Digitisation drives surge in M&A for technology services companies

“The fundamental drivers are the surge in demand for digitisation and the need to fulfill this demand and the supply shortages,” said Shivani Nagpaul, technology M&A leader at EY India.

The deal value globally stood at $297 billion, or about Rs 22 lakh crore, in 2021, significantly higher over the past year, the report said.

M&A activity in the industry gained momentum over the last 18 months and many deals were influenced by private equity firms in some manner, it said.

Companies are trying to gain both skill and fill capability shortages through acquisitions.

Instances like Infosys’ acquisitions of Simplus and Blue Acord iCi, Cognizant’s acquisition of Servian, and
Tech Mahindra acquiring DigitalOnUs were all focused on gaining specific capabilities, the report said.

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“Companies will have to determine what makes strategic sense for them in the build versus buy approach,” said Sangeeta Gupta, senior vice president at Nasscom.

Companies are also looking for a way to gain entry into new markets and to gain nearshore delivery through acquisitions.

North America and Europe continue to be focus geographies with over 35% and 45% of all M&A targets located there, respectively. There is also an increasing M&A activity in Latin American and Eastern European regions as companies are seeking a nearshore delivery footprint to their key markets of the US and the UK.

Firms are also opting more for tuck-in acquisitions to augment capabilities and there are select scaled acquisitions enabling industry consolidation, especially in areas like product engineering and managed services.

Demand has been particularly high in emerging technologies in cloud (infrastructure and platform as a service and managed services), digital engineering, and implementation of enterprise SaaS products, cyber security, and data/analytics.

Private equity firms have influenced about 45% of all deal activity as they look to build and operate their portfolio companies, resulting in a strategic approach to acquiring technology services providers, and increased competition within this space.

There have been select large deals in this period, driven by the imperative to access differentiated capability to meet the growing demand for digital transformation initiatives, like Wipro acquiring Capco and the Hitachi-GlobalLogic deal, the Nasscom-EY report said.

Given that demand for digitisation remains strong across industries; some of this deal momentum is expected to continue in 2022.

“Challenges like rising cost of capital and margin pressures and deciding how much to allocate to M&A will be driving future deals, and there may be some regulatory and geopolitical issues in desired geographies as well,” Nagpaul of EY India said.