september 2020 update...data, artificial intelligence, iot and cyber security remain the key tech...

September 2020 Update

The world is witnessing unprecedented times. The pandemic has challenged governments, companies and people to rethink the basics of how they

operate. Economies have contracted globally with the pandemic affecting developed and developing economies indiscriminately. The impact of the virus

has been skewed for various industry verticals, with travel and hospitality being hit the worst, and telecom and utilities seeing an expansion in some

cases. Technology has emerged as the key differentiator, underpinning the performance of companies across industries.

In this thought paper, we have tried to capture the pandemic’s impact on the IT outsourcing industry and associated deal activity. We have tried to cover

the following key topics:

1. Overall implications on IT industry as predicted by various renowned analysts. The actual performance delivered by IT Services & BPM players for the

quarter ending June 2020 along with their outlook for this year

2. Insights from our discussion with 200+ investors worldwide including both strategic buyers & private equity investors

3. Valuation trends over the last 5 years and how stock markets have shown a sharp rebound to pre-COVID levels in the last few months

4. Insights into deal activity over the last 6 months

Note that this report is an update to our earlier report (link) published on [ Date ] around Implications of COVID on Technology Outsourcing industry and

associated M&A deal activity.

2

• IT Services industry is forecasted to contract

by 0-10% as per various analysts

• Key challenges include delay of existing

projects and cut down on discretionary spend

• Acceleration in cloud adoption has led to 4%

growth in infrastructure spending

• IT services vendors have witnessed 0-5%

degrowth in QE Jun’20 while BPM companies

have been more impacted with ~10%

degrowth

• IT services vendors have expanded margins

by average 1.5% whereas BPM companies'

margins have contracted by 1% for QE Jun ‘20

• Companies focused on digital transformation,

analytics, cloud and cybersecurity continue to

grow in 2020

• Mature buyers (like Accenture, Cognizant,

Atos) have maintained their pre-pandemic rate

of acquisitions

• 63% of strategics are actively looking to

acquire; 34% looking at deals opportunistically

and only 3% have put M&A on hold

• Strategics have become more proactive with

their acquisition criteria with further focus on

next gen technologies

• 65% of PE funds are actively looking to

acquire; 33% looking at deals opportunistically

and only 2% have put M&A on hold

• Most PEs have a lot of dry powder and are

looking to actively deploy capital

• Continued availability of debt at attractive

interest rates is providing support to PE buyout

activity

• Investors have formed thesis by vertical

(staying away from retail, hospitality & travel

focused firms)

• IT / BPM stocks have rebounded sharply post

March 2020

• Most categories are trading at all-time highs

except for traditional ER&D players and

diversified BPM

• Digital Engineering players have outperformed

with their share prices increasing by 108%

since the fall in March

• EV / Revenue & EV / EBITDA multiples are

back to pre-COVID levels

• Valuations continue to hold up in private

markets with deals happening at attractive

valuations

• Investors are using back-ended earnout

structures to get comfort and for downside

risk protection

• Technology deals have started showing an

uptick over the last couple of months

• 60+ technology services deals have been

announced in June-Aug 2020

• Next-gen digital transformation players

focused on cloud, analytics & digital OPD have

garnered maximum attention

• Capability expansion has been a key driver of

deals for strategics

• PEs have become very active contributing to

15% of the deals as compared to 10% earlier

• We are recommending potential sellers to

launch sale / fund raising processes in case

the company’s financial performance and

trajectory is strong

3

75% of the respondents

expect clients’ business de-

growth in FY20-21, with 40%

of these respondents

expecting a De-growth of 5%

Worldwide IT spending is

expected to decline 5.1%

in constant currency

terms in 2020 to $2.25

trillion

• Deals are being restructured to

manage immediate priorities

with a focus on relooking at

terms related to fixed-costs,

payment-term flexibility,

resource reallocation

• Discretionary projects being

halted or re-scoped

• Innovation PoCs with unclear

ROIs being de-prioritized

• New opportunities are emerging as clients start to revisit their

digital transformation journey with high-speed secure infrastructure

and multi/hybrid cloud leading as the emerging tech spend areas.

