Key M&A trends
Systems integrators look set to continue to be hot M&A targets in 2020 and we expect further market consolidation. The industry landscape is fragmented, occupied by small and niche players, alongside a number of large cash-rich corporates looking to use acquisitions to build out both scale and vertical specialisms.
The trade buyer population is rapidly diversifying as consultancies, IT managed services providers, business process outsourcers and digital agencies have all demonstrated strong acquisition appetite in the sector. Meanwhile substantial private equity interest has helped to heighten competition and push up valuation levels.
Bigger is better
Scale is viewed as vital in order to gain access to the economic and personnel resources needed to win and handle the risk profiles of larger projects; whilst competing more successfully on price. For instance, Accenture alone did 29 acquisitions last year. Accenture prioritises businesses with $15m plus revenue and more than 100 employees to justify the acquisition cost and time completed.
Over a third of systems integrators last year said that finding and retaining employees was their biggest operational challenge. With a shortage of qualified consultants, particularly those that hold specific vendor accreditations, many acquisitions are driven by immediate access to a talent pool. Considering that value is largely driven from this employee base, retaining key personnel becomes the number one priority post acquisition.
Particularly for larger clients, systems integrators demonstrate credibility by developing specific industry knowledge. This is particularly prominent in industries characterised by compliance issues. We see stark reminders of the cost of failure. Vodafone received a record £4.6m fine from the regulator in 2016 after a major update to its CRM account migration caused numerous customer billing errors. It is no surprise that smaller systems integrators that have built extensive expertise in a niche have become sought after acquisition targets.
The need for on and offshoring
With significant disparity between wage demands in the west versus other less developed regions, on-shoring or nearshoring offers access to a cheaper and highly skilled talent pool, which is vital in order to successfully compete. Yet a particularly prevalent trend is that most customers are demanding a single source of control for large-scale projects and therefore offshore specialists are also focusing on building out a complementary onshore presence.
Pay per use models
Businesses which receive small recurring payments through the deployment of “technology as a service”, are likely to be highly sought after assets because of the greater quality of their earnings and a typically stickier proposition, with lower customer churn.
Heightened private equity interest
Historically the UK private equity landscape has been dominated by investment in managed services providers, but this is a trend that is changing, aided by a number of successful exits. Unlike in managed services investors have typically chosen to maximise returns by prioritising organic growth rather than bolt on acquisitions. Many have looked to add a higher margin own IP software proposition and fund aggressive international expansion.