2015 was very active for mergers and acquisitions, but the big players are holding off buying IT services businesses Reflecting slightly improved macro-economic conditions, 2015 was an active year for M&A activity in the IT services industry, says analyst Nelson Hall. The largest acquisition - for some years - was that of IGATE by Capgemini. And there was a large number of small to mid-sized transactions.
When analyzing this active M&A activity, several findings are striking, it says:
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In spite of all the intensive discussions about portfolio management and digital transformation services and platforms (as software products or BPaaS), most of the M&A activity remains about scale and driven by IT services vendors in the scale of $10bn-$15bn in revenues
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M&A in digital transformation services was limited and driven mostly by Accenture and to a lesser extent by the Deloitte network
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Unsurprisingly, the largest IT service vendors globally have no appetite for M&A in IT services: IBM, HP and Fujitsu, have not made IT services acquisitions in years (with the exception of IBM investing in IaaS). The exceptions were CSC, which is acquiring as it reinvents itself, and Atos, looking, like Capgemini, to gain scale in the U.S.
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Consolidation in the IaaS space has begun.
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Bulk of Transactions in 2015 Was About Scale and Driven by $10bn to $15bn Firms
The largest M&A of 2015 was with Capgemini and IGATE. The extremely expensive ($4bn in cash plus IGATE’s net debt of $400m) transaction was in line with Capgemini’s strategy to gain scale in the US and increase its presence in India. Capgemini now has 100k personnel in its global delivery network; it is now almost as large in India as HCL Technologies and Tech Mahindra. Capgemini will be on a pause for large acquisitions for the next three years, focusing on reducing its debt level.
Atos also had an active M&A year. The company continues to rely on acquisitions to fuel topline growth. Atos now seems to be targeting one to two significant transactions per year (2014: Xerox ITO and Bull; 2015: Unify and Equens pending). After Unifys and Equens, Atos will have very little debt or will be cash positive so acquisitions are very likely in 2016. Atos continues to favor consolidating its main service lines e.g. IT infrastructure services and payment services/commercial acquiring and main geos e.g. Europe and US. It is one of the firms (along with TCS and Cognizant) interested in Perot Systems.
Two serial acquirers, NTT DATA and CGI, were quieter this year, however. NTT DATA’s M&A strategy to date has been mostly geography-led, expanding systematically in geographies where it is not present; currently Asia. Following its everis (€600m in revenues) acquisition, there was little activity in 2015
CGI has now its net debt at CAN 1.8bn: the company has been actively looking for some time at large opportunities preferably in the U.S. financial services and utilities sector, and also potentially in the UK, and in software products.
“We are expecting more activity from both NTT DATA and CGI in 2016. And there is the Perot Systems situation, with Dell reported to be looking for $5bn (making it, like IGATE, a costly buy),” it says.
Looking at the largest IT firms globally (who also have software and hardware businesses) which target enterprises (and not the consumer market): HP, IBM, Microsoft, Cisco, Dell and EMC and Oracle: none of those firms has any appetite for IT services, apart from IaaS cloud:
Microsoft, Cisco and EMC have no interest in diluting margins by acquiring IT services, it appears, according to Nelson Hall. Dell in the wake of its acquisition of EMC will float SecureWorks, its managed security services business ($245m in Q1-Q3 2015 revenues) and is examining the sale of its non-support enterprise service business (largely the legacy Perot Systems business) it had acquired in 2009.
Building a business up as a target is one of the themes of the European Software and Solutions Summit, to be held in London in April 2016; more details here: