AppDev & Deployment M&A Soars First Half of 2022, What Comes Next?

The Application Development (AppDev) & Deployment market has been forced to increase output in recent years while managing challenges such as updating legacy systems, modernizing components without disrupting software delivery pipelines, and keeping up with demand for cloud-native applications. To address these challenges, sector leaders have increasingly engaged in mergers and acquisitions (M&A) to gain scale and new competencies; adopted microservice architectures to enhance autonomous development; and implemented continuous delivery models to automate deployment and testing tasks. Rising sector demand, coupled with heightened competition for market share, has resulted in elevated consolidation and favorable valuations for sector participants engaging in sell-side transactions.

Despite general headwinds in the public markets, AppDev Software and Services M&A activity continues to accelerate with strong appetite from private equity-backed strategics, buoying enterprise values and multiples.

David DeSimoneManaging Director, Capstone Partners

M&A Valuations Remain at Elevated Levels for AppDev Market

At the onset of the pandemic, AppDev & Deployment purchase multiples detached from the rest of the M&A market, staying at elevated levels as valuations largely fell across the rest of the market. Sector valuations have showed no signs of tapering off in recent months and are expected to remain at heightened levels for both software and services providers as buyers look to consolidate the fragmented spaced amid an accelerated digitization period.

M&A purchase multiples in the AppDev & Deployment sector averaged a robust 3.7x EV/Revenue and 11.5x EV/EBITDA between 2019 and Q1 2022, according to Capstone Partners. Sector valuations have remained on pace with the broader Technology, Media, & Telecom industry during the same period (3.0x EV/Revenue, 13.3x EV/EBITDA) and outperformed the middle market average of 2.3x EV/Revenue and 10.8x EV/EBITDA.

Services Targets Comprise the Majority of AppDev & Deployment Deals To-Date

M&A transaction volume in the AppDev & Deployment sector is on pace for another historic year in 2022, with 123 deals announced or completed year-to-date (YTD). This represents a 26.8% increase in deal flow compared to the same period in 2021, which far surpassed 2020 and 2019 levels.

The Services segment of the AppDev & Deployment sector continued to comprise the majority of deals to-date (68.3%). Both private and public strategics have targeted services providers to bolster their workforces amid a limited talent pool and meet the demand of backlogged projects. In the Services segment, strategic buyers accounted for 66.7% of transactions YTD, with private equity-backed strategics comprising another 29.8% of engagements in the segment. Public strategic buyers have been increasingly active in the segment, targeting information technology (IT) consulting businesses serving high-growth end markets.

Notable deal activity has included the Capstone-advised sale of Sentaca to IBM (NYSE:IBM) in March 2022. Terms of the deal are confidential. Sentaca operates as a Massachusetts-based telecommunications consulting business, offering cloud-native, automated framework testing, and Internet-of-Things (IoT) network access solutions. Additional notable transactions are outlined below.

• ASGN to Acquire GlideFast Consulting (June 2022, $350 Million) - In June 2022, ASGN (NYSE:ASGN), a leading provider of IT services and solutions, entered into a definitive agreement to acquire GlideFast Consulting for an enterprise value of $350 million. The transaction is expected to close early July 2022. Founded in 2015, GlideFast provides tailored solutions for ServiceNow (NYSE:NOW) implementations, integrations, and application development. With more than 1,800 certifications and 1,500 completed ServiceNow projects, GlideFast was named the 2022 ServiceNow Americas Elite Segment Partner of the Year. GlideFast's 350 consultants are expected to generate $95 million in revenue for full year 2022 with EBITDA margins in the mid-teens, according to a press release.¹

"Consistent with our three-year strategic growth plan, our acquisition of GlideFast supports ASGN’s commitment to acquire in-demand commercial consulting companies whose growth, combined with anticipated revenue synergies and the organic growth of our underlying business, will bring ASGN closer to our goal of $6 billion in revenues by 2024," said Ted Hanson, CEO of ASGN, in the press release.

• Alithya Group to Acquire Datum Consulting Group (June 2022, $45.5 Million) - Leading digital transformation services provider Alithya Group (TSX:ALYA) announced its acquisition of Datum Consulting group in June 2022 for an enterprise value of $45.5 million, equivalent to 2.5x EV/Revenue and 7.6x EV/EBITDA. Datum offers cloud-native application modernization and development services in addition to IT optimization consulting. The transaction enhances Alithya's recurring revenue profile given Datum's focus on higher margin, proprietary, cloud-based offerings. In addition, Datum's customer base provides a strong entry point to cross-sell Alithya's services to data-rich end markets including Insurance, Healthcare, E-Commerce, and Telecommunications.

