Category

Mergers & Acquisitions

HCL’s Sankalp Acquisition: Reflections of a Dynamic Industry

By | Blog, Mergers & Acquisitions, Uncategorized

In September, HCL Technologies announced its acquisition of the semiconductor engineering services firm Sankalp Semiconductor in an all-cash deal worth US$25 million, with Sankalp operating as a 100 percent subsidiary of HCL. While this is not a particularly large acquisition, it impacts a key market player, and it highlights a couple of key trends in the semiconductor engineering services market.

What the acquisition means for HCL

The acquisition impacts HCL in a few important ways:

Enhanced semiconductor engineering capabilities

The recent acquisition by HCL is a strategic move to cement its position in semiconductor chip engineering services by strengthening its existing digital design services and expanding into the analog and mixed-signal space.

Both HCL and Sankalp Semiconductor provide chip engineering services in the pre-silicon and post-silicon segments of the value chain (See Figure 1). But while HCL’s chip engineering expertise lies in digital design, Sankalp has strong capabilities in analog and mixed-signal circuit design as well.

And HCL will be gaining experience. Sankalp has more than 5,000 person-years of experience in semiconductor engineering services and covers the digital, analog, and mixed-signal domains through its 1,000+ engineers based in India and Canada. In analog and mixed-signal design alone, the company has more than 1,500 person-years of experience and has delivered more than 500 projects.

Increased revenue

Though HCL is a major player in engineering services, its acquisition of Sankalp Semiconductor, which reported revenues of ~US$20 million in FY2019, will be a nice boost to its semiconductor engineering services top line.

Increased market access

Sankalp will strengthen HCL’s play in specific market segments including automotive, consumer, IoT, medical electronics, networking, and wireless.

How the acquisition reflects industry trends

HCL’s acquisition of Sankalp is the latest in a series of acquisitions that have taken place in the semiconductor engineering services industry over the past few years. As shown in the graphic below, in 2015, Aricent acquired the Bengaluru-based semiconductor services firm SmartPlay Technologies Pvt Ltd before itself being acquired by Altran in 2017, which was – in turn – acquired by Capgemini in 2019. Cyient Europe Ltd acquired custom analog and mixed-signal circuits design company Ansem N.V, and L&TTS acquired Bengaluru-based Graphene Semiconductor.

All of these acquisitions reflect an important industry trend that has some specific consequences. There is an increasing focus on semiconductor engineering due to the rise of IoT and smart device applications, as well as a growing demand for greater computing power and device miniaturization.

This trend is driving several outcomes. First, it is forcing semiconductor companies to think about how to reduce time-to-market, as well as how to gain access to engineers with the right kinds of expertise. Many are turning to outsourcing to address these challenges. As a result, we expect outsourcing in this sector to grow at a rate of 10% over the next three years.

Second, it is forcing semiconductor engineering service providers to expand their portfolios to successfully address market needs. That challenge, coupled with the generally fragmented nature of the industry, is likely to result in ongoing merger and acquisition activity.

Ultimately, whether they choose to grow organically or inorganically, semiconductor engineering services firms will want to invest in their capabilities so they can grab a higher share of outsourcing from the ~US$ 470 billion semiconductor industry pie.

 

Capgemini-Altran Acquisition: Upping the Ante in Engineering Services | Blog

By | Blog, Mergers & Acquisitions

Back in December 2017, Altran’s acquisition of Aricent for US$2 billion was one of the biggest inorganic growth initiatives in the engineering services space. The acquisition helped Altran draw synergies across key verticals and strengthen its leadership position in the global engineering services space.

Fast forward just a short year and a half later to a much larger deal: Capgemini on June 24, 2019, announced its plan to acquire Altran for a cash consideration of ~US$4.1 billion and also assume Altran’s financial debt of ~US$1.6 billion, which is primarily attributable to its Aricent acquisition. The transaction is expected to close by the end of 2019.

Based on our calendar year 2018 estimates, the combined entity will hold over 10 percent of the global engineering services outsourcing market and will have nearly US$1.4 billion higher revenue than its nearest competitor.

