M&A, the new survival technique

HCL Technologies acquires Strong-Bridge Envision to enhance their digital consulting and transformation offerings. Microsoft acquires Bonsai an AI startup that enables developers with or without knowledge of machine learning to be an AI developer, Salesforce acquires Mulesoft to improve their API management capability and the list goes on.

Every year we see a chain of mergers and acquisitions (M&A) in the IT industry. Every year we see innumerable startups coming up and moving ahead. We see many of them keep growing meaningfully, and one day gets acquired by a larger more established organisation. But why are so many mergers and acquisitions taking place?

We all know that our industry is under a lot of pressure today. The industry, which used to take a double-digit growth rate for granted, is struggling to make a single digit growth today. Even the big players are fighting tooth and nail for a couple-of-hundred-dollar deal, and not leaving them on the table on account of being too small.

It’s a fiercely competitive market today. And, in the midst of this we are also seeing quite a few significant mergers and acquisitions happening in the IT services space, be it infrastructure led or applications or both. Is it a survival mechanism?

According to Equiteq’s IT Services Global M&A Report 2018, M&A activities have definitely slowed down in 2017, as compared to 2016, but we still see a continuous stream of M&As, especially done by the IT Majors like Accenture, CGI, Cap Gemini, ATOS etc. The deal volume has fallen almost 9% annually, and almost a third of the deals are by the giants who go through serial acquisitions.

Cross-industry mergers

Why are we seeing so many M&As? The reasons are varied. But the most common one seem to be acquiring technical capability, digital or otherwise. The primary goal behind acquisition is no longer acquiring more client or more market share, as it used to be a few years back, but only ‘acquiring capabilities’. Capability driven M&As can also be of two kinds, one for acquiring technology IPs or assets and the other pure scale in certain capability areas.

Acquiring technology assets seem to be the number one driver. This is also resulting in ‘cross industry mergers’, i.e. banks acquiring fintechs focusing on Banking technology assets or Telecom companies acquiring IT companies focusing on Telecom technology assets, Insurance companies acquiring Insuretechs and so on.

Come to analyse it, sometimes I wonder whether the acquisition spree is really a race to acquire capabilities or is it a race to ensure some growth in today’s tight market situation that makes organic growth so difficult?

We are seeing that the acquisitions today are focused on a few capability areas, Cloud, Analytics, IT security, AI, RPA etc. The available pool of skilled people are so few that companies are relying on acquisition to build the capability. The recent case in point is Capgemini acquiring the small staffing company Liquidhub, which focuses on staffing those with digital capabilities.

Another point to ponder about, in this context, is whether it is better to acquire companies for its technology IP or for its people scale. In today’s market, where we are moving more and more towards automation, reducing the need for adding people, the former definitely seems a better prospect. But scale based on high-end skill is worth pursuing.

So what does it really mean for the industry at large? It gives a much-needed growth opportunity to the acquirer in today’s tough-to-grow market situation. It also does help them build capabilities faster and equipped by the newly acquired skills and capabilities enable higher growth in the future. Most M&As today are smaller in size, where the acquirer is looking to plug in capabilities, where they are falling short.

On the other hand, it also gives a serious ‘wealth creation’ opportunity for smart entrepreneurs, who are focusing on building valuable niche capabilities. They can invest, create value in the area of digital transformation and disruption and make profitable exits. Both corporations and private equity firms are continuously scouting for such small, niche companies.

Accenture has made as many as 30 acquisitions in the last year and continue to look for more. So, we should see more and more smart entrepreneurs in the IT Services arena and that’s truly encouraging for our industry.

(The writer is EVP and Global Head of Services, in a leading tier 2 IT company)