Data, Artificial Intelligence, IoT and Cyber Security remain the key

tech themes

• Infrastructure spending is expected to post moderate growth of 4%

as businesses continue to fund existing cloud deployments while

some may even look to accelerate their cloud projects during the

remainder of the year as a means to control costs and defer capital

spending on upgrades to on-premise datacenters and applications

IT services spending will decline, mostly due to delays in new projects, but a large portion of services revenue will

be relatively protected from spending cuts where it relates to the management, support and operations of

technology, which is now fundamental to business performance and viability. At the same time, many companies

are also reluctant to reverse course on digital transformation, which is central to business strategy

Worldwide IT Services

spending is projected to

total $1.1 trillion in

2020, a decline of 6.8%

from 2019

5

-5% to 3.5%-2.5%

-2.5% to 3.5%-16.3%

-5% to -3.5% -9.7%

No guidance shared-9.0%

-5.5% to -0.5%-8.3%

6.0%-3.3%

7.4% to 8.5%4.8%

No guidance shared1.4%

6.0% to 10.0%-1.7%


3.5 to 4.5% -1.0%


-2.0% to -0.5%-3.4%


0.0% to 2.0%-2.4%

1.5% to 2.5%-4.0%







0.0%-0.9%

3.3% to 6.0%-8.2%




8.5%-2.9% 11%-4.6%

Latest quarter revenue growth (QoQ) Revised Revenue Growth Guidance EBITDA Margin Change for QE Jun 2020Source: Company press release

Note: All the above stats are for quarter ending June 2020. The growth guidance is for FY21 / CY20 unless specifically mentioned otherwise

-1.9%

5.4%

1.5%

1.2%

-0.8%

-2.7%

0.9%

-0.6%

1.4%

2.9%

-1.1%

1.4%

4.2%

-1.3%

NA

-0.5%

2.1%

0.4%

-4.5%

-6.7%

0.0%

1.4%

0.0%

1.7%

1.0%

-0.2%

-0.2%-1.6%-0.1%

6

Refocusing M&A

Initiatives

Looking To Fill

Specific Gaps

Target Specific

Dynamics

Process Related

Dynamics

Valuation &

Structuring

Source: The above analysis is based on primary research and interaction with IT outsourcing majors across US, Europe & India over the last 5 months (Apr-Aug 2020)

• Strategic buyers have gone back to the drawing board to redefine their

acquisition strategies and deploy capital more efficiently

• The bar is higher now and buyers are going ahead only where there is clear

rationale

• Buyers are more focused in their acquisition criteria and are looking at smaller

targets with focus on next-gen digital capabilities like cloud, analytics, digital

transformation etc.

• Buyers are conducting client specific diligence and trying to get comfort on

future projections and visibility on pipeline

• Buyers are also forming thesis by verticals (staying away from retail, travel &

hospitality focused assets)

• Buyers are trying to get their arms around conducting the entire acquisition

virtually without the ability to interact with target’s management in-person

• The diligence period is elongated for most buyers as they are trying to buy time

• Valuation expectations of buyers have moderated but deals continue to happen

at pre-COVID levels

• Back-ended earnout structures are being used to get downside risk protection

63%

34%

3%

Continue to be acquisitive

Looking at deals opportunitically

Put a pause to M&A activity

9

Source: The above analysis is based on primary research and interaction with PE players across US, Europe & India over the last 5 months (Apr-Aug 2020)

Availability of Dry

Powder

Focus on Portfolio

Companies

Process Related

Dynamics

Relook at Pre-

Existing Connects

• Lot of dry powder is available across PE funds and most are actively looking to

deploy capital

• Initially most PEs were focused on trying to assess impact of COVID on their

portfolio companies and trying to solve their issues

• Buyers are trying to get their arms around conducting the entire acquisition

virtually without the ability to interact with target’s management in-person

• The diligence period is elongated for most buyers as they are trying to buy time

• Most funds are doubling down on assets that they knew historically to take

advantage of their pre-existing relationships

10

65%

33%

2%

Continue to be acquisitive

Looking at deals opportunitically

Put a pause to M&A activity

Source: Last 5 years data taken as on 18th Aug 2020 from CapIQ; Indices for each group have been calculated free float market cap methodology (sum of free float shares* share price) and then rebased to 100