Engineering Services revenue for leading service providers1 CY 2018; US$ billion

1 Includes Everest Group estimates

The acquisition reinforces the fact that the global services industry views engineering services as an avenue to offset the low headroom for growth in the IT and business process services. While players such as HCL Technologies and Tata Consultancy Services have primarily followed the organic route to drive growth in this space (both the companies have a spot in the list of global top 10 engineering services companies,) Capgemini has become the largest engineering services company with this mammoth acquisition.

The acquisition also highlights how service providers are increasingly reckoning with the need to develop capabilities to cater to the Information Technology – Operational Technology (IT-OT) integration needs of today’s connected world. An IT-OT play helps service providers demonstrate capabilities across multiple value elements and capture a larger share of enterprise spend.

What this acquisition means for Capgemini

Altran reported year-on-year growth of 27.1 percent for calendar year 2018, and its organic growth stood at 8 percent. Capgemini will certainly benefit from Altran’s robust portfolio growth. But it stands to gain more benefits:

  • Top spot in the engineering services industry: The combined entity will be the undisputed leader in engineering services, with over US$4 billion in engineering services revenue, and ~54,000 professionals
  • Enhanced capabilities across key verticals: With Altran’s stronghold in the automotive, aerospace, electronics & semiconductors, medical devices, and software products spaces, and Capgemini’s strength in sectors including manufacturing and energy and utilities, the combined entity will have a leadership position across the majority of engineering verticals
  • Asset and infrastructure dividend: Altran has developed numerous labs, solutions, innovation centers, etc., that will add rich depth and breadth to Capgemini’s capabilities
  • Enhanced value proposition: Capgemini will not only be able to cross-sell its enhanced IT-OT value proposition to Altran’s existing, top R&D-spend clients – including six of the top 10 Independent Software Vendors (ISVs) and all of the top five automotive Original Equipment Manufacturers (OEMs) –– but also to its own engineering-heavy verticals
  • Enhanced nearshore delivery capabilities: Altran has a sizeable delivery presence in Eastern Europe, which is a hub for high-quality engineering talent, and a significant delivery presence is viewed as a differentiator in the engineering services space
  • Access to Altran’s hand-picked portfolio of companies: Capgemini will be able to enhance its capabilities in niche areas including design and cyber security through Altran’s previous acquisitions of companies like Frog Design and Information Risk Management (IRM.)

What it means for Altran

In its mid-2018 “The High Road, Altran 2022” plan, Altran presented the key objectives it aimed to achieve by 2022:

  • Compound Annual Growth Rate (CAGR) of 6.5-7 percent (organic) during 2017-2022
  • 25,000 engineers in near/offshore locations, including India, up from 16,000 in 2018
  • Momentum in high-growth segments such as ISVs, electronics, automotive, and medical devices
  • Leadership in North America, while pursuing selective growth in the APAC region
  • Complete integration of Aricent by 2020

With Capgemini coming into the picture, the growth plan for Altran will likely be redefined. Nonetheless, assessing how Capgemini impacts the objectives Altran’s leadership laid down is still worthwhile.

While Altran has been managing steady growth on its own (8 percent year-over-year organic growth in calendar year 2018,) integration with Capgemini will help generate greater exposure to clients and accelerated market growth in North America. It will also accelerate Altran’s delivery expansion in offshore locations.

As a downside, Altran will be integrating with Capgemini – which could come into play as soon as early 2020 – while it continues to attain full synergy with Aricent. This multi-faceted integration will require meticulous planning and execution to ensure success. It may result in increased attrition among the talent Altran acquired from Aricent.

Cues for the broader engineering services outsourcing industry

This acquisition further enhances the dominance of Europe-headquartered firms on the leaderboard of the global engineering services industry. Further, once the acquisition is complete, Capgemini – as the largest engineering services provider – will have developed a sizeable offshore delivery presence and will be capable of going to market with an optimum combination of four key factors: capabilities, scale, client proximity, and cost-effectiveness. Offshore-heritage service providers will need to step up their game to continuously invest in building and enhancing capabilities for new and emerging areas.