"I am thrilled for Datum to be joining Alithya, a growing world-class organization. Our new business unit will contribute to the strategic global expansion by Alithya currently under way, and the synergies will allow our clients to benefit from years of R&D and co-development with insurers of our suite of 14 proprietary products, now implemented throughout our customer base. Our team brings two-sided expertise encompassing cloud and decentralized platforms, as well as current low code platforms such as PEGA and modern cloud platforms (GCP and Azure). We are well positioned to take advantage of this context for the benefit of our clients as part of the Alithya community," said Amar Bukkasagaram, President and Founder of Datum, in a press release.²

Private Equity Increasingly Targets Interoperable Software Providers

The Software segment of the AppDev & Deployment sector, accounting for 31.7% of total transactions to-date, has been flooded with private equity buyers engaging in multiple acquisitions for platform companies. Armed with a record $1.4 trillion in dry powder, sponsors have increased their exposure in the segment, comprising nearly half (46.2%) of software deals YTD. Target interoperability for add-on acquisitions has remained at the forefront of sponsors' buy-and-build strategies as compatible systems can be incorporated and scaled at a faster rate, enabling private equity firms to maximize their return on investment. As exemplified below, sponsors have recently focused investments on Software-as-a-Service (SaaS) offerings to capture favorable cloud computing tailwinds.

• TA Associates-Backed Planview to Acquire Tasktop Technologies (May 2022, Undisclosed) - In May 2022, TA Associates-backed Planview entered into a definitive agreement to acquire Tasktop Technologies for an undisclosed sum. Tasktop offers SaaS tools for developers, software testers, business analysts, and product managers that automate artifact synchronization, Development & Operations (DevOps) integration, and the collection and aggregation of application lifecycle data. Upon completion of the acquisition, the combined entity plans to empower developers with accelerated time to market and improved operational efficiency. In the past year, Tasktop's software solutions have played a critical role in some of the most successful digital transformations, including Bayerische Motoren Werke (XTRA:BMW), HSBC (LSE:HSBA), Kaiser Permanente, T-Mobile (Nasdaq:TMUS), and TUI Group (XTRA:TUI1). The transaction marks Planview's fourth add-on deal since joining TA Associates' portfolio in December 2020 (platform deal valued at $1.6 billion).
• Triton Partners to Acquire Neptune Software (April 2022, Undisclosed) -K.-based private equity firm Triton Partners announced its acquisition of Neptune Software in April 2022. Terms of the transaction were not disclosed. Neptune provides a low-code/no-code (LCNC) enterprise application development platform, enabling customers to reduce time and costs on development, integration, and operations. Neptune currently serves more than 660 enterprise clients for a combined 3.5 million licensed users. "Neptune Software has an attractive SaaS business in a segment that has significant growth potential. LCNC platforms could cover some 75 percent of newly developed business applications by 2025, and the fundamental scarcity of IT-talent and need for efficiencies within organizations make LCNC platforms essential going forward. With this investment we aim to back the company's further commercial development while also expanding its presence in key geographies," said Per Frankling, Triton Investment Advisory Committee Member, in a press release.³

What Does the Second Half of 2022 Hold for the AppDev Market?

Several factors are expected to shape the sector in the second half of 2022 and beyond, providing valuable acquisition and revenue opportunities for innovative market participants.

1. Containerization to Be the Basis for Development Teams

Containers provide a solution to the common issue of reliably running applications in multiple computing environments, which often occurs in the transfer of an application from development stages to a test environment. Application containers operate as a stand-alone, all-in-one package which include the supporting code, software dependencies, and hardware requirements for the application to function. In 2020, nearly 60% of back-end developers utilized containers to improve software scalability and security, up 10% from 2019, according to Cloud Native Computing Foundation.⁴

As containers are likely to become the default solution for back-end developers in the near-term, buyers in the sector have increasingly targeted providers with container-based tools in acquisitions. In a recent example, Clearlake Capital-backed Perforce Software acquired Puppet Labs for an undisclosed sum (May 2022). Puppet Labs provides automation solutions to run cloud infrastructure and container-based applications in production, across public, private, and hybrid cloud environments. Furthermore, the company offers support, training, and professional services. “Puppet has been in the DevOps space for over 15 years with a focus on infrastructure-as-code and containers. Going forward, however, we believe enterprise customers are looking for strategic partners who can provide more breadth and depth across the entire DevOps lifecycle. Integrating Puppet into Perforce does just that," said Yvonne Wassenaar, CEO of Puppet Labs, in a press release.⁵ Together, the combined company's customer base includes 40 companies of the Fortune 50.