Note: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap

IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc,

EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService

Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPIT

164

133

227

1,369

398

90

194

S&P 25% 36%

Large Cap IT 30% 44%

Mid Cap IT 50% 81%

Digital

Engineering34% 108%

CRM Focused

BPM28% 67%

Diversified

BPM54% 61%

ER&D 51% 33%

12

Source: Last 5 years data taken as on 18th Aug 2020 from CapIQ





2.0x

2.8x2.7x

2.2x

1.3x2.1x

2.7x

6.7x

1.0x1.2x

1.9x 2.4x

0.8x 0.9x

S&P 22% 28%


Mid Cap IT 50% 56%

Digital

Engineering37% 63%

CRM Focused

BPM52% 61%

Diversified

BPM40% 47%

ER&D 57% 38%

13

10.3x

15.4x

11.8x

10.6x

12.3x

12.7x

19.1x

7.8x

8.2x

11.0x

14.6x

8.1x

7.9x

S&P 22% 36%


Mid Cap IT 57% 59%

Digital

Engineering49% 148%

CRM Focused

BPM55% 48%

Diversified

BPM45% 51%

ER&D 62% 26%

Source: Last 5 years data taken as on 18th Aug 2020 from CapIQ





51.9x

14

157

164126133

181227

897

1,369

319398

11190

299

194

01-Jan-2020 01-Apr-2020 01-Jul-2020

2.7x 2.8x

2.3x2.2x

1.9x 2.1x

6.5x6.7x

1.0x

1.2x

2.5x2.4x

1.3x

0.9x

01-Jan-2020 01-Apr-2020 01-Jul-2020

14.1x

15.4x

10.2x10.6x11.7x

12.7x

36.3x

51.9x

8.3x8.2x

15.2x

14.6x13.4x

7.9x

01-Jan-2020 01-Apr-2020 01-Jul-2020

S&P 500 Large Cap IT Mid Cap IT Digital Engineering CRM Focussed Diversified BPM ER&D

Source: Last 5 years data taken as on 26th Mar 2020 from CapIQ




Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPIT15

July 2020 $250Mn 3.0x

July 2020 $80Mn 2.1x

July 2020 $565Mn 3.9x

July 2020 $22Mn 1.7x

July 2020 $110Mn 5.0x

June 2020 $93Mn 2.8x

April 2020 $139Mn 4.1x

16

Note- The deal activity is based on deals announced till 31st August 2020; Source: Mergermarket

283

220

227

270279

262269

248

225

249234

225 226

191

149

9082

127 124

162

-10000

0

10000

20000

30000

40000

50000

60000

70000

80000

0

50

100

150

200

250

300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3

2019 2020

Number of Deals Sum of Deal Value USD(m)

18

16

23

20

28

14

28

20

13

10

1819

24

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Qtr3 Qtr4 Qtr1 Qtr2 Qtr3

2019 2020

Source: Avendus deal tracker19

Source: Avendus deal tracker

DATE BUYER TARGET RATIONALE

31-Aug-20 Cyient Integrated Global Partners Pty Ltd Capability Play

27-Aug-20 NTT DATA, Inc. Acorio LLC Capability Play

27-Aug-20 Discovery Health Partners Consova’s payment integrity business Capability Play

26-Aug-20 UST Global, Inc. Tastry, Inc. Capability Play

26-Aug-20 Change Healthcare PROMETHEUS Analytics® Capability Play

25-Aug-20 Cognizant Tin Roof Software LLC Capability Play

25-Aug-20 Dynamic Quest Southern Data Solutions Capability Play, Geography – Market Access

25-Aug-20 ConvergeOne Altivon Capability Play

24-Aug-20 Employees from CGI Inventas AS Capability Play

24-Aug-20 Core BTS Blue Chip Consulting Group Capability Play

20-Aug-20 emids Flextech Vertical Focus

19-Aug-20 Konica Minolta Depth Security Capability Play, Vertical Focus

19-Aug-20 Centauri Health Solutions HCFS Capability Play

18-Aug-20 Goldman Sachs MBD and Everstone Capital InfoStretch Corporation Private Equity

18-Aug-20 Revint Praxis Healthcare Solutions Capability Play

17-Aug-20 SPi Global Holdings, Inc. LearningMate Solutions, Inc Private Equity

14-Aug-20 Improving Object Partners Capability Play, Geography – Market Access

13-Aug-20 Accenture CreativeDrive Capability Play

11-Aug-20 Cerberus Sentinel Technologyville Capability Play

10-Aug-20 Accenture Organize Cloud Labs Capability Play

10-Aug-20 Thomas Bravo Majesco Private Equity

06-Aug-20 OceanSound Partners Netrix Private Equity

05-Aug-20 TTEC Holdings, Inc. VoiceFoundry, LLC Capability Play

03-Aug-20 DAS Health Ventures Technology Seed Capability Play, Geography – Market Access