We expect the inorganic growth wave to continue in this space. While it is unlikely that we will soon see another acquisition of this scale, we expect both large and mid-sized players to explore smaller acquisitions that address their unique objectives. While large service providers will flex their financial muscle to gain market share and niche capabilities, mid-sized service providers will look to build adjacent capabilities. And when this happens, both the providers and their clients will win.

Dassault Systèmes Acquires Medidata to Ride the Platform Wave in Life Sciences | Blog

By | Blog, Healthcare & Life Sciences, Mergers & Acquisitions

When news first hit in late April 2019 of speculation around Medidata Solutions being acquired by Dassault Systèmes – a France-based software company that develops 3D design, 3D digital mock-up, and product lifecycle management software – Medidata’s stock value went soaring. The deal immediately made sense. The fact that Dassault Systèmes was looking to ramp up its offerings for life sciences companies made Medidata, which we recently recognized as a Leader and Star Performer in our PEAK Matrix™ for Clinical Trials Products 2019, an attractive acquisition prospect.

 

Everest Group Life Sciences Clinical Trials Products PEAK Matrix Assessment 2019

 

Fast forward to June 2019 and the deal is done. The all-cash transaction is valued at US$5.8 billion and represents Dassault Systèmes’ largest acquisition to date. It will finance the deal with a €1 billion loan, a €3 billion bridge-to-loan facility, and available cash. It’s the first time the French company has resorted to external funding, which only accentuates how much it prizes Medidata as an asset.

The strategic intent behind the deal

Dassault Systèmes began focusing on the life sciences market a few years ago with the vision to improve the penetration of digital technologies in the industry. Its last life sciences-focused acquisition was that of Accelrys in 2014, which helped Dassault Systèmes establish BIOVIA, its brand for biological, chemical, and materials modeling and simulation, research, and open collaborative discovery.

With the acquisition of Medidata Solutions, Dassault Systèmes makes a statement that it is serious about achieving this vision. The acquisition will make life sciences Dassault Systèmes’ second largest industry focus, after transportation and mobility. Medidata grew at a CAGR of 17 percent during 2015-2018, driven by its dominance in electronic data capture through its flagship product, Rave.

Dassault Systèmes prides itself on its 3DEXPERIENCE platform, which is meant to enhance digital collaboration in complex sectors like aerospace, infrastructure, and mobility. Dassault Systèmes now looks to extend these benefits to life sciences. By adding Medidata’s clinical and commercial offerings to its own 3D experience expertise, Dassault Systèmes aims to create a platform that offers complete digital continuity to the life sciences industry, addressing complex challenges such as personalized medicine and patient-centric experiences.

Unpacking the companies’ synergies

Synergy area

Dassault Systèmes

Medidata Solutions

Value proposition

 

Design, modeling, and visualization software, with leading capabilities for the aerospace, defense, and consumer goods industries. Dassault Systèmes now aims to bolster its life sciences division

 

Life sciences clinical and commercial software pure-play, with deep domain expertise and strong consulting pedigree

Coverage of the life sciences value chain

 

Drug discovery, manufacturing, and supply chain Clinical and commercial operations

Key technology offerings

Design, modeling, simulation, and virtualization software Data capture, real world evidence, advanced analytics, AI-driven insights, and operations management

Customers

Customers are mostly in the aerospace, defense, and consumer goods industries

Sizable number of European life sciences clients, including medical devices firms such as Medtronic, FEops, Novo Nordisk, and Kavo Dental

1,300 life sciences companies, three quarters of which are in America. This includes most of the Big Pharma and CRO firms

Product coverage across the value chain

Product coverage across the value chain

Key opportunities

Dassault Systèmes is sitting on a lot of cash. This will give Medidata the financial muscle it needs to make the right investments in talent and technology to compete with the big players like Oracle Health Sciences and Accenture.

The integration of capabilities could lead to the creation of a unique end-to-end platform for life sciences across the entire value chain. Medidata has clinical and commercial capabilities, and Dassault Systèmes has offerings for drug discovery, manufacturing, and supply chain.

