EY today launched a report in collaboration with nasscom titled ‘A Year of Paradoxes: M&A Trends and Outlook in the Technology Services Sector’. In 2022, the technology service sector proved to be a year of paradoxes. Despite signs of a slowdown at the end of the year and into Q1 CY23, the technology service sector still witnessed a surge in M&A and private equity deals, reaching a total of USD 57 B+ more than double the amount seen in 2020 (USD 27 B+).
FY 2022 – The year of deals
In 2022, the technology service sector including IT Services, BPM, and ER&D saw an uptick in transaction activity, with a total of 947 deals – the highest number recorded in the past five years. The total deal value and volume in 2022 doubled from the levels seen in 2020, though deal value remained relatively steady throughout 2021 and 2022. (excluding two USD10 B+ deals in 2021).
Private equity participation in IT services deals increased 2.5x in 2022 compared to 2020 and dominated the large deal (USD500M+) segment with a 62.5% share. Notably, BPM and ER&D services experienced growth of 1.5x and 1.8x respectively compared to 2020.
Commenting on the findings of the report, Nitin Bhatt, Technology Sector Leader, EY India, said, “The extensive buyer activity across segments is what stood out in the remarkable dealmaking over the past two years. While the first quarter saw a slowdown in deal activity, both strategic purchasers and private equity firms continue to hunt for enhancing their digital and domain capabilities, expanding geographic reach, and filling white spaces in their portfolios. Even as assets in areas such as cloud, data & AI, cybersecurity and digital product engineering still command a relative premium, we do expect to see an uptick on the demand side of deals. The real question is how sellers should strategize their exit in this market.”
Emerging Themes & Investment Strategies
IT services players are increasingly acquiring equity interest in IP/product companies to gain access to cutting-edge technology and create differentiation. Large strategic buyers are showing significant interest in emerging technologies like IoT, AR/VR, Hyper-automation, and Low Code No Code. In order to accelerate their competitive advantage in both emerging technologies and the talent market, there has been a notable increase in technology services investment post-pandemic. Despite current economic uncertainties, enterprise digital transformation is a multi-decade, multi-billion-dollar trend, suggesting that the demand for advanced IT solutions will remain high for the foreseeable future.
As the current environment evolves, the focus on spending priorities and the nature of vendor partnerships are likely to shift. Enterprise buyers will probably reevaluate their digital spending priorities, emphasizing cost optimization and seeking providers who can deliver transformation through outcome-based models. In sectors like manufacturing, automotive, and supply chain, emerging technologies such as AR, VR, IoT, and edge intelligence are finding new applications. These trends are expected to maintain inorganic strategies at the forefront of strategic buyers and PE roll-up growth agendas.
Sharing her views, Sangeeta Gupta, Senior Vice President and Chief Strategy Officer, Nasscom, said, “The last 24 months have witnessed a significant shift in enterprise investments towards digital and business transformation. Technologies such as AR, VR, IoT, and edge intelligence, are now finding applications in manufacturing, automotive, and supply chain. In FY2023, this transformation accelerated with an urgent need to revisit the business strategy and transform existing models to unlock value from emerging opportunities. As a result, firms have focused on capability building through M&As, partnerships and more importantly relook at their business strategies. The growth areas of technology segments will continue to focus on digital CX, digitization, cloudification & digital components that are increasingly being built into all deals, partnerships, and M&As.”
Adding to it, Shivani Nagpaul, Technology Investment Banking Leader, EY India, said, “We observe that the demand for technology service providers to provide a differentiating proposition in their solutions for digital transformation is more acute than before. Technology Services vendors are prioritizing investments (organic and inorganic) in technological hotspots that are recession-resistant, such as cybersecurity, data and AI, automation, etc. in order to establish and sustain their competitive edge. This necessity will probably stimulate deal activity but with a more cautious approach.”
Outlook for FY2023
With greater emphasis on emerging digital capabilities, the market is likely to become more cautious and adopt creative deal structures to manage risk. Although deal activity has softened, with 150+ deals announced in Q1 CY23 compared to 270+ in Q1 CY22 and 220+ in Q1 CY21, deal activity for mid-sized companies is expected to remain strong across the broader M&A market. Select segments of strategic buyers and PE roll-ups are expected to continue driving deal momentum.