20



30-Jul-20 Fujitsu Limited Fujitsu Frontech (47.01% Stake) Control

29-Jul-20 NantHealth OpenNMS Capability Play

28-Jul-20 Cognizant New Signature Inc. Capability Play

28-Jul-20 Ciox Health Medal, Inc Capability Play

27-Jul-20 Atos SE EcoAct Capability Play

27-Jul-20 Atos SE Digital.security Capability Play, Geography – Market Access

27-Jul-20 TA Associates & Francisco Partners Edifecs Private Equity

23-Jul-20 Wipro Limited 4C Consulting Capability Play

23-Jul-20 Nubank Cognitect Capability Play

22-Jul-20 Parthenon Capital Nuvem Health Control

20-Jul-20 Dedalus Italia SpA DXC (healthcare software business) Vertical Focus

20-Jul-20 Dynamic Quest Nexxtep Technology Services Geography – Market Access

20-Jul-20 Thoma Bravo Majesco Private Equity

16-Jul-20 L&T Technology Services Limited Orchestra Technology Capability Play

14-Jul-20 Wipro Limited IVIA Servicos de Informatica Capability Play, Geography – Market Access

14-Jul-20 RLH Equity Partners MCA Connect Private Equity

07-Jul-20 Computer Design & Integration Plan B Technologies Capability Play

07-Jul-20 Brillio Cognetik Capability Play, Geography – Delivery Capability

01-Jul-20 Gryphon Investors 3Cloud Private Equity

29-Jun-20 Cedar Gate Technologies (backed by GTCR) Citra Health Solutions Capability Play, Platform Acquisition

24-Jun-20 UST Global Ksu3baka Strategic Investment

24-Jun-20 Atos Paladion Networks Private Limited Capability Play

24-Jun-20 Atos AliA Consulting Capability Play

23-Jun-20 Equifax Urjanet Private Equity

21



20-Jun-20 Baring Private Equity Asia Hexaware Technologies (37.56% Stake) Take Private

19-Jun-20 The Access Group Eclipse Hardware Capability Play, Geography – Delivery Capability

19-Jun-20 Sompo Holdings Palantir Technologies Strategic Investment

17-Jun-20 Perficient Productora de Software Capability Play

17-Jun-20 Trinity Hunt Partners Keste Private Equity

16-Jun-20 Blue Venture Fund, Abacus Insights Private Equity

15-Jun-20 IBM Corporation Spanugo Capability Play

15-Jun-20 Novetta (backed by Carlyle) WaveStrike Scale

11-Jun-20 Wipro Ventures CloudKnox Security Strategic Investment

08-Jun-20 Wavecrest Growth Partners Stirista Private Equity

08-Jun-20 Orion Innovation Zodiac Systems Capability Play

03-Jun-20 Navisite Privo Capability Play

03-Jun-20 Effectual Five Talent Capability Play

29-May-20 HCL Cisco’s Self-Optimizing Network (SON) Capability Play

26-May-20 Digodat MightyHive (division of S4 Capital) Capability Play

23-May-20 OnMobile Global rob0 Inc. (25% stake) Capability Play

20-May-20 Saalex Information Technology Arctic MSP Capability Play, Geography – Market Access

12-May-20 Stellar IT StanSource Capability Play

11-May-20 APC Holdings Sequential Technology Private Equity

09-May-20 Ceridian Excelity Global Capability Play, Geography – Market Access

07-May-20 HPS Investment Partners, Farallon Capital Management and GIC Atento Holding (64.34% Stake) Private Equity

05-May-20 Cognizant Collaborative Solutions Capability Play

05-May-20 Accenture Callisto Integration Capability Play

28-Apr-20 Martello GSX Capability Play

22



23-Apr-20 Chesapeake Systems StorExcel Geography – Delivery Capability, Capability Play

22-Apr-20 Atos Miner & Kasch Capability Play

21-Apr-20 CentriLogic ObjectSharp Capability Play

21-Apr-20 SS&C Capita Life & Pensions Services Geography – Delivery Capability Play

