IT Firms Focus on Acquisitions to Tap New Revenue Streams in 2023
Last Monday, Quest Global, a provider of engineering services, announced that private equity firm Carlyle will take over for Bain Capital and Advent, who were leaving the business.
Despite weak revenue growth and global macro challenges, IT companies are acquiring rival companies. Private equity fund transactions are also on the rise.
Last Monday, Quest Global, a provider of engineering services, announced that private equity firm Carlyle will take over for Bain Capital and Advent, who were leaving the business.
Happiest Minds, a midcap IT company that only made one acquisition this year, claimed it is in talks to buy another 2-3 businesses. Thoucentric, a specialized consultancy company headquartered in Bengaluru and 450 employees, was bought by Xoriant last week. ChrysCapital, a PE company, purchased Xoriant in January of this year.
This quarter, two high-size companies—Infosys and HCLTech—acquired some of their client’s operations. As part of the $2.1 billion agreement with Verizon, HCLTech said last week that “a select group of Verizon Business Global Customer Operations staff will transition to HCLTech”. Infosys purchased Danske Bank’s IT centre in India, which employs more than 1,400 people.
According to UnearthInsight’s forecast, Indian mid-sized IT services companies would dominate the M&A and consolidation race in FY24, with over $2 billion spent across 25 to 35 SME acquisitions.
According to Pareekh Jain, the founder of Pareekh Consulting, “Valuations become reasonable when the market is down. Acquisitions during these periods provide businesses with fresh opportunities to expand their skills in new sectors and service areas. Additionally, it fosters business expansion in less robust regions.
Jain further mentioned that lately, PE firms have invested in three IT companies: Xoriant, R Systems, and Encore. As foreigners took over as CEOs, many businesses also saw changes in their top management. They exhibit their new way of thinking in these corporations’ recent acquisitions.
Happiest Minds, Mphasis, Sonata, and LTTS, are the additional corporations that have acquired businesses this year. Even Coforge is looking aggressively for a firm to buy in the data analytics and cloud sectors.
“Especially when the market is down, it creates opportunities for us to drive acquisitions in competency and capability areas, which are at the core of our focus,” said Sukamal Banerjee, CEO and MD of Xoriant. I assume that even other organizations consider this a chance to follow suit. While it is not valid for his firm, Banerjee continued, many would choose the inorganic path to accelerate their growth when organic growth is slowing down.
According to UnearthInsight CEO Gaurav Vasu, three main factors—a slowdown in technology investment, client-vendor consolidation, and a decline in the number of tech services companies listed—are driving SME tech consolidation.
The ever-evolving technology landscape in 2023 witnesses Information Technology (IT) firms making significant moves to strengthen their market position, expand their portfolios, and tap into new revenue streams. One of the most prominent strategies deployed by these firms is through mergers and acquisitions (M&A).
The IT domain is notorious for its rapid pace of innovation. What’s groundbreaking today can become obsolete tomorrow. Companies need to update their offerings to stay ahead of the competition consistently. Instead of developing everything in-house, which can be time-consuming and expensive, acquiring firms with the desired technology can significantly speed up the process.
One of the primary reasons behind acquisitions is the opportunity to diversify. For instance, a cloud service provider might want to step into AI-driven services. The provider can integrate AI offerings by acquiring a startup specializing in AI without starting from scratch. This saves time and allows the firm to present a broader spectrum of services to its clients.
When IT firms acquire other companies, they’re not just purchasing technologies or services but often tapping into an entirely new customer base. This acquisition strategy is a fast-track method for expanding clientele, ensuring consistent revenue growth.
In today’s data-driven world, information is gold. Companies with vast data repositories can benefit significantly from the right tools and platforms to extract valuable insights from this data. Acquiring firms that specialize in data analytics, business intelligence, or other related domains can open new revenue streams from existing datasets.
With technological advancements, there needs to be a consistent gap in the required skills. For instance, with the rise of quantum computing or advanced neural networks, there’s a demand for specialized skills. Instead of investing in training, which is a longer route, IT firms often find acquiring a company with the requisite talent pool more feasible.
When IT companies grow in size through acquisitions, they often enjoy the benefits of economies of scale. Larger companies can negotiate better deals, streamline operations, and enjoy cost benefits which, in turn, can result in better pricing for their clients and increased profitability.
For many IT firms, acquisitions are a passport to enter new geographical markets. By acquiring local firms, they can gain insights into regional market dynamics, culture, and regulations, ensuring a smoother entry and a higher chance of success.
In some cases, IT firms acquire budding competitors for their offerings and to eliminate potential future threats. Such acquisitions can safeguard a company’s dominant market position and ensure sustained revenue growth.
While acquisitions seem like a golden goose for IT firms, they come with challenges. Cultural integration, technology harmonization, and staff retention are potential roadblocks. Successful M&A requires a strategic approach, a clear understanding of the objectives, and robust post-acquisition management.
The year 2023 has seen an uptick in M&A activities among IT firms, underlining the importance of this strategy in the contemporary business landscape. As companies continuously seek novel avenues for growth, acquisitions present a tested route for accessing new technologies, markets, and revenue streams. However, as with all significant decisions, firms should approach investments judiciously, weighing potential benefits against inherent risks.
