September 2020 Update - Avendus
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September 2020 Update
The world is witnessing unprecedented times. The pandemic has challenged governments, companies and people to rethink the basics of how they
operate. Economies have contracted globally with the pandemic affecting developed and developing economies indiscriminately. The impact of the virus
has been skewed for various industry verticals, with travel and hospitality being hit the worst, and telecom and utilities seeing an expansion in some
cases. Technology has emerged as the key differentiator, underpinning the performance of companies across industries.
In this thought paper, we have tried to capture the pandemic’s impact on the IT outsourcing industry and associated deal activity. We have tried to cover
the following key topics:
1. Overall implications on IT industry as predicted by various renowned analysts. The actual performance delivered by IT Services & BPM players for the
quarter ending June 2020 along with their outlook for this year
2. Insights from our discussion with 200+ investors worldwide including both strategic buyers & private equity investors
3. Valuation trends over the last 5 years and how stock markets have shown a sharp rebound to pre-COVID levels in the last few months
4. Insights into deal activity over the last 6 months
Note that this report is an update to our earlier report (link) published on [ Date ] around Implications of COVID on Technology Outsourcing industry and
associated M&A deal activity.
2• IT Services industry is forecasted to contract • Mature buyers (like Accenture, Cognizant, • IT / BPM stocks have rebounded sharply post • Technology deals have started showing an
by 0-10% as per various analysts Atos) have maintained their pre-pandemic rate March 2020 uptick over the last couple of months
• Key challenges include delay of existing of acquisitions • Most categories are trading at all-time highs • 60+ technology services deals have been
projects and cut down on discretionary spend • 63% of strategics are actively looking to except for traditional ER&D players and announced in June-Aug 2020
• Acceleration in cloud adoption has led to 4% acquire; 34% looking at deals opportunistically diversified BPM • Next-gen digital transformation players
growth in infrastructure spending and only 3% have put M&A on hold • Digital Engineering players have outperformed focused on cloud, analytics & digital OPD have
• IT services vendors have witnessed 0-5% • Strategics have become more proactive with with their share prices increasing by 108% garnered maximum attention
degrowth in QE Jun’20 while BPM companies their acquisition criteria with further focus on since the fall in March • Capability expansion has been a key driver of
have been more impacted with ~10% next gen technologies • EV / Revenue & EV / EBITDA multiples are deals for strategics
degrowth • 65% of PE funds are actively looking to back to pre-COVID levels • PEs have become very active contributing to
• IT services vendors have expanded margins acquire; 33% looking at deals opportunistically • Valuations continue to hold up in private 15% of the deals as compared to 10% earlier
by average 1.5% whereas BPM companies' and only 2% have put M&A on hold markets with deals happening at attractive • We are recommending potential sellers to
margins have contracted by 1% for QE Jun ‘20 • Most PEs have a lot of dry powder and are valuations launch sale / fund raising processes in case
• Companies focused on digital transformation, looking to actively deploy capital • Investors are using back-ended earnout the company’s financial performance and
analytics, cloud and cybersecurity continue to • Continued availability of debt at attractive structures to get comfort and for downside trajectory is strong
grow in 2020 interest rates is providing support to PE buyout risk protection
activity
• Investors have formed thesis by vertical
(staying away from retail, hospitality & travel
focused firms)
34
• Deals are being restructured to • New opportunities are emerging as clients start to revisit their
manage immediate priorities digital transformation journey with high-speed secure infrastructure
with a focus on relooking at and multi/hybrid cloud leading as the emerging tech spend areas.
