8CIOReview | | APRIL 2021IN MY OPINIONCURRENT CONDITION OF MERGERS AND ACQUISITIONS IN THE OUTSOURCED IT SERVICES MARKETSBy Jonathan Simnett, Director/Sector Principal, Hampleton PartnersIn recent years, organisations ­ be they start-ups, scale-ups, publicly-listed, governmental agencies and healthcare providers ­ have been forced to increasingly digitise their products, processes and services. COVID-19, and the lockdown measures necessary to control the spread of the pandemic around the world, have accelerated this momentum. This, in turn,has had a profound impact both on those tasked with providing the infrastructure and services that support this transition, and on the valuations of their companies in the IT and Business Services sector.As a specialist technology M&A advisory company, Hampleton Partners closely follows and tracks valuations in this area. We think of IT and Business Services asbeing composed of three distinct segments: Outsourced Services - comprising transaction processing, BPO, software development, staffing, contract manufacturing & design, customer care; Tech Services and Support - encompassing tech & management consulting, web & email marketing measurement and design; and Integration Services - which coversintegration of networks, telecoms, systems and security.Answering a growing needAt the simplest level,COVID-19, and the lockdown measures imposed, has meant the bulk of employees that can work from home have been required to work there. This, in turn, has challenged IT departments to provide enhanced, more flexible,and advanced capabilities, whether in-house or outsourced to address a broader spread of requirements as organisations adjust to operating in changed and uncertain circumstances.For instance,given the new demands on IT infrastructures, IT services firms and departments have had to ensure that they are able to work with virtualisation tools and enable integration with other systems, softwares and platforms. They are also being driven to work with,and integrate,the cloud for efficiency in remote working and to maximise corporate agilitywith videoconferencing and desktop virtualisation software for the cloud, facilities that have keeping many organisations functioning. Furthermore, the need for rapid and widespread implementation of capabilities in analytics or digital marketing ­ especially given the rise of digital commerce to compensate for the COVID-19-driven crisis in brick-and-mortar retail ­ has pushed businesses to seek out assistance from IT and marketing services firms. Effective CRM integration with other systems and software is more crucial than ever for businesses who rely on customer retention.In this environment,Outsourced Services companies, which offer services ranging from payment processing to software development, continue to enjoy strong growth on the back the ever-present need to increase connectivity, agility and reduce costs. Volumes and valuations dipYou might think all of thesewould bewelcomedevelopments for anyone considering selling their IT and Business Services firm. But, curiously, given the demand for services across the sector, in the first half of 2020, transaction volume dipped to 378 deals, compared to the 416 deals recorded in the second half of 2019. This dip may be due to a drop off in intercontinental deals in Q2 2020 due to pandemic-related challenges in completing transactionsand as some companies - very temporarily it turned out as the summer progressed­ had held fire on investing. As a result, some valuation multiples came in lower across the sector with the result that the trailing 30-month median EBITDA multiple dropped to 9x ­ the lowest in four years ­ while the revenue multiple remained stable at 1.2x.
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