Digital transformation driving M&A in IT services

Since the start of 2023, Australian deal activity has largely remained subdued. The reduction has largely been attributable to persistently high interest rates, making debt financing of deals more expensive, and economic and geopolitical uncertainties curbing deal-making appetites for investors, management teams, and board members alike. Valuation gaps between buyers and sellers certainly haven’t helped either. However, one sector has been defying this trend - Business Services.

A sector driven by digital transformation demand

Fuelled by the post-COVID acceleration of digital adoption, transformation and disruption, Business Services and in particular, IT Services, has continued to experience buoyant levels of deal activity – both from strategic buyers and financial sponsors, namely private equity.

The rapid pace of digital innovation necessitates that companies not only keep up but also stay ahead of technological trends. This is particularly the case in Australia where digital adoption by individuals is among the highest levels globally, and among the public sector, Australia ranks seventh in the UN’s E-Government Development Index. Consequently, the Australian private sector finds itself at the forefront of digital transformation, making domestic operators in this sector attractive targets for international investors. IT services also remain a very fragmented sector, and therefore, gaining scale through consolidation is an inevitability.

IT services is defying Australian deal activity trends

Growth in Australian private equity (PE) deal activity alone in the Business Services sector is up 200% in March 2024 compared to the March 2023 quarter. Moreover, Business Services deals represented almost a quarter (23%) of all PE deals locally during the March 24 quarter.

Source: Preqin

This growth, which has been underpinned by IT Services businesses, is being driven by a number of key factors from the acquirers’ perspective including:

• wanting to leverage technological innovations to enhance competitive advantages
• enhancing digital capabilities to expand service offerings to meet the growing and evolving technological landscape and end-client demands
• capturing scarce talent across these new skilled technological areas.

These above factors are clearly evident through a number of recent transactions:

Velrada, globally awarded Microsoft Partner, sold to ASG Group

The acquisition of Velrada by ASG Group, a subsidiary of Nomura Research Institute, enabled ASG to boost its capacity for seamless delivery of Microsoft’s technology, enhancing their global scale and reach into new geographical markets. This strategic alliance also enriches ASG’s service offerings and deepens their relationship with Microsoft.

100% acquisition of Auto-IT Group by Perseus Group (Constellation Software Inc.)

The acquisition of Auto-IT, one of Australasia's largest dealer management system (DMS) solutions and IT consulting services providers helped to expand Perseus' access and footprint into a broad range of vertical DMS markets including automotive, agriculture, trucking and construction across ANZ and APAC region. The combination of software and services as a revenue model continues to be a strong driver of increased customer spend and retention metrics.

Bain & Company acquires Max Kelsen’s consulting and managed services divisions

The enthusiasm for generative AI among Australian business leaders underscores the urgency and strategic value of acquisitions in this space as the majority of executives anticipate significant industry transformation to result from generative AI within the next three years. However, many cite a lack of technical talent in this area as a key challenge. Bain & Company, Inc.'s acquisition of Max Kelsen's consulting and managed services divisions is a prime example of addressing this capability gap. By integrating Max Kelsen’s Artificial Intelligence (AI) and Machine Learning (ML) solutions, Bain is now able to offer more impactful solutions to its clients with new, additional expertise in what is currently the world’s greatest growth thematic.

Brainlabs acquires Australia’s biggest digital independent media agency, Sparro

Brainlabs' recent acquisition of Sparro also highlights the effectiveness of acquisitions to access scarce digital talent. By acquiring Sparro, the largest independent digital media agency in Australia with a team of over 110 professionals, Brainlabs significantly bolstered its capabilities in tech and data-driven strategies, marketing automation, conversion optimisation, SEO, and programmatic media. This acquisition not only expands Brainlabs' footprint in the APAC region but also brings in Sparro's award-winning expertise and high-profile client base, addressing critical talent needs and enhancing Brainlabs' overall digital focus.

How BDO can help

While acquirers have remained broadly cautious with their investments across many sectors, the IT services sector has demonstrated strong growth as acquirers look to seize capability and scale in high-demand areas such as digital transformation.

Demand for technology and digital services is only forecast to increase further, as businesses of all sizes feel the need to bring in specialists to help them navigate the rapidly changing technological environment.

For businesses in the IT services sector contemplating a sale or acquisition, engaging with a knowledgeable M&A team like BDO can be critical. M&A transactions involve complex financial, regulatory, tax and operational issues, and having the right team on your side is crucial.

As well as deep technology sector knowledge and suite of services, our experts are able to draw upon specialist capabilities from across the firm and leverage our international network in finding the right buyer set, ensuring that transactions are completed efficiently and effectively.

Reach out if you want to explore how we can help you through the M&A journey.