Worldwide IT Services terms related to fixed-costs, Data, Artificial Intelligence, IoT and Cyber Security remain the key
spending is projected to payment-term flexibility, tech themes
total $1.1 trillion in resource reallocation
• Infrastructure spending is expected to post moderate growth of 4%
2020, a decline of 6.8%
• Discretionary projects being as businesses continue to fund existing cloud deployments while
from 2019
75% of the respondents halted or re-scoped some may even look to accelerate their cloud projects during the
expect clients’ business de- remainder of the year as a means to control costs and defer capital
• Innovation PoCs with unclear
growth in FY20-21, with 40% spending on upgrades to on-premise datacenters and applications
ROIs being de-prioritized
of these respondents
expecting a De-growth of 5%
Worldwide IT spending is
expected to decline 5.1%
in constant currency IT services spending will decline, mostly due to delays in new projects, but a large portion of services revenue will
terms in 2020 to $2.25 be relatively protected from spending cuts where it relates to the management, support and operations of
trillion technology, which is now fundamental to business performance and viability. At the same time, many companies
are also reluctant to reverse course on digital transformation, which is central to business strategy
5-1.0% 3.5 to 4.5% -1.9% -9.0% No guidance shared 2.9% -2.5% -5% to 3.5% 0.4%
-5.0% No guidance shared 5.4% -4.6% No guidance shared -1.1% -16.3% -2.5% to 3.5% -4.5%
-6.3% No guidance shared 1.5% 2.0% No guidance shared 1.4% -9.7% -5% to -3.5% -6.7%
-2.4% 0.0% to 2.0% 1.2% -0.9% 0.0% 4.2% -9.0% No guidance shared 0.0%
-3.4% -2.0% to -0.5% -0.8% -8.2% 3.3% to 6.0% -1.3% -8.3% -5.5% to -0.5% 1.4%
-4.0% 1.5% to 2.5% -2.7% -12.7% No guidance shared NA
-3.4% No guidance shared 0.9% 3.1% No guidance shared -0.5%
-3.3% 6.0% 0.0%
-7.3% No guidance shared -0.6% -5.0% No guidance shared 2.1%
4.8% 7.4% to 8.5% 1.7%
-6.3% No guidance shared 1.4%
1.4% No guidance shared 1.0%
-1.7% 6.0% to 10.0% -0.2%
-2.9% 8.5% -0.1% -4.6% 11% -1.6% -11.2% No guidance shared -0.2%
Latest quarter revenue growth (QoQ) Revised Revenue Growth Guidance EBITDA Margin Change for QE Jun 2020
Source: Company press release
6 Note: All the above stats are for quarter ending June 2020. The growth guidance is for FY21 / CY20 unless specifically mentioned otherwise8
• Strategic buyers have gone back to the drawing board to redefine their
Refocusing M&A acquisition strategies and deploy capital more efficiently
3% Initiatives • The bar is higher now and buyers are going ahead only where there is clear
rationale
• Buyers are more focused in their acquisition criteria and are looking at smaller
Looking To Fill
targets with focus on next-gen digital capabilities like cloud, analytics, digital
Specific Gaps
34% transformation etc.
63% • Buyers are conducting client specific diligence and trying to get comfort on
Target Specific future projections and visibility on pipeline
Dynamics • Buyers are also forming thesis by verticals (staying away from retail, travel &
hospitality focused assets)
• Buyers are trying to get their arms around conducting the entire acquisition
Continue to be acquisitive Process Related
virtually without the ability to interact with target’s management in-person
Dynamics
Looking at deals opportunitically • The diligence period is elongated for most buyers as they are trying to buy time
Put a pause to M&A activity
• Valuation expectations of buyers have moderated but deals continue to happen
Valuation & at pre-COVID levels
Structuring
• Back-ended earnout structures are being used to get downside risk protection
9 Source: The above analysis is based on primary research and interaction with IT outsourcing majors across US, Europe & India over the last 5 months (Apr-Aug 2020)Availability of Dry • Lot of dry powder is available across PE funds and most are actively looking to
2% Powder deploy capital
Focus on Portfolio • Initially most PEs were focused on trying to assess impact of COVID on their
33% Companies portfolio companies and trying to solve their issues
65% • Buyers are trying to get their arms around conducting the entire acquisition
Process Related virtually without the ability to interact with target’s management in-person
Dynamics
• The diligence period is elongated for most buyers as they are trying to buy time
Continue to be acquisitive Relook at Pre- • Most funds are doubling down on assets that they knew historically to take
Existing Connects advantage of their pre-existing relationships
Looking at deals opportunitically
Put a pause to M&A activity
10 Source: The above analysis is based on primary research and interaction with PE players across US, Europe & India over the last 5 months (Apr-Aug 2020)1,369 S&P 25% 36%
Large Cap IT 30% 44%
Mid Cap IT 50% 81%
Digital
34% 108%
Engineering
398
CRM Focused
227 28% 67%
BPM
194
164 Diversified
54% 61%
133 BPM
90
ER&D 51% 33%
Source: Last 5 years data taken as on 18th Aug 2020 from CapIQ; Indices for each group have been calculated free float market cap methodology (sum of free float shares* share price) and then rebased to 100
Note: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap
IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc,
EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService
12 Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPITS&P 22% 28%
6.7x Large Cap IT 51% 40%
Mid Cap IT 50% 56%
2.7x Digital
37% 63%
Engineering
2.7x 2.8x
1.9x 2.4x CRM Focused
2.2x 52% 61%
2.0x BPM
2.1x
1.3x
1.2x Diversified
1.0x 40% 47%
BPM
0.8x 0.9x
ER&D 57% 38%
Source: Last 5 years data taken as on 18th Aug 2020 from CapIQ
Note: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap
IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc,
EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService
13 Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPIT51.9x
S&P 22% 36%
Large Cap IT 53% 60%
Mid Cap IT 57% 59%
19.1x Digital
49% 148%
15.4x Engineering
12.3x
14.6x CRM Focused
11.8x 12.7x 55% 48%
BPM
11.0x
10.6x
10.3x
8.2x Diversified
8.1x 45% 51%
BPM
7.8x 7.9x
ER&D 62% 26%
Source: Last 5 years data taken as on 18th Aug 2020 from CapIQ
Note: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap
IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc,
EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService
14 Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPIT1,369
51.9x
6.7x
6.5x
897
36.3x
15.2x
2.7x 2.8x 15.4x
2.5x 2.4x 13.4x
398 2.2x 14.6x
319 2.3x 14.1x 12.7x
1.9x 2.1x 11.7x
299 10.6x
227 1.3x 1.2x 10.2x
181
157 194 8.2x
1.0x 8.3x
126 164 0.9x 7.9x
111 133
90
01-Jan-2020 01-Apr-2020 01-Jul-2020 01-Jan-2020 01-Apr-2020 01-Jul-2020 01-Jan-2020 01-Apr-2020 01-Jul-2020
S&P 500 Large Cap IT Mid Cap IT Digital Engineering CRM Focussed Diversified BPM ER&D
Source: Last 5 years data taken as on 26th Mar 2020 from CapIQ
Note: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap
IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc,
EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService
15 Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPITJuly 2020 $250Mn 3.0x
July 2020 $80Mn 2.1x
July 2020 $565Mn 3.9x
July 2020 $22Mn 1.7x
July 2020 $110Mn 5.0x
June 2020 $93Mn 2.8x
April 2020 $139Mn 4.1x
16300 283 80000
279
270 269
262
227 249 70000
248
250 234
220 225 225 226 60000
200 191 50000
162
149 40000
150
127 124 30000
100 90 20000
82
10000
50
0
0 -10000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3
2019 2020
Number of Deals Sum of Deal Value USD(m)
18 Note- The deal activity is based on deals announced till 31 st August 2020; Source: Mergermarket28 28
24
23
20 20
19
18
16
14
13
10
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
Qtr3 Qtr4 Qtr1 Qtr2 Qtr3
2019 2020
19 Source: Avendus deal trackerDATE BUYER TARGET RATIONALE
31-Aug-20 Cyient Integrated Global Partners Pty Ltd Capability Play
27-Aug-20 NTT DATA, Inc. Acorio LLC Capability Play
27-Aug-20 Discovery Health Partners Consova’s payment integrity business Capability Play
26-Aug-20 UST Global, Inc. Tastry, Inc. Capability Play
26-Aug-20 Change Healthcare PROMETHEUS Analytics® Capability Play
25-Aug-20 Cognizant Tin Roof Software LLC Capability Play
25-Aug-20 Dynamic Quest Southern Data Solutions Capability Play, Geography – Market Access
25-Aug-20 ConvergeOne Altivon Capability Play
24-Aug-20 Employees from CGI Inventas AS Capability Play
24-Aug-20 Core BTS Blue Chip Consulting Group Capability Play
20-Aug-20 emids Flextech Vertical Focus
19-Aug-20 Konica Minolta Depth Security Capability Play, Vertical Focus
19-Aug-20 Centauri Health Solutions HCFS Capability Play
18-Aug-20 Goldman Sachs MBD and Everstone Capital InfoStretch Corporation Private Equity
18-Aug-20 Revint Praxis Healthcare Solutions Capability Play
17-Aug-20 SPi Global Holdings, Inc. LearningMate Solutions, Inc Private Equity
14-Aug-20 Improving Object Partners Capability Play, Geography – Market Access
13-Aug-20 Accenture CreativeDrive Capability Play
11-Aug-20 Cerberus Sentinel Technologyville Capability Play
10-Aug-20 Accenture Organize Cloud Labs Capability Play
10-Aug-20 Thomas Bravo Majesco Private Equity
06-Aug-20 OceanSound Partners Netrix Private Equity
05-Aug-20 TTEC Holdings, Inc. VoiceFoundry, LLC Capability Play
03-Aug-20 DAS Health Ventures Technology Seed Capability Play, Geography – Market Access
20 Source: Avendus deal trackerDATE BUYER TARGET RATIONALE
30-Jul-20 Fujitsu Limited Fujitsu Frontech (47.01% Stake) Control
29-Jul-20 NantHealth OpenNMS Capability Play
28-Jul-20 Cognizant New Signature Inc. Capability Play
28-Jul-20 Ciox Health Medal, Inc Capability Play
27-Jul-20 Atos SE EcoAct Capability Play
27-Jul-20 Atos SE Digital.security Capability Play, Geography – Market Access
27-Jul-20 TA Associates & Francisco Partners Edifecs Private Equity
23-Jul-20 Wipro Limited 4C Consulting Capability Play
23-Jul-20 Nubank Cognitect Capability Play
22-Jul-20 Parthenon Capital Nuvem Health Control
20-Jul-20 Dedalus Italia SpA DXC (healthcare software business) Vertical Focus
20-Jul-20 Dynamic Quest Nexxtep Technology Services Geography – Market Access
20-Jul-20 Thoma Bravo Majesco Private Equity
16-Jul-20 L&T Technology Services Limited Orchestra Technology Capability Play
14-Jul-20 Wipro Limited IVIA Servicos de Informatica Capability Play, Geography – Market Access
14-Jul-20 RLH Equity Partners MCA Connect Private Equity
07-Jul-20 Computer Design & Integration Plan B Technologies Capability Play
07-Jul-20 Brillio Cognetik Capability Play, Geography – Delivery Capability
01-Jul-20 Gryphon Investors 3Cloud Private Equity
29-Jun-20 Cedar Gate Technologies (backed by GTCR) Citra Health Solutions Capability Play, Platform Acquisition
24-Jun-20 UST Global Ksu3baka Strategic Investment
24-Jun-20 Atos Paladion Networks Private Limited Capability Play
24-Jun-20 Atos AliA Consulting Capability Play
23-Jun-20 Equifax Urjanet Private Equity
21 Source: Avendus deal trackerDATE BUYER TARGET RATIONALE
20-Jun-20 Baring Private Equity Asia Hexaware Technologies (37.56% Stake) Take Private
19-Jun-20 The Access Group Eclipse Hardware Capability Play, Geography – Delivery Capability
19-Jun-20 Sompo Holdings Palantir Technologies Strategic Investment
17-Jun-20 Perficient Productora de Software Capability Play
17-Jun-20 Trinity Hunt Partners Keste Private Equity
16-Jun-20 Blue Venture Fund, Abacus Insights Private Equity
15-Jun-20 IBM Corporation Spanugo Capability Play
15-Jun-20 Novetta (backed by Carlyle) WaveStrike Scale
11-Jun-20 Wipro Ventures CloudKnox Security Strategic Investment
08-Jun-20 Wavecrest Growth Partners Stirista Private Equity
08-Jun-20 Orion Innovation Zodiac Systems Capability Play
