6 M&A Trends Shaping the Technology Services Sector in 2024
Published by Equiteq
In the recent Technology Services Quarterly M&A Trends Report, the global Equiteq team outlines six key trends predicted to shape M&A in the coming year.
Here are the trends and key takeaways:
M&A Trend 1: Resilience Amid Economic Uncertainty
M&A activity in the Technology Services sector continues to demonstrate resilience in 2024, though activity last quarter was slower than expected in some regions due to ongoing political and economic uncertainties, particularly around interest rates in the UK and Europe.
Deal volumes increased across the Knowledge Economy, indicating cautious optimism.
- Buyer Behavior: Financial and strategic buyers remain comfortable with the macroeconomic landscape but are adopting a 'wait and see' approach in some regions. While resilience and profitability remain critical, there is cautious optimism about the market's potential.
- Sector Focus: Consistent interest in regulated industries like healthcare reflects the stability these sectors offer, although broader macroeconomic factors remain in play.
M&A Trend 2: The Rise of AI and Data Analytics
The rapidly evolving AI landscape continues to be a significant driver of M&A activity, with increasing demand for custom-built AI solutions.
Businesses seek tailored AI technologies to fit specific needs, moving away from off-the-shelf options.
- Key Deals: Databricks and other firms made notable acquisitions to bolster their GenAI offerings, with a growing emphasis on data-driven and bespoke AI growth.
- Market Dynamics: Companies with strong data analytics capabilities, especially those offering custom-built AI solutions, are particularly attractive to buyers. Sustainable business models with recurring revenues remain key factors driving these acquisitions.
M&A Trend 3: APAC's Growing Influence
There is a marked increase in M&A interest in IT Services within the APAC region, with both Japan and India experiencing growth. Japan has seen a resurgence in M&A activity, with international buyers taking advantage of the deflated yen, while India's demand for data and AI capabilities continues to drive deals.
- Regional Insights: Stabilising interest rates and slowing inflation have encouraged dealmakers in APAC, with notable activity in both Japan and India due to their expanding tech services markets.
- Investment Trends: Major firms like Databricks are experiencing substantial growth in their India business, while Japan’s attractiveness is growing due to favourable currency conditions.
IT Services M&A activity remains on a positive trajectory, with private equity-backed strategic buyers playing a growing role in driving deals. These hybrid buyers are targeting smaller firms with specialised capabilities, offering flexible deal structures that attract both buyers and sellers.
- Notable Transactions: Accenture’s acquisitions of Flow Group and Arns Group highlight the ongoing consolidation in key IT consulting spaces, driven by both strategics and private equity-backed players.
- Buyer Strategy: Strategic buyers, particularly those backed by private equity, are willing to pay premium valuations for differentiated technology that fills operational gaps and enhances their service offerings.
M&A Trend 5: Private Equity's Continued Engagement
Private Equity (PE) remains a significant force in the M&A landscape, driven by increased pressure to deploy capital as funds raised in 2022 near their two-year mark. This urgency is pushing PE firms to pursue larger deals and accelerate acquisitions, despite ongoing macroeconomic challenges.
- Market Conditions: Lower valuations present opportunities for PE buyers, but divestment options remain challenging due to market conditions. The need to deploy capital is also increasing the willingness to take on larger, more complex deals.
- Investment Focus: PE investors are actively seeking firms with strong growth potential and profitability, with a growing emphasis on deploying capital quickly while balancing acquisition opportunities and strategic divestments.
M&A trend 6: Private Equity-Backed Strategics on the Rise
In Q2 2024, the M&A landscape saw a notable increase in activity driven by private equity-backed strategic buyers. These firms, leveraging capital from financial backers, are becoming more aggressive in their acquisition strategies. This hybrid approach allows them to target smaller, specialised companies, particularly in digital engineering, AI, and cloud services.
Key Drivers:
- Bolt-on Acquisitions: Bolt-on acquisitions are becoming more common, with private equity-backed firms using these to fill gaps in their service portfolios.
- Strategic Flexibility: Smaller firms are more agile in deal structures, offering attractive upfront cash and share combinations, leading to more creative deal-making strategies.
Conclusion:
The M&A landscape in the Technology Services sector for 2024 is shaped by resilience in the face of economic uncertainty, a strong focus on AI and data analytics, growing influence from the APAC region, strategic acquisitions in IT services, and continued engagement from Private Equity.
As the market stabilises, these trends indicate a more favorable environment for deal-making, driven by strategic growth and technological advancements.
For more insights, download the full Technology Services Quarterly M&A Q2 Report.
David Jorgenson CEO, Equiteq