Potential risks

It’s not clear how the integration of Medidata’s products with the broader 3DEXPERIENCE platform will take place. It could be a challenge linking Medidata’s clinical trials and commercial operations solutions with Dassault Systèmes’ design and visualization offerings.

Dassault Systèmes’ has diversified offerings across several industries. In the long run, this may dilute Medidata’s brand image as a leader and focused player for clinical trials technology.

Closing thoughts

The life sciences industry needs aggressive digitalization to realize efficiency gains and reduce the lengthy timelines between drug conceptualization and drugs reaching the market. We’ve seen technology vendors coming up with integrated solutions for clinical trials to help enhance trial efficiency. While the need for a platform is evident, technical debt and change management issues hinder this platform-centric vision. This is a high growth market, which is likely to attract more interest in the coming 18-24 months. More SaaS companies will need to pivot to the platform conversation to scale and remain relevant. We will be tracking this space closely.

Spotlight on Salesforce’s Acquisition of Tableau | Blog

By | Blog, Mergers & Acquisitions

On June 10, 2019, Salesforce announced an agreement to acquire Tableau, a leading interactive data visualization company, for US$15.7 billion in an all-stock deal. Here’s our take on it.

Strategic Intent behind the Deal

The announcement is a masterful move to aid Salesforce’s hyper growth agenda to become a US$28 billion company in three years’ time. In the past 15 months, Salesforce has accelerated the data pivot through its acquisitions of Mulesoft in March 2018 and now Tableau, for a combined value of $22.2 billion.

Given its ambitious topline growth goals, Salesforce has hedged its bet against a pure cloud play. Tableau, which is not a cloud company, runs most of its products on-premise, with over one-third deployments in the cloud. However, last year, Tableau announced that its products will also be available on hyperscalers’ cloud platforms (AWS, Microsoft Azure, and GCP.) Addressing the ubiquity of data in a modern enterprise and recognizing the transition in software consumption pattern, Salesforce is taking an “anytime, anywhere” analytics approach to cater to enterprise’s hybrid cloud-first mandate.

In addition, Tableau’s strong performance against rivals including IBM Cognos, MicroStrategy, Oracle BI, and QlikView makes a strong case for the acquisition, given Salesforce’s big bet on its Customer 360 initiative and its broader foray into empowering clients with data analytics and visualization capabilities.

Enhancing the Data Analytics and Experience Pivot

Salesforce, a veteran in the CRM space, is repositioning itself as a digital experience (DX) platform, wherein it intends to become a one-stop, end-to-end solution for enterprises’ DX needs. It has been making strategic acquisitions over the years to plug in the gaps in its DX platform portfolio to achieve this goal.

SFDC Acquisition blog DX image

Because Tableau and Salesforce’s in-house analytics tool, Einstein Analytics, can easily interoperate, the company will be able to sell a well-packaged data analytics offering. Tableau’s niche capabilities in data analytics will not only deliver an improved data management solution but will also help enterprises form data-intensive strategies and optimize the overall stakeholder experience. And, the acquisition gives Salesforce new up- and cross-sell opportunities, as enterprises will be able to purchase CRM and business intelligence (BI) capabilities from a single vendor.

Gaining a Full View of Enterprise Data

Looking at the timeline of Salesforce’s acquisitions, we see a strategic shift from targeting digital marketing and commerce space toward enhancing enterprise data lifecycle management. Since 2018, Salesforce’s top deals have been to expand its coverage in the data and analytics space. Undoubtedly, the move has given Salesforce a shot in the arm when it comes to showcasing its capabilities across the data management value chain. Tableau sits atop of its acquisitions, plugging in multiple outside data sources and offering an easy to use UI for data visualization.

SFDC Acquisition blog CRM image

Indeed, Salesforce’s acquisition of Tableau is a strategic next step after its 2018 acquisition of MuleSoft. While Salesforce leveraged Mulesoft to create a “Salesforce Integration Cloud” that allows different cloud applications to connect via APIs, Tableau can help it gain deeper insights in this data, in turn driving enterprises toward data-driven decision making.

