As investment bankers covering both the Software and IT Services sectors, we have a vantage point view of yet another emerging trend in today’s technology environment — IT Services companies are quietly becoming active acquirers of Software businesses.
Service companies are evolving
We see the acquisition of Software businesses by technology services companies as the next stage of evolution in their lifecycle and need to further differentiate from competition which is driven by market forces. The services industry is characteristically susceptible to changes across several dimensions at the same time. The needs and demands of customers are continually changing. The technology stack underlying the service offerings continue to experience tectonic shifts. The availability, cost and composition of talent are continually changing. Therefore, as service companies scale, their operating model must adapt to the changing business climate to be successful.
Cloud as a transformative factor
As an illustrative example, one of the biggest changes impacting the IT environment has been rapid adoption of cloud. COVID-19 has created an inflection point that has made the move to the cloud an urgent imperative; it is a foundation for digital transformation. Hitherto, IT Services companies provided a major portion of software development and maintenance work at the site of the customer (on-prem) or from delivery centers at nearshore / offshore locations. With the advent of cloud, workloads are shifting to hosted systems and service models are making the switch to the cloud. This transformation is not easy even for the largest vendors.
Tier-1 and Tier-2 services companies provide large-scale program management and managed services with armies of consultants. As workloads are moved to hyperscaled cloud platforms like AWS, GCP and Azure, IBM etc. program management must shift to the cloud too. Cloud is driving the need for service providers to acquire or build software tools that makes the transition to the cloud and IT program management in the cloud more efficient, economical, and achieved in a timely manner.
Cloud-related Software companies are a hot topic for M&A within IT Service providers:
1) Tools that enable shifting/migrating workloads to the cloud
2) Platforms for modernizing applications — microservices, containerization
3) Cloud security
4) Cloud AI and advanced data models
5) Cloud automation
Based on our conversations with practitioners at leading IT Services firms such as Accenture, Wipro and other leading services companies, cloud will be the dominant factor shaping their business and client strategies for the foreseeable future.
Service companies investing more into products
In September 2020, Accenture announced the launch of a $3B investment program (Accenture Cloud First) to accelerate clients’ shift to the cloud and digital transformation. Accenture has a $2B corpus for M&A; the company expects to acquire product businesses in support of its Cloud First strategy and leverage such IP to gain competitive advantages in its service business.
Wipro Ventures, the strategic investment arm of Wipro Limited, closed on a $150M second fund in 2020 to invest in enterprise software areas such as cloud infrastructure, cybersecurity, analytics and AI; the idea is to establish strategic partnerships with innovative startups and bring their leading-edge solutions to Wipro’s customers.
Anil Raibagi, Global Head — Corporate Development at Wipro, told us in a conversation: “Wipro will invest in platforms and tools that enable solution delivery at higher productivity and software solutions that can enable interoperability/ data migration across platforms. We are also interested in vertical solutions across specific industries.”
Below are some recent transactions of Tier-1 services companies acquiring software / product businesses.
Additional Software sectors highly relevant for IT Service providers:
· Automation: AI/Machine Learning driven technologies that enhance productivity and reduce unit costs. A good example is the acquisition of RAGE Frameworks by Genpact (NYSE: G), a deal advised by the author of this article. RAGE was an AI platform enabling business process automation in the financial services industry. Genpact, a leading BPO firm, saw immense value in using automation to drive productivity, quality and headcount cost savings in the rapid delivery of their outsourced services
· Vertical solutions: industry-specific software platforms that allow service providers to gain competitive strengths through vertical utilities that multiple customers can use. In 2016, Wipro acquired HealthPlan Services (HPS), a leading Business Process as a Service (BPaaS) provider in the US health insurance market. The $460M deal is expected to drive Wipro’s leadership in the health insurance administrative service market
· Technologies that drive non-linear growth: products that enable shift from a headcount-driven linear model to a platform-leveraged model to accelerate growth. In 2018, HCL Technologies acquired Actian for $330M, which provided them mature platforms and accelerators for data management, integration and analytics
· Analytics / IoT: advanced analytics and IoT technologies that can be delivered as-a-Service and scales the service provider’s respective practice areas quickly. Accenture acquired Kogentix, an open-source platform, in 2018 to enable their customers to release value from large data sets much faster and also leverage a talented data team. In 2020, Cognizant acquired Bright Wolf, an Industrial IoT business, to add to its Industry 4.0 expertise and leverage Bright Wolf’s IIoT accelerators
· Interoperability software: wrappers or UI that helps enterprises manage multiple vendors in ecosystems such as cybersecurity where there are numerous product solutions which need to be integrated. In 2019, Wipro acquired International TechneGroup for $45M; ITI provided software that solved complex integration and interoperability issues with use of PLM software and systems.
Allied Advisers professionals have worked extensively with both software and services companies on their sale to Tier-1 and Tier-2 strategic services buyers and PE firms, including IBM, Accenture and Genpact among others. We have also had the privilege of advising large IT services companies such as Tata, Wipro and Infosys on their acquisition plans. Please feel free to reach out to us to evaluate your strategic options for the next stage of your journey.
Ravi Bhagavan is Managing Director with Allied Advisers, a global technology-focused boutique advisory firm headquartered in Silicon Valley with presence in Los Angeles, Tel Aviv and Mumbai focused on investment banking for entrepreneurs and investors. Allied Advisers bankers have completed technology transactions globally for clients. Contact: email@example.com