IT Services
Q1 2024 Update
Q1 2024 IT Services Landscape Overview
2023 Recap
o High interest rates and inflation dampened M&A activity as Strategics sought to protect cash and PE adjusted to a new debt reality
o Resilience and profitability became priorities, with a shift away from riskier investments and acquisitions
o Mixed market – While transaction counts declined, total deal value remained strong as larger, A+ companies were first in the M&A line
o Tepid business environment – Any growth in spend was most-commonly observed with existing clients; new client acquisition was relatively muted
M&A Outlook – Remainder of 2024
2024 State of Play
o IT budgets are rebounding – the long-term spend outlook is extremely favorable given ongoing IT talent shortages, fundamental cloud needs, and AI adoption
o Deal activity is trending above pre-pandemic levels and valuations have firmed up, indicating very healthy acquisition demand
o Buyers continue to pay up for strategically-valuable IT services assets (differentiated focus, geographic presence, regulation-intensive industries, etc.)
o However, buyers continue to employ more scrutiny in selecting assets, which may result in more exhaustive due diligence and more deal structure
IT Services M&A is stabilizing, and asset interest across all buyer types remains significantly elevated – overall market sentiment is improving, and signs continue to point to an uptick in volumes 2H 2024 The MSP space remains highly active as platforms seek differentiation via industry vertical focus, geography, and capabilities expertise – buyers are increasingly going downstream on scale for strategically-valuable targets There is sustained demand for enterprise software consulting and implementation partners across the board (Microsoft, Salesforce, Snowflake, Databricks, Atlassian, Adobe, Workday, etc ), with recent notable chatter around ServiceNow, SAP, and Oracle.
Worldwide IT Spending Forecast – As of January 2024
Source: Gartner
IT Services M&A Activity – Deal Count by Quarter
More supportive fundamental business environment
IT Services Public Markets
Note: 1. Market data as of 3/31/2024
Public Valuations
Historical Index Performance
Share prices have recovered from a low point in 2023 – and, despite some choppiness in 2024, are showing strength on a historical basis and tracking above pre-pandemic levels
Spotlight: Project Rhino Sell-Side Case Study
Process Overview – What Happened?
Scaled VAR / MSP / MSSP firm seeking a growth partner, preferably a Financial Sponsor or PE-Backed Strategic
HVA served as the exclusive advisor to target, supported the management team end to end, and facilitated a competitive process with a high level of buyer engagement
PE majority buyout investment
– HVA identified motivated buyer with strong MSP thesis and satisfied transaction objectives across the management team
Key Value Drivers – What Mattered?
Buyer Fit
Target
USPs
Considerations
• Alignment with buyer thesis and fit with existing investments
• Seller revenue base, maturity, and scalability as a platform investment
• Leadership team equity rollover given proposed deal structure
• Financial services and PE go-to-market focus
• Growing and premium-margin MSP / MSSP segment
• VAR “power” – unique commercial advantages of enterprise cyber software re-sale
• Balancing target’s financial, operational, and cultural go-forward objectives
• Finding buyer who could get comfortable with, and even leverage, the VAR segment
• Target finance team transition during process
Market Observations – What Did We Learn?
• Actively consolidating MSP / MSSP landscape with emphasis on commercial focus and capabilities – dwindling number of platform targets that are both scaled and uniquely positioned in the market
• Aggressive interest from all buyer types (PE-backed platforms looking for add-ons, PE groups seeking a platform, and Strategics) – good matches are a function of a target’s specific identity and a buyer’s business priorities
• For a scaled target business that has diversified services or is in a state of service transition, a sum-of-the-parts (SOTP) valuation approach likely makes the most sense, provided the “parts” are of material size
• Beyond the big pieces, growth trajectory, gross margin profile, segment profitability, client base composition, client retention, revenue visibility, business development activities, strength of team, and ongoing financial performance throughout a process are all critical valuation factors
M&A Activity – Notable Transactions
UNDISCLOSED JAN 2024
• Evergreen, backed by Alpine Investors, acquired Lancom Technology, a New Zealand-based MSP that specializes in software development, cloud services, and business process automation; Lancom also has key partnerships with AWS and Microsoft
• Geographic presence and focus continue to be top of mind for acquirers (after ~75 acquisitions, this is Evergreen’s first transaction in the ANZ region) – this deal also highlights the range of capabilities and specialties that are interesting for MSPs, including software development
UNDISCLOSED JAN 2024
UNDISCLOSED JAN 2024
$66.0M FEB 2024
UNDISCLOSED FEB 2024
UNDISCLOSED MAR 2024
• Sourcepass, a New York City-based MSP and MSSP, acquired California-based Microsoft Cloud firm Big Green IT; Sourcepass has been highly acquisitive (11 transactions since March 2022), and adding Big Green IT will expand its expertise in Microsoft Copilot, Teams, Azure, and Microsoft 365 Cloud solutions
• The Microsoft enterprise ecosystem is evolving rapidly, and consulting and implementation specialist partners continue to garner significant attention in the marketplace
• Accenture acquired New York City-based Impendi, a sourcing and procurement services provider with a focus on private equity clients; Impendi specializes in data-driven solutions and analytics and also works with clients across financial and professional services, manufacturing, consumer goods, and technology
• Data & analytics expertise is a top M&A priority in the market – and consistent with what HVA observed on Project Rhino and the OperationsRx transaction, selling value-add services into private equity firms and their portfolio companies is a very attractive commercial channel for buyers
• Wipro made a significant strategic investment into Florida-based Aggne, an insurance technology specialist offering a wide range of services designed to help insurers transform operations, drive new efficiencies, and deliver optimal customer experiences; Aggne is a premier partner in the Duck Creek ecosystem and also has partnerships with Socotra and Origami Risk
• Large consultancies and integrators are on the hunt for competitive advantages (end market or capabilities expertise), such as Aggne’s differentiated services to clients in P&C insurance
• Chicago-based private equity firm CIVC made a platform investment in Maryland-based Hightstreet IT Solutions, a cloud-focused Oracle implementation and managed services provider; Highstreet provides a full suite of services across the entire cloud lifecycle for clients in the education, financial services, government, healthcare, non-profit, and commercial sectors
• PE investors are as hungry as ever to get into the IT Services space – CIVC has successfully executed on its active IT services thesis, partnering with platforms Datavail (data managed services), Allata (digital engineering services), iVision (managed IT services), and KeyData (cybersecurity)
• Anatomy IT, a leading healthcare IT platform backed by Atlantic Street Capital, acquired Minneapolisbased Manta HealthTech, a healthcare-focused managed IT services firm; Manta is focused on intelligent digital transformation, cybersecurity, and value-based care delivery and payment models and serves medical, dental, optometry, and veterinary care organizations
• There is widespread, pressing demand for technology and information security modernization across healthcare – global healthcare IT spend is expected to at least double from current levels by 2027
Additional Select IT Services Transactions
IT SERVICES
HVA IT Services Expertise
About Harbor View Advisors
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