Data Orchestration Meets Cognitive

We give a thumbs up to this deal, particularly for what it means to the market going forward. Why?

The move fits well with Salesforce’s agenda to move into machine learning-driven analytics. Essentially, it will now have a strong BI tool, underpinned by AI, that will democratize enterprise access to next-generation data modeling and analytics capabilities.  A Tableau-integrated Salesforce Einstein Analytics offering should be able to deliver an intelligent, intuitive analytics and data visualization platform that leverages enterprise-wide data to help enterprise customers, employees, and partners with well-curated insights.

How Enterprises Benefit In Digital Transformation From DXC Technology Acquiring Luxoft | Blog

By | Blog, Mergers & Acquisitions

DXC Technology yesterday announced its acquisition of Luxoft, a global-scale digital innovator with world-class digital talent. I think this is an interesting acquisition, not only from a services industry perspective but also from the perspective of benefits to enterprise customers undertaking digital transformation.

Read more in my blog on Forbes

HCL Acquires IBM Products – Desperation or Aspiration? | Sherpas in Blue Shirts

By | Blog, Mergers & Acquisitions, Outsourcing

On December 6, 2018, HCL announced it had acquired seven IBM products across security, commerce, and marketing for a record US$1.8 billion. To provide a financial context to this acquisition: HCL, India’s third largest IT services provider, invested about 22 percent of its annual revenue to bolster its products and platforms portfolio – what it refers to as its Mode 3 portfolio – which barely contributes to 10 percent of its annual revenue.

Demystifying the Why

What strategic outcomes could HCL potentially derive from this deal?

  • Cross-sell opportunities: Access to the more than 5,000 enterprises currently using the acquired IBM products
  • Superior value proposition around as-a-service offerings: Integration of these products with HCL’s ADM, infrastructure, and digital services
  • Top-line growth due to recurring revenue streams and expanded EBIDTA margins
  • Fewer dependencies on external vendors: Improved capabilities to bundle internal IP with services can enable HCL to have greater control over outcomes, thereby enhancing its ability to deliver value at speed

 Sounds good…Right?

At first glance, the acquisition may seem to be a strategic fit for HCL. But when we dug deeper, we observed that while some of the IP plugs gaps in HCL’s portfolio, others don’t necessarily enhance the company’s overall capabilities.

HCL acquisitions

This analysis raises meaningful questions that indicate there are potential potholes that challenge its success:

  • Confusion around strategic choices: The product investments point to a strong proclivity towards IT modernization, rather than digital transformation. This acquisition of on-premise products comes at a time when inorganic investments by peers’ (recent examples include Infosys’ acquisition of Fluido and Cognizant’s acquisition of SaaSFocus) and enterprises’ preference are geared towards cloud-based products
  • Capability to drive innovation at speed on the tool stack: To address the digital needs of new and existing clients, as well as to deliver on the promise of as-a-service offerings, HCL needs to repurpose the products and make significant investments in modernizing legacy IP
  • Financial momentum sustenance: With an increasing number of clients moving away from on-premise environments to cloud, it remains to be seen if HCL can sustain the US$650 million annual revenue projection from these products
  • Customer apprehensions: Customers that have bundled these products as part of large outsourcing contracts built on the foundation of their relationships with IBM will likely be apprehensive about the products’ strategic direction, ongoing management, and integration challenges as their IT environments evolve
  • The illusion of cross-sell: It remains to be seen if HCL can succeed in cross-selling digital services for these legacy products, especially in the beginning of its relationship with the 5,000+ clients currently using the in-scope IBM products.

 The Way Forward

The acquisition definitely is a bold move by HCL, which may seem meaningful from an overall financial investment and ROI perspective. However, the subdued investor confidence reflects poor market sentiment, at least at the start. Although this could be considered a short-term consequence, HCL’s investments in these legacy products is in stark contrast to the way the rest of industry is moving forward.

