Application Development and Deployment M&A Update – February 2023

Heightened Demand for Application Development & Deployment Services Drives Sector M&A

Capstone Partners released its February 2023 Application Development and Deployment M&A Update, reporting that the AppDev & Deployment sector demonstrated significant economic resilience in 2022, supported by heightened demand for outsourced software development services and elevated digital transformation spending by organizations looking to create new sources of value through digital products, services, and experiences. Organizations have increasingly relied on outsourced software development services to support digital transformation and information technology (IT) infrastructure needs. This has largely been driven by the high costs associated with building internal development teams, which can lead to tighter budget constraints and lower profit margins. Especially for enterprise-wide solutions, businesses that outsource software development services stand to benefit from cost reductions, proven workflows and processes, scalability, and a quick time-to-market. As a result, the Services segment is expected to continue to lead the AppDev & Deployment sector in market share, revenue, and acquisition opportunities in 2023.

Merger and acquisition (M&A) activity in the AppDev & Deployment sector reached record levels in 2022, with 224 transactions announced or completed. This marks an increase of 3.2% year-over-year (YOY) and 69.7% compared to 2020, demonstrating the resilience of sector deal flow despite economic headwinds. A persistent strategic and private equity buyer pool has contributed to elevated levels of sector M&A activity, with both buyer groups engaging in competitive bid processes to capitalize on digital transformation tailwinds. The Services segment continued to account for the majority of sector M&A targets in 2022, led by outsourced IT providers, custom application development businesses, and digital and cloud transformation services providers. As organizations have increasingly shifted to outsourcing their software development and IT infrastructure needs, buyers have looked to gain entry in the segment through accretive acquisitions. The Software segment attracted strong acquirer interest from strategics and sponsor-backed portfolios in 2022, with buyers typically targeting segment participants within a specific technology stack such as Microsoft Dynamics 365 and Azure.

Also included in our Application Development and Deployment M&A Update:

• How AppDev & Deployment sector M&A purchase multiples remained strong in 2022 despite economic headwinds.
• A breakdown of large-scale M&A transactions in the space and how enterprise consolidation has uplifted sector purchase multiples.
• Why the middle market comprised the majority of sector M&A volume in 2022 and what investment criteria buyers have prioritized.