Application Development and Deployment Services at the Frontline of M&A
As enterprises worldwide recognize the imperative of digital efficiency – to both better serve customers and drive operational profitability – we have seen a dramatic increase in demand for Digital Transformation Services and DevOps Platform-as-a-Product offerings.
Prior to the pandemic, an organization’s technology strategy was largely considered a subset of its overall business strategy – however more recently, COVID-19 has forced business models to shift, and technology and business strategies are now intertwined. In a survey completed in 2021, 89% of executives stated that their organization’s ability to generate value would be based on the limitations and opportunities of their technology, according to Accenture.1 Furthermore, companies that are digital leaders have been found to outpace their competitors’ revenue growth by 2-3x. This widespread and rapid adoption of digital tools has fueled demand in the Application Development (AppDev) and Deployment industry as organizations have sought adaptable solutions to address ongoing innovations to technology stacks. In accordance with heightened industry demand, merger and acquisition (M&A) activity increased 102% year-over-year (YOY) with 101 transactions announced or closed. Capstone expects deal activity to continue at this meteoric pace, positioning 2021 to be a record-setting transaction year.
AppDev and deployment service providers have accounted for 56.7% of announced or closed M&A targets year-to-date (YTD). Buyers have targeted information technology (IT) consulting and software solutions providers to enhance the speed and scale of digital infrastructures and to focus on deploying and monitoring network transfers. Of note, NTT Data (TSE:9613) announced its acquisition of California-based Nexient, a provider of software development consulting and application testing services, in May for an undisclosed sum. Nexient will serve as a scalable anchor for NTT Data's Application Development and Modernization practice, bringing its agile software development talent to NTT Data's global customer base. "NTT DATA is investing to grow our business and our digital expertise through hiring, training, and research and development, as well as targeted acquisitions of best-in-class, digital companies. Nexient is the next step in this strategy and a great addition to our team," Eric Clark, NTT Data Chief Digital and Strategy Officer, said in a press release.2
Digital Transformation Service Providers Consolidate to Meet Demand
Digital transformation allows an organization to create new, or modify existing business processes, IT architecture, and customer experiences to meet changing business and market requirements. In the truncated timeline set by COVID-19, technology adoption was swift even for the slower adoptees. To support this sudden demand, many digital providers leveraged M&A to quickly scale their AppDev, testing, and deployment offerings. As an example, Booz Allen Hamilton (NYSE:BAH) recently announced the acquisition of Liberty IT Solutions in May for an enterprise value of $725 million. Booz Allen, a leading provider of IT consulting and management services, will gain ~600 technology solution architects, software developers, and other technical employees in the acquisition, according to a press release.3 Additionally, Booz Allen will absorb Liberty's $2 billion backlog of digital transformation work built over the past 18 months, strengthening its unique market position as a leader in digital transformation services.
With many organizations successfully completing digital network transfers prior to the pandemic, these early adopters now seek to unlock the full value of moving their enterprise systems to the cloud, evidenced by the 18.4% increase in global end-user spending on public cloud services in 2021, according to Gartner.4 Cloud transformation service providers migrate traditional, on-premise systems to the cloud with the transfer of applications, software programs, desktops, and stored data. Pure-play cloud provider Snowflake (NYSE:SNOW), which went public last year and was the largest software initial public offering (IPO) in history, has exhibited strong growth in its services segment as organizations heavily relied on its cloud expertise. Snowflake offers an integrated platform for organizations to house, share, and build data applications in the cloud. While Snowflake's proprietary platform serves as the main business segment, its Professional Services segment experienced a 205% revenue increase YOY in Q1 2021 ($38.3 million), with Fortune 500 customers utilizing Snowflake's development teams to efficiently migrate to the cloud with optimal application designs and rapid deployment, according to its Q1 2021 investor presentation.5
Established public companies have utilized strategic acquisitions in 2021 as the foundation for growth initiatives. In May, Amdocs (Nasdaq:DOX), operator of an open and modular cloud network, announced its acquisition of Sourced Group for an enterprise value of $75 million. Sourced Group offers customer-centric consulting and governance services to migrate large-scale enterprise IT systems to cloud infrastructure. The acquisition will accelerate Amdocs's initiative to take its communication and media clients to the cloud.
DevOps Strive to Achieve a Platform-as-a-Product Model
Software development and IT operations (DevOps) providers work across the entire application lifecycle, from development and testing to deployment and operations in order to reduce siloed efforts and increase service velocity. To limit the cognitive load on software product teams, DevOps providers have increasingly used a Platform-as-a-Product (PaaP) model to market internal, rapid application development (RAD) software as a subscription offering to create recurring revenue streams.
DevOps providers with steady revenue streams, strong margin profiles, and incorporated cloud-based infrastructure have garnered substantial buyer interest this year. Industry participants have paid premium valuations to add innovative digital solutions, evidenced by Tech Mahindra’s (NSEI:TECHM) acquisition of DigitalOnUs for $120 million, equivalent to 3.9x revenue (April). DigitalOnUs’s cloud-native DevOps platform enables organizations' internal software teams to write and modify code through its self-service framework. DigitalOnUs continues to provide client support and review services while clients make initial alterations.
"The acquisition of DigitalOnUs marks an important milestone in Tech Mahindra’s growth journey, and will further enhance our capability in cloud native engineering, and better equip us to develop cutting-edge digital solutions for our customers. Scaling up near shore delivery capability, with majority in Mexico and Canada will be critical to execute digital transformation programs. We welcome the associates of DigitalOnUs into the Tech Mahindra family, and look forward to achieving great success together. We are also looking forward to have Suri [DigitalOnUs's CEO] play a key role as part of our North America’s leadership team to further drive the digital transformation journey of our customers,” Vivek Agarwal, Tech Mahindra Corporate Development President, said in a press release.6
Accenture, "Technology Vision 2021," https://www.accenture.com/us-en/insights/technology/technology-trends-2021?c=acn_us_technologyvisiogoogle_11975722&n=psgs_0221&gclid=Cj0KCQjwzYGGBhCTARIsAHdMTQzr_Vl8uMjrf00LFlfwLAT1cI6OV8yDWCTcsw4Eb7DQY8jvQacvvGsaArKyEALw_wcB&gclsrc=aw.ds, accessed June 8, 2021.
NTT Data, "NTT Data to Acquire Nexient," https://us.nttdata.com/en/news/press-release/2021/may/nexient-intent-to-acquire, accessed June 8, 2021.
Booz Allen Hamilton, "Booz Allen Enters Agreement to Acquire Liberty IT Solutions," https://www.boozallen.com/e/media/press-release/q1-2022/booz-allen-enters-agreement-to-acquire-liberty-it-solutions.html, accessed June 9, 2021.
Gartner, "Gartner Forecasts Worldwide Public Cloud End-User Spending to Grow 18% in 2021," https://www.gartner.com/en/newsroom/press-releases/2020-11-17-gartner-forecasts-worldwide-public-cloud-end-user-spending-to-grow-18-percent-in-2021, accessed June 9, 2021.
Snowflake, "Q1 2021 Investor Presentation," https://s26.q4cdn.com/463892824/files/doc_financials/2022/q1/Q1-FY22-Snowflake-Investor-Presentation_vFINAL.pdf, accessed June 9, 2021.
Tech Mahindra, "Tech Mahindra Acquires 100% Stake in DigitalOnUs," https://www.techmahindra.com/en-in/techm-acquires-100-per-stake-digitalonus/, accessed June 10, 2021.
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