2. The Rise of Security Across the Application Lifecycle

Organizations have been faced with an increasingly hostile digital environment, as cyber attacks have infiltrated some of the largest technology providers including Microsoft (Nasdaq:MSFT) in March 2021 and Meta (Nasdaq:FB) in August 2021. While the Development, Security & Operations (DevSecOps) methodology was introduced more than a decade ago, the integration of security and application development has become paramount in protecting software from inception throughout its service life. By 2024, the adoption of DevSecOps is expected to reduce the financial impact of application security breaches by 90%, according to Gartner.⁶

Top application lifecycle management (ALM) providers have recently pursued acquisition targets in the DevSecOps subsegment to fortify security protocols and reassure clients that their applications are protected against potential breaches. This includes PTC's (Nasdaq:PTC) acquisition of Germany-based Intland Software for an enterprise value of $280 million in April 2022. In addition to offering custom application development services, Intland Software provides DevOps and DevSecOps SaaS solutions under the Codebeamer product line to identify risks early on and adequately prepare and execute their mitigation. "The addition of Codebeamer will broaden and deepen our ALM portfolio and enable us to further support our customers' efforts to incorporate sophisticated software systems into their products," said Jim Heppelmann, President and CEO of PTC, in a press release.⁷ PTC plans to continue providing Codebeamer as a standalone solution, with an option to bundle the offering with its existing products.

3. Artificial Intelligence and Machine Learning Increasingly Utilized in DevOps

As artificial intelligence (AI) and machine learning (ML) functions grow more capable, DevOps teams’ appetite for implementing these technologies is slated to rise. Namely, the use of AI and ML can automate repetitive tasks and reduce inefficiencies across the software development lifecycle, enabling teams to keep up with software delivery pipelines. By 2023, 75% of DevOps teams are expected to utilize ML techniques to appropriately address sophisticated software issues, according to Gartner.⁸

In addition, 40% of DevOps teams are projected to augment application and infrastructure monitoring with AI for IT operations capabilities, resulting in premium M&A valuations for AI services targets. Of note, CGI France, a subsidiary of CGI (TSX: GIB A), acquired Umanis (ENXTPA:ALUMS) for an enterprise value of $385 million, equivalent to 1.4x EV/Revenue and 11.1x EV/EBITDA (March 2022). Umanis provides digital services including cloud transformation, application testing, DevOps, and AI deployment. Umanis' AI offering implements AI infrastructures enterprise-wide, rather than single projects, adding a unique value proposition to CGI's suite of AppDev services. "The combination of CGI's operations and those of Umanis will further deepen our presence and positioning across Western and Southern Europe. This transaction is consistent with the metro market merger element of our Build and Buy strategy for delivering profitable inorganic growth, while acting as a catalyst for future organic growth," said George Schindler, President and CEO of CGI, in a press release.⁹

To discuss the trends above, provide an update on your business, or learn about Capstone's wide range of advisory services and Application Development & Deployment sector knowledge, please contact Managing Director David DeSimone.

Endnotes

1. ASGN, "ASGN Incorporated to Acquire GlideFast Consulting, an Elite ServinceNow Partner," https://investors.asgn.com/news/news-details/2022/ASGN-Incorporated-to-Acquire-GlideFast-Consulting-an-Elite-ServiceNow-Partner/default.aspx, accessed June 9, 2022.

2. Alithya, "Alithya to Acquire Datum, Adding Recurring SaaS Revenues and Growing Global Capabilities," https://www.alithya.com/en/newsroom/alithya-to-acquire-datum-adding-recurring-saas-revenues-and-growing-global-capabilities, accessed June 9, 2022.

3. Triton Partners, "Triton Signs Agreement to Acquire Neptune Software," https://www.triton-partners.com/media/news/triton-signs-agreement-to-acquire-neptune-software/, accessed June 10, 2022.

4. Cloud Native Computing Foundation, "The State of Cloud Native Development," https://www.cncf.io/wp-content/uploads/2020/08/CNCF-The-State-of-Cloud-Native-Development_Q419.pdf, accessed June 10, 2022.

5. Perforce, "Perforce to Acquire DevOps Pioneer Puppet," https://www.perforce.com/press-releases/perforce-acquire-devops-pioneer-puppet, accessed June 10, 2022.

6. Gartner, "The Top 8 Cybersecurity Predictions for 2021-2022," https://www.gartner.com/en/articles/the-top-8-cybersecurity-predictions-for-2021-2022, accessed June 11, 2022.

7. PTC, "PTC to Acquire Next-Generation Application Lifecycle Management Company Intland Software," https://www.ptc.com/en/news/2022/ptc-to-acquire-intland-software, accessed June 11, 2022.

8. Gartner, "Gartner Predicts the Future of AI Technologies," https://www.gartner.com/smarterwithgartner/gartner-predicts-the-future-of-ai-technologies, accessed June 11, 2022.

9. ActunewsWire, "CGI Enter Into an Agreement for the Acquisition of Umanis…," https://www.actusnews.com/en/umanis/pr/2022/03/11/cgi-enter-into-an-agreement-for-the-acquisition-of-umanis-a-leading-data-digital-and-business-solutions-firm-in-france, accessed June 12, 2022.