IT Services

The IT services industry is large and complex. It includes companies that provide consulting, design, management, programming and support for computers and mobile devices, networks, and the Internet. The Austin Dale Group team has many years of experience working in the industry as owners, executives, advisors, and deal makers. