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Advisors, Private Equity

PE and Strategics Eye IT Services

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What’s driving consolidation in IT services? For a new whitepaper on consolidation in the business services industry, we talked to CEOs and deal professionals in the space to get their take on deal volume, prospects for the coming months, and more.

According to SDR Ventures, “IT Services accounted for a large percentage of M&A activity in Professional Services” in Q1 2016, “as firms are acquiring technical expertise to expand their service offerings.” SDR also notes that large firms like Accenture and Computer Sciences Corporation plan to make acquisitions “a key part of their growth strategies in 2016.”

IT Consulting

Information technology consulting and services companies come in all sizes and have a broad range of capabilities, making them a very attractive segment of the market for private equity investors.

Smaller organizations in particular are most viable consolidation prospects, given the strain placed on them to simultaneously deliver on new business development, marketing, and customer projects. Private equity investors can provide these small organizations the opportunity for growth by combining with larger organizations. Chris Desautelle, CFO of IT consulting company 4th Source, says that “combining with larger organizations also provides broader set of capabilities that many customers require that smaller shops cannot provide. Broadening the footprint in customers helps lower churn and strengthens the relationship with the customer providing longevity, which drives higher business levels and higher return for shareholders.”

According to Equiteq, “global deal volumes are just short of a 10-year high in the IT consulting sector,” and 2016 is “looking very promising.” In North America, deals increased from 272 to 365 from 2014 to 2015. The continued growth is a result of strong deal volume in 2015 as well as increasing dependence on technology across a wide variety of sectors. Strategic acquisitions continue to rise “as large firms prefer to grow through acquisition rather than organically.”

The high deal volume is likely to remain the same moving forward as private companies master newer technologies like mobile computing, enterprise resource planning, IT security, cloud, infrastructure, and data management.

“Fragmentation partly occurs because as new technologies are rolled out and big enterprises look to adapt them, more established players are slow to recognize which allows smaller more nimble players to grab business and market share,” says Desautelle. “As mobile and analytics reach mainstream adoption the natural order will be for larger enterprises to consolidate.”

Managed Services

Bob DeLisa, founder and CEO of Cooperative Systems, a managed services company, describes his niche as “essentially outsourced IT for small companies.” His company is making acquisitions in the space to expand their geographic footprint. “I’ve created a growth plan to triple the size of our business in the next four years,” says DeLisa. “I’m looking for a company that’s a good fit where we can absorb as many of their employees as possible as well as their customer base, as that’s what’s generating their revenue.”

DeLisa says he’s noticed a lot of rollups in the space over the past two years. “Most of the people who started these companies are lifestyle people. They may have started their companies back in the 1990s, and now there’s a lot more competition from younger generations.”

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