Frankfurt, Dusseldorf These are golden times for many IT service providers: providers who introduce cloud services, support the development of a data strategy or strengthen IT security have full order books. Despite economic uncertainty, companies are investing in digitization.
Financial investors want to participate in this boom. Private equity firms have been buying IT service providers of all shapes and sizes for a number of years to forge into larger companies. They hope to accelerate revenue and profit growth at the acquired IT service providers.
Figures from the consulting company Alantra for the German-speaking region confirm this trend: Since 2015, financial investors have taken over around 50 platforms for IT services, including Cloudflight, Valantic and Skaylink. These companies in turn made more than 220 company acquisitions.
A wave of consolidation is underway in the hitherto fragmented industry with a few corporations such as Capgemini, Atos or T-Systems and a large number of small and medium-sized companies. For customers, this often means better and more comprehensive services – but sometimes also higher prices.
Intive, for example, is currently on the market and promises to accelerate digital transformation. Owner Mid Europa Partners has chosen Goldman Sachs as sales advisor. Bidders could value the company, which has an operating profit (Ebitda) of 30 to 35 million euros, at 400 to 500 million euros.
Private equity investors pursue two strategies
According to financial circles, the digital agency FFW of the investor Findos is for sale. The company with twelve million euros Ebitda could be valued at 150 to 160 million euros in a deal. Jambit, owned by the founders, could have a valuation of around €70m to €80m with its Ebitda of around €7m if the company changes hands in the near future. The companies declined to comment.
All three sales processes are still ongoing and, despite their different sizes, have one thing in common: there is a high probability that the buyer will be a private equity investor. In the search for attractive returns, companies that deal with digitization are in demand.
>> Read here: Deutsche Telekom stops sale of T-Systems
Two complementary strategies are pursued. Either the company is used as the core for a new IT service provider, or it is a so-called add-on acquisition that supplements an existing company with specialists and opens up new customer groups.
This procedure corresponds to the industry logic. “Nowadays, an IT service provider needs a certain minimum size in order to be able to assert itself in tenders,” says Mario Zillmann, partner at the Lünendonk consulting firm. With more and more orders, a combination of several skills is required. In tenders, for example, consulting and technology topics are increasingly being asked for in equal measure.
An example: When a company introduces the new generation of SAP software, support in adapting business processes is usually required in addition to technical know-how. “There are many small and medium-sized companies that cannot meet such requirements on their own,” says Zillmann.
Investments in cloud and IT security
The market is attractive. Companies have to modernize their IT infrastructure in order to be able to use the possibilities of artificial intelligence and Internet-enabled products (Internet of Things). Modern technology is also required for digital customer contact, whether via website or app. At the same time, investments in IT security are essential for survival.
The IT budgets are therefore increasing in many organizations. “The relocation of the IT infrastructure to the cloud and the issues of the digital workplace, cybersecurity and data analytics are key drivers for digitization, especially in medium-sized companies,” says Mathias Heymann, technology expert at the consulting firm Alantra.
>> Read here: IT service providers are hoping for a cloud boom
The strong fragmentation of the IT services landscape in Germany with simultaneously increasing customer requirements are driving the consolidation and the targeted development of larger platforms. Financial investors supported the process, which is reflected in increasing deal volumes and high valuations.
However, the forces of small providers are often no longer sufficient. “Customer requirements with regard to IT service providers are becoming more complex. This is also reflected in increased project budgets, which small providers can often no longer meet,” says Christoph Bregulla from the investment banking boutique MCF. “Private Equity is ready with the capital and experience to create larger units in what remains a fragmented market.”
“Not just capital, but expertise”
Transactions in recent months show that financial investors are pursuing precisely this strategy. The Munich-based service provider Skaylink, which specializes in the introduction and operation of cloud services and was formed with the help of the financial investor Waterland, bought its small Danish rival cVation in November.
“All investors are looking at software and digitization service providers because they are still growing despite tighter budgets on the customer side, even in the crisis,” says Carsten Rahlfs, Managing Partner at Waterland. For example, many companies are in the process of introducing the SAP program S/4 Hana. “This gives an implementation provider a special boom over the years.”
The Swiss Partners Group, in turn, acquired the Munich-based digitization service provider Cloudflight in November at a valuation of around EUR 400 million and announced initiatives such as strengthening the technical skills of the teams, expanding into new markets and professionalizing internal structures.
In January, the Dutch private equity firm Rivean Capital acquired a stake in Berlin-based competitor Init at a valuation of almost 300 million euros. “Rivean does not prefer investments in ‘ready-made companies’, but in those that can be professionalized,” says Matthias Wilcken, partner at the investment company.
“In order to further develop IT service providers, you not only need capital, but also expertise and specific knowledge of the local market. After all, customers often don’t need the standard product for their IT needs, but tailor-made solutions.”
Resale to McKinsey and Co.?
Once private equity has finished its buy & build strategy with IT service providers, the most obvious option is resale to a consulting or service group, and in some cases an IPO. There have been several such exits in the past two years: McKinsey bought S4G, IBM Neudesic, Accenture Infinity and Allgeier Evora.
>> Read here: McKinsey questions its own strategy
The strategy is not without risk. “With ‘company building’, the challenge is to create a uniform corporate culture and to commit the management team to a goal,” says Lünendonk partner Zillmann. Only then is it possible to advise customers holistically and be an attractive employer.
The partner is convinced that this will not always succeed. “But we won’t see that until later – the wave has only been running for a few years and empirical values are still missing.”
More: The “It doesn’t work anyway” mentality: How Germany is falling behind