sell.
He holds a Master’s degree in Science and Technology Policy from The University of Manchester and attended the Stanford Graduate School of Business. A regular media commentator and conference and seminar presenter, he blogs on technology innovation, investment, marketing and management on LinkedIn and at "The World According to @WestFour".