On the day of the acquisition, HCL’s stock price fell 7.8 percent, signaling negative market sentiments and thumbs down from analysts. In contrast, the market behaved differently in response to  acquisitions by HCL’s peers in the recent past.

To prove the market wrong, HCL needs to focus its efforts on developing and innovating on top of these products; developing synergies with its ADM, infrastructure, and digital services; alleviating client apprehensions; and providing a well-defined roadmap on how it plans to sustain momentum leveraging these products over the long term.

What is your take on HCL’s acquisition of these IBM products? We would love to hear from you at [email protected] and [email protected].

SAP Accelerates Experience Pivot with a $8 billion Bet on Qualtrics | Sherpas in Blue Shirts

By | Blog, Cloud & Infrastructure, Customer Experience, Mergers & Acquisitions

Just days before 16-year old Qualtrics was due to launch its IPO, SAP announced its acquisition of the customer experience management company in an attempt to bolster its CRM portfolio. Qualtrics, one of the most anticipated tech IPOs of the year, and oversubscribed 13 times due to investor demand, adds to SAP’s arsenal of cloud-based software vendor acquisitions.

Delving into SAP’s Strategic Intent

Seeking transformational opportunities, the acquisition will allow SAP to sit atop the experience economy through the leverage of “X-data” (experience data) and “O-data” (operational data). Moreover, the acquisition will enable SAP to cash in on a rather untapped area that brings together customer, employee, product, and brand feedback to deliver a holistic and seamless customer experience.

SAP had multiple reasons to acquire Qualtrics:

  • First, it combines Qualtrics’ experience data collection system with SAP’s expertise in slicing and dicing operational data
  • Second, it sits conveniently within SAP’s overarching strategy to push C/4 HANA, its cloud-based sales and marketing suite.

SAP’s acquisition history makes it clear it seeks to achieve transformative growth by bolting in capabilities from the companies it acquires. It has garnered a fine reputation when it comes to onboarding acquired companies and realizing increasing gains out of the existing mutual synergies. Its unrelenting focuses on product portfolio/roadmap alignment, cultural integration, and GTM with acquired companies have been commendable.

Here is a look at its past cloud-based software company acquisitions:

SAP has taken a debt to finance the Qualtrics acquisition, making it imperative to show business gains from the move. With Qualtrics on board, it seems SAP’s ambitious cloud growth target (€8.2-8.7 billion by 2020) will receive a shot in the arm. However, the acquisition is expected to close by H1 2019, implying that the investors will have to wait to see returns. Moreover, SAP’s stock price in the past 12 months has dropped by 10.6 percent versus the S&P 500 Index rise of 3.4 percent. While SAP has seen revenue growth, its bottom-line results have been disappointing with a contraction in operating margins (cloud revenues have grown but tend to have a lower margin profile in the beginning.) This is likely to be further exacerbated given the enterprise multiple for this deal.

Fighting the Age-old Enterprise Challenge

Having said that, SAP sits in a solid location to win the war against the age-old enterprise conundrum of integrating back-, middle-, and front-office operations and recognize the operational linkages between the functions. Qualtrics’ experience management platform, known for its predictive modeling capabilities, generating real-time insights, and decentralizing the decision-making process, will certainly augment SAP’s value proposition and messaging for its C/4 HANA sales and marketing cloud. In fact, the mutual synergies between the two companies might put SAP at an equal footing with Salesforce in the CRM space.

While it may seem that SAP has arrived a bit early to the party, given that customer experience management is still a niche area, the market’s expected growth rate and SAP’s timely acquisition decision may allow it to leap-frog IBM and CA Technologies (now acquired by Broadcom), the current leaders in the space. Indeed, over the last couple of years, Qualtrics has pivoted beyond survey and other banal customer sentiment analysis methods to create a SaaS suite capable of:

  • Analyzing experience data to derive insights about employees, business partners, and end-customers
  • Democratizing and unifying analytics across the back-, middle-, and front-office operations
  • Delivering more proactive and predictive insights to alleviate experience inadequacy.