03-Jun-20 Navisite Privo Capability Play
03-Jun-20 Effectual Five Talent Capability Play
29-May-20 HCL Cisco’s Self-Optimizing Network (SON) Capability Play
26-May-20 Digodat MightyHive (division of S4 Capital) Capability Play
23-May-20 OnMobile Global rob0 Inc. (25% stake) Capability Play
20-May-20 Saalex Information Technology Arctic MSP Capability Play, Geography – Market Access
12-May-20 Stellar IT StanSource Capability Play
11-May-20 APC Holdings Sequential Technology Private Equity
09-May-20 Ceridian Excelity Global Capability Play, Geography – Market Access
07-May-20 HPS Investment Partners, Farallon Capital Management and GIC Atento Holding (64.34% Stake) Private Equity
05-May-20 Cognizant Collaborative Solutions Capability Play
05-May-20 Accenture Callisto Integration Capability Play
28-Apr-20 Martello GSX Capability Play
22 Source: Avendus deal trackerDATE BUYER TARGET RATIONALE
23-Apr-20 Chesapeake Systems StorExcel Geography – Delivery Capability, Capability Play
22-Apr-20 Atos Miner & Kasch Capability Play
21-Apr-20 CentriLogic ObjectSharp Capability Play
21-Apr-20 SS&C Capita Life & Pensions Services Geography – Delivery Capability Play
20-Apr-20 Accenture Plc Gekko Capability Play
14-Apr-20 W20 Symplur Capability Play
10-Apr-20 Hitachi, Ltd. Fusionex International plc Capability Play
09-Apr-20 Luxoft CMORE Automotive Capability Play
07-Apr-20 Mediacurrent Duo Consulting Capability Play
07-Apr-20 EMS Consulting Digital Banking Services (DBS DX) Capability Play
02-Apr-20 Accenture Plc Yesler, Inc. Capability Play
02-Apr-20 Pythian Agosto Capability Play
26-Apr-20 TA Associates Accion Labs Private Equity
25-Mar-20 Capgemini Whitesky Labs Capability-Geography Play
23-Mar-20 Perficient Brainjocks Capability-Delivery Play
23-Mar-20 Cognizant Lev Capability Play
21-Mar-20 Bright Shine Corporation Shenzhen Rayvision Technology Private Equity
18-Mar-20 Baird Capital Partners Aura Futures Group Private Equity
16-Mar-20 MAG Aerospace Aaski Technology Client Acquisition
23 Source: Avendus deal tracker2%
1%
10% 16% Capability 14% 6%
9% Geography 15% US
4%
1% Europe
4% Jan-Mar 4% Apr-Aug Vertical Jan-Mar Apr-Aug
2020 2020 Scale 25% 2020 2020 APAC
58% 12% 59%
18% 63% Delivery Capability Others
Private Equity 77%
2%
Analytics
10% 15% 8% 8%
21% 5% BPM
Cloud
Strategic 40% 19%
Jan-Mar Apr-Aug Jan-Mar Apr-Aug 18% Cybersecurity
2020 2020 PE 2020 18%
2020 ER&D / OPD
5% Digital Agency
7%
85% 15% 5% Generic IT
90% 11% 18% Vertical Specific
Source: Avendus deal tracker
24 Note: The total deals tracked between Jan-Mar 2020 & Apr-July 2020 is 61 & 84 respectivelyInvestor looking to invest and allocate more • In the April-June period the
capital number of new processes had
Number of new processes
Strategics continue to perform come down significantly with few
well and generate cash to do quality assets coming to the
deals market. Few assets that have
done well in the current
environment are coming to the
market
PEs have lot of dry powder to • Number of processes have
invest again started to launch since
Apr May Jun Jul Aug Sep mid-July
2020 2020 2020 2020 2020 2020
If owners are looking to sell, the market is conducive to deal making and they
If owners are looking to sell, the market is conducive to deal making and they should
should launch as long as the company performance is holding up which would
launch as company
mean that long as isthe company
growing performance
quarter on quarter andisitholding
is able toup which would mean that
create
company is growing
projections quarter
for the next on quarter
3-4 quarters with aand
highitdegree
is able to create projections for the next
of confidence
3-4 quarters with a high degree of confidence
25Email: abhinav.goel@avendus.com Email: shreyansh.jain@avendus.com
Mobile: +1 929 239 7136 Mobile: +91 90077 70946
Landline: +1 646 707 0789 Landline: +91 080 6448 3632
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