M&As in the Global Services Space: Why, What, Where, and Who Next?
Drawing on the vast amount of data it maintains in its ITO and BPO provider database, Everest Group recently completed a market report entitled “Mergers and Acquisitions (M&A) in
IT Outsourcing – “Deals are Back”” that focuses on global services M&A activity over the last five years. Granted, the global meltdown in 2008, 2009 and earlier 2010 stalled a lot of M&As, but activity rebounded later in 2010, and we expect it to continue to pick up. A brief look:
Most of the acquisitions since 2005 were driven by a need to fill gaps in the service portfolio, expand into new client bases, add captives for greater geographic delivery reach, enhance delivery capabilities, gain broader/deeper industry-specific skill sets, industry consolidation or any combination thereof.
Multinational corporations (MNCs) focused significantly on acquiring core technology companies, in large part to add innovation capabilities to their delivery portfolios. And Indian players targeted the consulting space to move up the value chain of IT services due to changes in and maturation of buy-side clients’ business requirements and objectives. Heritage BPO providers seemed content to augment their BPO capabilities, yet appeared reluctant to acquire ITO competence. Large deals made a comeback given the reasonable valuations and willingness of many companies to get bought during the economic recovery.
Perhaps surprisingly to some readers, the consulting companies received the least valuation among all the target types of companies, despite an assumption that consulting is a higher value business. The issue with consultancies is their lack of scale and an impregnable expansion wall they hit after a period of time. As their assets are their people, retention becomes a major issue. And given tight budgets, clients may be reluctant to pay a significant incremental price for consulting services, thus making consultancies less valuable for the acquirer.
India was the preferred geography when it comes to adding to the delivery network, and rightly so. While the region has large Tier-1 service providers, it also boasts of a significant number of smaller IT service providers and niche IT service providers. These are attractive targets for companies seeking to expand their delivery networks into more cost-effective destinations and that are unable to find many suitable companies to acquire in other geographies. North America was the leading geography in which acquirers and a large number of acquisition targets are based. And expanding into new client bases invariably led the service providers to perform M&A activities in EMEA.
M&A will continue to be a strategic tool for both Indian and MNC providers. In light of i-Gate’s recent acquisition of Patni Systems, it will be interesting to see what all suitable candidates are willing to sell. For example, a large U.S. MNC has been touted as an M&A target for quite some time now; Infosys was rumored to be interested in Logica; and there has been talk of a potential acquisition of Headstrong by Capgemini. Oh yes, the M&A market seems to be buzzing again with activity, with smaller players serving as willing sellers, and larger companies seeking to acquire strategic assets at reasonable valuation.
Who is the next in line?