The current economic uncertainties notwithstanding, enterprise digital transformation is a multi-decade, multi-billion-dollar trend, suggesting that the demand for advanced IT solutions will remain high for the foreseeable future, as per the report
The deal activity in the global technology services sector has softened, with over 150 transactions announced in the first quarter of 2023 compared to 270-plus deals in Q1 2022 and over 220 in the first quarter of 2021, according to an EY-Nasscom report.
The report - Mergers and Acquisitions (M&A) Trends and Outlook in the technology services sector - noted that in 2022, the technology service sector proved to be a year of paradoxes.
Despite signs of a slowdown at the end of the year and in Q1 CY23, the technology service sector witnessed a surge in M&A and private equity deals, reaching a total of over $57 billion in 2022, which was more than double the amount seen in 2020 (at over $27 billion).
On the outlook for 2023, the report said that with greater emphasis on emerging digital capabilities, the market is likely to become more cautious and adopt creative deal structures to manage risk.
"Although deal activity has softened, with 150 plus deals announced in Q1 CY23 compared to 270 plus in Q1 CY22 and 220 plus in Q1 CY21, deal activity for mid-sized companies is expected to remain strong across the broader M&A market," according to a statement outlining the findings of the report.
Select segments of strategic buyers and PE (private equity) roll-ups are expected to continue driving the deal momentum.
In 2022, the technology service sector, including IT Services, BPM (Business process management) and ER&D (engineering and R&D), saw an uptick in transaction activity, with a total of 947 deals – the highest number recorded in the past five years.
"The total deal value and volume in 2022 doubled from the levels seen in 2020, though deal value remained relatively steady throughout 2021 and 2022 (excluding two USD 10 billion-plus deals in 2021)," it said.
Private equity participation in IT services deals increased 2.5 times in 2022 compared to 2020 and dominated the large deal (USD 500 million plus) segment with a 62.5 per cent share. Notably, BPM and ER&D services experienced growth of 1.5 times and 1.8 times, respectively, compared to 2020.
Nitin Bhatt, Technology Sector Leader at EY India, said, "The extensive buyer activity across segments is what stood out in the remarkable deal-making over the past two years".
While the first quarter saw a slowdown in deal activity, both strategic purchasers and private equity firms continue to hunt for enhancing their digital and domain capabilities, expanding geographic reach and filling white spaces in their portfolios, Bhatt added.
The report revealed that IT services players are increasingly acquiring an equity interest in IP/product companies to gain access to cutting-edge technology and create differentiation.
"Large strategic buyers are showing significant interest in emerging technologies like IoT (Internet of Things), AR/VR (Augmented reality and virtual reality), Hyper-automation, and Low Code No Code. In order to accelerate their competitive advantage in both emerging technologies and the talent market, there has been a notable increase in technology services investment post-pandemic," the report said.
The current economic uncertainties notwithstanding, enterprise digital transformation is a multi-decade, multi-billion-dollar trend, suggesting that the demand for advanced IT solutions will remain high for the foreseeable future, as per the report.
Sangeeta Gupta, Senior Vice President and Chief Strategy Officer of Nasscom, said that the last 24 months have witnessed a significant shift in enterprise investments towards digital and business transformation.
"Technologies such as AR, VR, IoT and edge intelligence, are now finding applications in manufacturing, automotive, and supply chain," Gupta said, adding the growth areas of technology segments will continue to focus on digital CX (Customer Experience), digitisation, cloudification and digital components that are increasingly being built into all deals, partnerships and M&As.