Software M&A overview: Ukraine, Poland, Russia, Belarus
Participation from non-tech players continued to rise, as they closed more deals than technology buyers for a third year in a row. Digital and advanced technologies have disrupted multiple industries, and traditional industry incumbents have increasingly used acquisitions as a means to leapfrog this process. Public markets have rewarded non-tech companies that have pursued acquisitions to address digital transformation, accelerate innovation and develop products that confront disruption/sector convergence within their industries. We believe that companies considering an M&A or financing process would benefit from approaching the right non-tech buyers and should proactively seek to approach these groups to create competitive tension and maximize value.
Software development M&A: executive summary
- Growth 4-5x faster than globally. CEE outsourcing grows much faster than global average: 20-25%* y-o-y vs 5% globally
- Strong fundamentals. Fundamentals are very strong for continuous growth, we expect the CEE software outsourcing sector to double in revenue terms within 4-5 years
- Peak M&A activity in 2018. Peak number of M&A / investments in CEE in 2018: 30 deals announced. Most of the deals closed in 2018 are in the range of 1-2x EV / Revenue and 7-14x EV / EBITDA
- Leaders` M&A —– IPO / exit play. 5+ well-funded CEE players with revenue around $100M or more are expanding through M&A with the ultimate aim of IPO / exit play.
What are the largest acquirers looking for:
- Company’s ability to retain and win new large contracts, so that the most of the revenue is recurring
- Mid-market and/or enterprise clients
- Above the market revenue growth (consistently over 30% YOY)
- High EBITDA (over 15%) and Gross margin (over 40%)
- Founders’ willingness to stay for 2-4 years post acquisition
- Other strategic rationales might play a role depending on an acquirer – as type of delivery, technology specialization or broad stack etc.
Key strategic rationales driving M&A strategyInorganic growth gives established players a way to expand capabilities, client portfolios and scale
- Acquisition of new verticals or deepening of existing capabilities. Deal example: Luxoft – IntroPro, 2017 (Media, TV and Entertainment)
- New delivery geographies to diversify market / political risks.
- Delivery in new countries/regions enables to tap into talent pool.
Deal example: Endava – Velocity Partners, 2018 (delivery centers in Argentina, Uruguay, Colombia, Venezuela)
- Acquisition of new clients or enhancement of current client profile.
- Small players can be attractive depending on their client profile.
Deal example: GlobalLogic – Rofous Software, 2011 (e.g. LinkedIn, Stryker)
- Enables companies to bid for larger projects. Deal example: Helmes – Solbegsoft, 2018
Technical / language capabilities
- Enhancement of tech teams is faster via M&A than through organic growth.
Deal example: Smile – Adyax, 2018