Cognitive Meets Customer Experience Management – The Road Ahead

SAP’s Intelligent Enterprise strategic tenet, enabled by its intelligent cloud suite (S/4 HANA, Fiori), digital platform (SAP HANA, SAP Data Hub, SAP Cloud Platform), and intelligent systems (SAP Leonardo, SAP Analytics Cloud), has allowed customers to embed cutting edge technologies – conversational AI, ML foundation, and cloud platform for blockchain. SAP is already working towards the combination of machine learning and natural language query (NLQ) technology to augment human intelligence, with a vision to drive business agility. Embedding the experience management suite within next-generation Intelligent Enterprise tenet will play a key role in achieving the exponential growth targets by 2020.

Please share your thoughts on this acquisition with us at: [email protected] and [email protected].

Acquisition Of Red Hat Repositions IBM For Digital IT Modernization | Sherpas in Blue Shirts

By | Blog, Cloud & Infrastructure, Digital Transformation, Mergers & Acquisitions

IBM’s $34 billion cash acquisition of Red Hat announced early this week has far-reaching implications for the IT services world. IT is modernizing, moving from a legacy world with data centers, proprietary operating systems and proprietary technologies to a digital environment with cloud, open-source software, a high degree of automation, DevOps and integration among these components. IBM’s legacy assets and capabilities are formidable, but the firm was not well positioned for IT modernization and struggled with digital operating models. The Red Hat acquisition is significant as it repositions IBM as a vital, must-have partner for enterprise customers in IT modernization and evolving digital operating models. This is a very intriguing acquisition for IBM. Let’s look at the implications for IBM and enterprise customers.

Read more in my blog on Forbes

Services Prediction: More Mega Deals Coming | Sherpas in Blue Shirts

By | Blog, Digital Transformation, Mergers & Acquisitions, Outsourcing

An interesting trend is developing in the services industry, reversing the trend we’ve seen for the past five years. I predict that this year, and for the next few years, we will see a modest rise in mega deals – deals with $500,000,000 or more in Total Contract Value (TCV). Where are those deals coming from?

At Everest Group, we watch services transactions closely. Over the last five years, the industry experienced a big move away from mega deals, preferring smaller and smaller transactions. This was then exacerbated by digital rotation where customers were interested in digital pilots – which are small deals. But this year we note a renewal of interest – in some specific situations – for large deals.

Here’s my take on three forces driving mega deals now.

Force #1: IP-Plus-Services Model

One force driving mega deals is where the service provider wraps services around the intellectual property (IP) platform the provider owns. TCS’s book of business of large deals is a good example of this. TCS has an IP platform around insurance and mega deals tied to that platform. The $2 billion-plus TCS transaction with Transamerica earlier this year is a good example. What makes the deal so large? The customer is modernizing its IT by jettisoning its legacy technology and transferring it to TCS for modernization through the TCS platform.

As the services industry pivots to digital models, IP ownership plays an increasingly important role. Automating work diminishes the importance of labor arbitrage, and the profit pool reconfigures around IP owners. The nature of the IP-plus-services model allows mega deals to happen. I expect more of this kind of deal to happen at TCS as well as at providers like Cognizant, which has a similar platform in the pharmaceutical healthcare space with TriZetto. Both TCS and Cognizant are using their investments in IP platforms to differentiate their offerings and capture large contracts.

Where service providers own important IP platforms, I see those as the basis for some very large deals.

Force #2: Leveraging the Balance Sheet

Another source for large deals is providers leveraging their balance sheet to finance a customer’s large-scale IT modernization. HCL and Wipro are good examples of providers using this approach to create very large deals. They use their balance sheets to fund expensive IT modernization deals, including taking over a customer’s legacy assets. This strategy accelerates a service provider’s growth, and I expect to see more mega deals using this strategy.

Force #3: Digital Transformation Programs

This year, we’ve seen digital transformation move out of the pilot phase into full-blown transformation programs. The amount of money customers spend on these transformations is staggering, often hundreds of millions of dollars. The large availability of enterprise funding for transformation is likely to encourage larger deals.

