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M&A Activity in 2015 (Part 2): Few Vendors Acquire in Digital; IaaS Industry Consolidation Begins

This is the second of three articles examining M&A activity in IT services during 2015. Last time we looked at how M&A activity was being driven by $10bn to $15bn vendors. This time we take a look at M&A around newer service offerings and digital transformation. The firms that are acquiring capabilities in digital services are vendors in good financial health that have mostly already set up a large offshore presence in India (Deloitte being the exception).

Accenture Drives M&A Activity in Digital Services

The topic of digital transformation services (DTS) has been dominating conversations and management focus for the past three years. Yet, quite surprisingly, it has not been a major focus of attention in M&A activity, apart from Accenture and Singtel.

Accenture acquired 18 companies in its FY15 for $800m. The majority of those were digital agencies or in DTS overall. And Accenture is very likely to make further acquisitions: the company has guided it is targeting acquisitions will represent 1% to 2% of its revenue growth in FY16. The company has the funding: it has a net cash balance of $3.1bn and will receive a further $0.8bn from Amadeus for the sale of its Navitaire business.

Deloitte has a similar M&A strategy to Accenture, though the Deloitte Consulting network also continues to grow its capabilities in traditional ERP services as well as acquiring digital agencies and security firms. Deloitte Consulting is a third of the size of Accenture  and has wider gaps in its service portfolio.

Among the Indian oriented service providers, Infosys, Wipro and HCL Technologies are also accelerating in DTS investments with each having made two to four acquisitions this year. Wipro and Infosys want to gain local capabilities in digital agencies for digital UX, HCL Technologies in specific SaaS skills. Wipro and Infosys are also investing in newer offerings such as BPaaS and automation.

Finally, looking at new offerings, Singtel made a significant move with its $80m acquisition of Trustware, a managed security services vendor with revenues of $216m. While telecom service providers have shown little interest in acquiring IT services capabilities this decade, managed security services is more of an adjacent capability –and is a high growth, potentially high margin, market.

Consolidation of the Public IaaS Industry Begins

Amazon Web Services continues to enjoy impressive revenue growth and very high margins. Microsoft with Azure, and Google Cloud are also growing well. The rest of the public IaaS industry is probably in a different shape. The IT industry seems to have decided that the public IaaS was no longer an open industry with large capex investments and few winners. M&A has been limited as a result and we are expecting more divestments. HPE is shutting down its public IaaS business (HP Helion Public Cloud) on January 31, 2016 and emphasizing its private cloud capabilities and its expertise in managing heterogeneous environments.

We are seeing this growing aversion to large capex investments reach the adjacent hosting industry: Equinix is buying Telecity for £2.3bn. On a much smaller scale, AT&T sold its managed application hosting to IBM and Colt its cloud/hosting unit to PE-backed Getronics in the U.K. And IBM won a $1bn IT infrastructure management deal (involves the transfer of 580 personnel) from Norway’s EVRY to develop a hybrid infrastructure based on IBM’s public IaaS SoftLayer.

Looking ahead, we expect several more regional vendors will follow EVRY’s approach and divest their capex-intensive hosting and datacenter activities. Similarly, we expect to see large telecom service providers either investing further in IaaS or exiting/selling the business.

We will soon publish a third article on our M&A expectations for 2016.


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