- We are seeing a significant increase in M&A activity in the global BPO and IT services market.
- M&A grew considerably in 2010, with the total number of deals, aggregate Enterprise Value, and median deal size all up more than 50% from 2009.
- The median revenue multiple for deals in the BPO sector ticked up to 1.6x EV/Rev (Enterprise Value-to-Revenue) and 1.2x EV/Rev for IT services deals, back to levels last seen before the economic crisis and market crash (pre-2008).
- We believe that BPO and IT services M&A activity in 2011 and 2012 could continue its increased activity and rise above the sector’s pre-recession deal flow.
- There is a significant and growing BPO and IT services market in addition to increased M&A activity in Latin America; we are spotting increased investments in Brazil, Argentina and Mexico.
- There were 7 acquisitions of Managed Services companies announced in January 2011
M&A activity in the BPO and IT services sector was strongest in the second and third quarters of 2010 with large deals like Aon’s acquisition of Hewitt Associates ($4.8 billion) and NTT’s acquisition of Dimension Data ($2.9 billion) driving up deal multiples and aggregate volume. Median deal sizes also increased over the course of the year, with the Q4 median at $53 million, more than double the Q1 median of $26 million. Median transaction value to LTM revenue multiples also moved up sharply over the year, from 0.7x in Q1 to 1.2x in Q4 for IT services firms, indicative of a strong market.
We noticed a number of companies that earned multiples much higher, including Diamond Management and Technology Consultants’ acquisition by PricewaterhouseCoopers for 1.7x LTM revenue and 14.5x LTM EBITDA; Stefanini’s acquisition of TechTeam Global for 1.26x LTM revenue (EBITDA was nil); NTT Data’s acquisition of Keane International Inc. for 1.5x LTM revenue (estimate); and iGate’s acquisition of Patni for 2.3x LTM revenue.
Strong M&A Market in the Latin American BPO and IT Services
Latin America has become an increasingly important and dynamic BPO and IT services market. Significant investments are being made, and companies based there are growing across borders into geographies like North America, as Brazil-based Stefanini IT Solutions did with its acquisition of U.S.-based TechTeam Global in late 2010. Latin America is number three overall in jobs outsourced from the U.S., its local economies are growing, and both acquirers and investors are betting on its BPO and IT services opportunity.
Indian outsourcing giant Tata has leveraged its presence in 14 countries in Latin America, with offshore centers in Brazil, Uruguay, Mexico and Chile to serve its clients with local and global IT resources. There were 14 M&A transactions involving Latin American targets in 2010, a substantial increase compared to the three Latin American targets in all of 2009. Many U.S. players, including HP, Accenture and Unisys, are increasing their presence in Brazil in particular, a growing center for BPO and IT services.
Significant M&A transactions in this area for 2010 included Apax Partners’ $950 million investment in Brazil-based TIVIT S.A., a provider of integrated services in IT infrastructure, application systems and business process outsourcing. Capgemini also made a notable entry into the Brazilian market, paying $560 million for a 55% in CPM Braxis S.A., a provider of application services, infrastructure technology services and business process outsourcing.
2011 will continue to see additional M&A activity from Latin American BPO and IT services firms. Valuations and deal volume will be up to pre-2007 levels. As the BPO and IT services market demands more global capabilities, many firms from Europe, the U.S. and India will expand further into Latin America, both organically and by acquisition.
Large global IT Services Providers will Continue to Consolidate, Build Scale, and Gain Differentiation
Large IT services providers such as CSC and Accenture made multiple acquisitions during 2010, and acquisitions during the fourth quarter alone show these firms are diversifying their portfolios. CSC acquired ImageSolutions, a privately-held, global life sciences leader in regulatory submission management solutions and related implementation and outsourcing services, to bolster its Healthcare practice (largely the former First Consulting Group). It also acquired Vulnerability Research Labs to strengthen its cyber security offerings across an array of industries, including the public sector.
Accenture made 3 acquisitions over the past three months: 1) Beijing-based Genesis Interactive Technology, a mobile outsourced product development offering business which further entrenches Accenture in China where it currently has over 4,000 employees; 2) Knowledge Rules, a Philadelphia-based consulting company that gives Accenture a foothold in implementing and integrating business solutions using Pegasystems’ BPM software; and 3) Ariba’s BPO assets, which will strengthen its sourcing and procurement services offering.
One consistent theme coming out of the most recent global economic downturn is that the largest BPO and IT services firms big keep getting bigger; they have strong balance sheets to continue that trend through 2011 and 2012. We expect to see continued increasing investments and M&A into the BPO and IT services market for the next few years.
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