The net result of these three forces? I believe we will see a modest increase in mega deals, and in certain areas, larger deals for the remainder of this year and next year.

I’m not claiming the entire services market is moving to mega deals. In fact, two size-diminishing secular trends that were well underway continue: (1) decomposing the legacy, multi-tower deals to single towers and bidding those out (2) the move from managed services to systems integration and digital work. These trends will continue to create a fabric of smaller transactions.

However, some large deals are emerging. I believe the three forces I described are working against the well-established trends for smaller deals we saw during the last five years.

The Digital Health Unicorns Are Proving Their Value | Sherpas in Blue Shirts

By | Blog, Healthcare & Life Sciences, Mergers & Acquisitions

In August 2016, Everest Group published an analysis of hot digital health startups that were disrupting the status quo of the industry landscape. It ended becoming a unicorn-spotting analysis…cut to February 2018, and by healthcare and life sciences organizations have acquired three — Flatiron Health, NantHealth, Practice Fusion — and among the top 25 players. While we speak, there are multiple conversations around the others as investor interest peaks.

HC startups Blog

What are the key business reasons behind these three acquisitions?

  • Flatiron Health by Roche: Flatiron Health has an end-to-end cloud-based EHR platform (OncoEMR) exclusive for oncology that curates the evidence-based drug development process. As oncology is one of Roche’s major focus areas, this is extremely valuable for the company while devising cancer drugs. No wonder Roche agreed to a US$1.9 billion acquisition price, in addition to its existing stake in the company. Flatiron Health also has a OncoAnalytics module that leverages big data analytics for better diagnosis and treatment.
  • NantHealth by Allscripts: NantHealth is a cloud-based healthcare firm that aims to improve patient outcomes and personalized treatment. Its proprietary learning system, CLINICS, utilizes machine learning and cognitive computing to provide information for better care delivery, tools and insights for efficient care financing, and wellness management programs for enhanced patient engagement. NantHealth fits well within Allscripts’ ambitious plan to build a healthcare company that drives innovation in patient care and improves evidence-based research in R&D processes.
  • Practice Fusion by Allscripts: Practice Fusion is a web-based cloud EHR platform that also provides patient engagement and practice management assistance. Unlike traditional EHR platforms, Practice Fusion provides a simple and intuitive user interface. Beyond these capabilities, this acquisition also adds ~30,000 ambulatory sites to Allscripts’ client base in the hard-to-crack independent physician practices segment.

What’s working with these healthcare startup acquisitions

Here’s what is common among these recent acquisitions:

  1. Data is the new oil: The real asset is access to critical healthcare data. Companies that convert the data into actionable insights, resulting in better patient care, emerge as clear winners.
  2. Uberization of everything: Healthcare enterprises have struggled with huge fixed investments in EHR platforms, on-premise infrastructure, etc. This has created a deep dent in their profitability numbers. Because Flatiron Health, NantHealth, and PracticeFusion and are cloud-based companies, there are no more fixed costs, everything is demand-based. Clearly, the as-a-service model has become the choice for healthcare firms.
  3. Care – of, by, and for the people: Accelerated R&D cycles, augmented physician capabilities, and improved precision in diagnosis and treatment all ultimately result in improved patient care, enhanced clinical outcomes, and boosted patient engagement. All three of these acquired companies focus on improving at least one of those factors. And they all allow the acquiring companies’ patients to take center stage.

Digital moves from pilot to program

At a broader industry level, these acquisitions mirror the change in sentiment around digital initiatives. Our research shows signs that enterprises are moving beyond proof of concept to proof of value. While digital, as a market, lends itself to smaller deals with focuses on design thinking, first principles problem solving, and business model redesign, we see these initiatives now scaling up.

Digital HC blog
As the digital marketplace matures, investment activity is only going to intensify. While early adopters are reaping rich rewards, valuations and competition for viable targets are likely to skyrocket. It’s clear that healthcare enterprises see significant business value, and are willing to put their money where their mouth is. Stay tuned to this space for more analysis of what’s happening in the healthcare and digital spaces.