The first quarter of CY23 saw the global technology service sector witnessing a surge in M&A and private equity deals, reaching a total of more than $57 billion, more than double the amount in 2020 (more than $27 billion), according to a report.
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, noted a report by EY and Nasscom.
Moreover, 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 more than $10 billion deals in 2021). While private equity participation in IT services deals increased 2.5x in 2022 compared to 2020, it dominated the large deal (more than $500 million) segment with a 62.5 per cent share. Notably, BPM and ER&D services experienced growth of 1.5x and 1.8x, respectively, compared to 2020.
“While the first quarter saw a slowdown in deal activity, both strategic purchasers and private equity firms continue to hunt for ways to enhance their digital and domain capabilities, expand geographic reach, and fill white spaces in their portfolios. Even as assets in areas such as cloud, data and 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,” said Nitin Bhatt, Technology Sector Leader, EY India.
The report states that IT service providers are increasingly acquiring equity interests in IP and product companies to gain access to cutting-edge technology and create differentiation. Large strategic buyers are showing significant interest in emerging technologies such as IoT, AR/VR, hyper-automation, and low-code, no-code.
Similarly, 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.
“In FY23, 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, and digital components that are increasingly being built into all deals, partnerships, and M&As,” said Sangeeta Gupta, Senior Vice-President and Chief Strategy Officer, Nasscom.
Outlook for FY23
With an emphasis on emerging digital capabilities, the market is expected to become more cautious and adopt creative deal structures to manage risk. Although deal activity has softened, with more than 150 deals announced in Q1 CY23, compared to more than 270 in Q1 CY22 and more than 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 rollups are expected to continue to drive deal momentum.