20-Apr-20 Accenture Plc Gekko Capability Play

14-Apr-20 W20 Symplur Capability Play

10-Apr-20 Hitachi, Ltd. Fusionex International plc Capability Play

09-Apr-20 Luxoft CMORE Automotive Capability Play

07-Apr-20 Mediacurrent Duo Consulting Capability Play

07-Apr-20 EMS Consulting Digital Banking Services (DBS DX) Capability Play

02-Apr-20 Accenture Plc Yesler, Inc. Capability Play

02-Apr-20 Pythian Agosto Capability Play

26-Apr-20 TA Associates Accion Labs Private Equity

25-Mar-20 Capgemini Whitesky Labs Capability-Geography Play

23-Mar-20 Perficient Brainjocks Capability-Delivery Play

23-Mar-20 Cognizant Lev Capability Play

21-Mar-20 Bright Shine Corporation Shenzhen Rayvision Technology Private Equity

18-Mar-20 Baird Capital Partners Aura Futures Group Private Equity

16-Mar-20 MAG Aerospace Aaski Technology Client Acquisition

23

59%25%

14%

90%

10% 8%2%

19%

5%

15%11%

40%

58%18%

4%

9%

1%10%

63%12%

4%1%

4%

16% Capability

Geography

Vertical

Scale

Delivery Capability

Private Equity 77%

15%

6%

2%

US

Europe

APAC

Others

8%5%

18%

7%

18%5%

18%

21%

Analytics

BPM

Cloud

Cybersecurity

ER&D / OPD

Digital Agency

Generic IT

Vertical Specific85%

15%

Strategic

PE

Jan-Mar

2020

Apr-Aug

2020

Jan-Mar

2020

Apr-Aug

2020

Jan-Mar

2020

Apr-Aug

2020

Jan-Mar

2020

Apr-Aug

2020


Note: The total deals tracked between Jan-Mar 2020 & Apr-July 2020 is 61 & 84 respectively24

If owners are looking to sell, the market is conducive to deal making and they

should launch as long as the company performance is holding up which would

mean that company is growing quarter on quarter and it is able to create

projections for the next 3-4 quarters with a high degree of confidence

• In the April-June period the

number of new processes had

come down significantly with few

quality assets coming to the

market. Few assets that have

done well in the current

environment are coming to the

market

• Number of processes have

again started to launch since

mid-JulyApr

2020

May

2020

Jun

2020

Jul

2020

Aug

2020

Sep

2020

Nu

mb

er

of

ne

w p

roce

sse

s

Investor looking to invest and allocate more

capital

Strategics continue to perform

well and generate cash to do

deals

PEs have lot of dry powder to

invest

If owners are looking to sell, the market is conducive to deal making and they should

launch as long as the company performance is holding up which would mean that

company is growing quarter on quarter and it is able to create projections for the next

3-4 quarters with a high degree of confidence

25

Email: [email protected]

Mobile: +91 90077 70946

Landline: +91 080 6448 3632

Email: [email protected]

Mobile: +1 929 239 7136

Landline: +1 646 707 0789

26

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no.: PMS - INP000003625 | SEC - USA: CRD No. 156771 | Avendus Capital, Inc: FINRA-USA: CRD No. – 150160 | Avendus Capital(UK) Private Limited: Authorised and regulated by the Financial Conduct Authority (493919) | Avezo

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IL&FS Financial Centre,

C & D Quadrant – 6th Floor,

Bandra-Kurla Complex, Bandra

(East),

Mumbai – 400 051, India

The Millenia Tower,

A – 10th Floor, No 1 & 2,

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Time Tower,

901-B,

M.G. Road, Gurgaon,

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PS Arcadia,

7th Floor, Unit 7B, 4A,

Camac Street,

Kolkata – 700 016, India

Sahiti Sreshta,

1st Floor, Plot No. 1222,

Road No. 36, Jubliee Hills,

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Regus Business Centre,

Earth Arise, Unit No. 1101, 11th

Floor, Sarkhej – Gandhinagar

Highway, Makarba,

Ahmedabad – 380 015, India

Redbrick Offices Limited,

Level 5 & 6, The Pavilion, S B

Road, Chaturshringi, Next to JW

Marriott, Laxmi Society, Model

Colony, Shivajinagar, Pune – 411

006, India

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