Macroeconomic forces are shaping the M&A landscape in IT Services. Cheap financing and favourable debt markets mean there are more private equity firms making acquisitions. In addition to using more leverage and buying up an ever-increasing number of IT Services companies, PEs are increasing the size of their purchases, says the latest IT & Business Services M&A market report from Hampleton Partners, the international technology mergers and acquisitions advisor.
Even before this week’s news, it outlines how low interest rates and favourable debt markets have made it easier for private equity firms to pick up market-leading IT businesses. PE buyers have grown their share of the sector’s M&A activity to 15% of all transactions in 2019, compared to just under five percent in 2014.
In 2018, the median deal size for strategic buyer was only $28 million, whereas private equity median deal size was $196 million – 600% more. This rift has continued to grow: in 2019, the strategic median deal size was $34 million, while the PE median deal size was $556 million – a whopping 1500% more.
In total, $14.67 billion was spent by private equity buyers in 2019 – an increase from the $11.85 billion spent in 2018.
And in the industry sectors. Tech Services & Support is the largest segment of the IT Services sector, accounting for 43% of deals. However, companies in the IT Outsourced Services segment are attracting the highest valuations, with trailing 30-month median multiples hitting a five-year high at 10.6x – compared to 8.2x in the Integration Services segment.
And Europe matters in this: 60% of transactions involved a North American target company, while 29% involved a target headquartered in Europe. Of those European companies targeted, 71% were purchased by a European acquirer – a tendency which has remained almost identical to previous periods. While the vast majority of European targets acquired by North American buyers will be the result of European subsidiaries making regional acquisitions, in reality the proportion is around 90%. The same is the case with North America making IT Services M&A an intra-continental exercise.
Miro Parizek (pictured) founding partner, Hampleton Partners, says: “The migration of core business services to digital and to the cloud, plus widespread implementation of analytics, digital marketing, machine learning, social commerce and more, are creating a strong demand for companies across the sector. “Macroeconomic forces are also contributing to M&A activity, as private equity firms can now afford to buy market-leading tech companies with high growth potential, leading to larger deal sizes.”
The outsized influence of private equity firms is shown by the $5.4 billion purchase of electronics distributor Tech Data by Apollo Global Management in November 2019.
Hampleton reported 407 IT & Business Services transactions in the second half of 2019, up from 380 in the first half of the year. Companies in the IT Outsourced Services segment attracted the highest valuations, with trailing 30-month median multiples hitting a five-year high at 10.6x compared to 8.2x in the Integration Services segment.
Miro Parizek continued: “At the end of 2018, we predicted that private equity interest would continue to grow. It has – now peaking at over 15% share of deals. “However, we believe this trend may slow down, as acquisitive PEs consolidate their position in the IT Services sector. Many have purchased several, somewhat related IT Services companies and must now deal with consolidation and integration in order to harvest some of the value in their thesis, beyond building a larger holding sharing a logo.”
Hampleton’s IT & Business Services M&A report analyses transactions, trends and activity across the Integration, Technology and Support Services segments as well as IT Outsourcing.
