Tag: M&A news

Technology Synergy Drives M&A Spike in the Banking and Financial Services Industry | Blog

Technology used to be an enabling strategic pillar for banks and financial services (BFS) organizations. Now, it is the core of these firms’ value creation playbooks. Indeed, BFS firms are building digital capability platforms using modern technologies to create what we have named SUPER — or Secure, Ubiquitous, Personalized, Easy, and Responsive — banking experiences and optimized operations.

This move to digital would require BFS firms to invest disproportionately in building these industry platforms at speed and scale. M&As (merger and acquisitions) are helping BFS firms trigger this transformation agenda by siphoning off cost synergies from mergers and investing in technology rationalization, modernization, and innovation.

Bloomberg estimated that more than US$500 billion worth of BFS M&A deals happened in 2020. That magnitude is the second highest since the 2008 financial crisis and only lags 2019 by a razor-thin margin due to the pandemic induced slowdown. Our recent analysis found that eight out of ten of the largest M&As in the BFS industry in 2020 mentioned technology synergy as one of the key drivers for the transaction.

Traditionally, acquisitions served as an opportunity to enter new product lines and/or geographies, gain new capabilities, and achieve cost savings and operational efficiencies via technology modernization and streamlining processes and systems. The recent acquisitions in the BFS space have focused additionally on technology synergy and the ability to weaponize the combined technology estate. Technology synergy is achieved in these M&A transactions by:

  • Acquiring digital capabilities and solutions
  • Achieving scale that makes economic sense to invest in building industry platforms using cloud, APIs, and data & analytics technologies
  • Acquiring digital skills
  • Combining discrete technology components of merged entities to create industry platforms.

As mentioned in the image below, leaders at BFS firms undergoing such M&As stress the importance of digital as a lever for these strategic acquisitions. For instance, in the merger of First Citizens BancShares, Inc. and CIT Group, Ellen R. Alemany – Chairwoman and CEO of CIT, who will assume the role of Vice Chairwoman of the combined entity – highlighted how well-positioned the two firms will be to leverage their product portfolio and technology across the franchises, and make additional investments in technology to enhance the customer experience.

Focus on tech synergy causing a spike in M&A activity in BFS

Expansion of the IT estate to build digital capability platforms has created a paradigm shift in business cases for M&As. The platform-based economy not only enables new businesses and systems but also facilitates rapid integration across merged entities.

A notable example is S&P Global’s bid to buy IHS Markit in December 2020, which serves as an example of a technology-driven merger in the financial information and credit rating space. It has created an opportunity for the two firms with unique and harmonizing assets to create a formidable data and technology offering. IHS is the industry frontrunner in leveraging platforms for underwriting corporate stock and bonds and trade processing. The combined entity will become a data powerhouse for complex financial products, and this will directly funnel exponential growth for S&Ps credit rating service, which comprises 40-50 percent of its revenue.

Skill acquisition is gradually gaining popularity across multiple deals. Aspects like digital identity and security are addressed in Moody’s purchase of Regulatory DataCorp (RDC), a provider of KYC/AML data services, and Mastercard’s acquisition of RiskRecon for cybersecurity services. In the platforms/technology space, Charles Schwab acquired the technology and intellectual property of a fintech, Motif. And customer experience took centerstage in Goldman Sachs’ acquisition of United Capital, with a focus on scaling up its UI/UX products. Talent acquisition is another factor that is gaining ground across some of these mergers.

In November 2020, PNC Financial Services acquired the US Operations of the Spanish lender BBVA. And most recently, Huntington Bancshares acquired TCF Financial. The banks are not only increasing their asset size and market reach but also gearing up to save costs by optimizing their IT estate and branch networks. These cost savings are being funneled to build better digital experiences as more customers are opting for online and mobile services for their banking needs.

Similarly, significant deal activity is expected in the asset management space. For example, Macquarie Group is set to buy Waddell & Reed for US$1.7 billion. This traction in asset management is driven not just by pressure on fees and revenue but also by increased costs attributed to technology and digital spending. Asset management firms with deep pockets are already betting heavily on the success of platform- and data-based niche firms. For instance, BlackRock recently purchased minority stakes in the platform-based alternative wealth management firm iCapital Network and the robo-advisor Envestnet.

Our analysis suggests that the M&A trend will pick up for regional and community banks in a bid to gain scale. This is critical to compete with larger players as customer intimacy and relationships move from physical to digital. They will be better equipped to build new capabilities in robotics, AI/ML, and advanced analytics as banking increasingly digitizes. The combined entities will also have a larger pool of resources wherein better skill-to-talent match can be achieved.

BFS M&As will be a boost to the consulting and IT services industry

M&A’s will entail increased spending in post-merger integration and consulting expenditures in the short term. BFS firms will need partners that can create a modernization roadmap for the combined entity. The merged entities can gain significant cost synergies by rationalizing their vendor portfolio and IT estate, as several applications and platforms will become redundant. Hence, a modernization roadmap will enable value creation in the long run.

Of course, the merged entities must also make rapid changes in their working models, delivery strategies, and sourcing decisions to thrive in the new normal. Investments in some specific technologies/tools will ensure growth and continuity of operations. Digital acquisition is thus becoming a table stake as firms determine the right valuation even before they formulate the integration strategy.

Large BFS firms are looking at targets that help them create a digital service model for the future. We are already seeing increased M&A activity among regional banks, asset management firms, and brokerage houses. As we inch closer – hopefully – to the end of the pandemic, BFS firms will be eyeing M&A opportunities that deliver technology synergy and associated business transformation benefits. Picking the right segment, target, and timing of these initiatives will be crucial.

Discover even more insights in the BFS industry in our recent research and reports:

Or if you would like to understand more about the impact of the increased M&A activity in the BFS industry, please reach out to us at [email protected] and [email protected].

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

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.

NIIT Technologies’ likely merger with Hexaware could benefit both, say experts | In the News

Baring PE on April 5 announced the acquisition of a 30 percent stake in NIIT Technologies (NIIT). Experts believe this opens up the possibility of the PE firm considering a merger of NIIT with Hexaware, another Mumbai-based mid-cap IT company in which it owns a majority stake. A merger would prove beneficial for both the companies, experts said.

Yugal Joshi, Vice President, Everest Group, a management consultancy firm said, both are small vendors and will benefit from this combination given the portfolio are complementary.

Read more in Money Control

Wipro Bets on $1.6-Billion Alight Deal to Tide Over Growth Woes | In the News

After several quarters of slow growth, IT major is seen to have regained the momentum with the clinching of the $1.6-billion Alight deal earlier this month.

The contract has not only cemented the position of its chief executive officer (CEO) Abidali Neemuchwala, it has also proven the ability of the current management to successfully chase and close larger deals that are becoming scarcer in the market.

“This is the second mega deal for in the past four years after the Taken together, these deals help address the persistent growth issues that has experienced in the past couple of years,” said Peter Bendor-Samuel, founder and CEO of global advisory firm, Everest Group. “As these factors take hold, we anticipate that Wipro’s growth prospects are improving, and will start to look more similar to its peers,” he added.

Read more in Winslow Record

How can we engage?

Please let us know how we can help you on your journey.

Contact Us

  • Please review our Privacy Notice and check the box below to consent to the use of Personal Data that you provide.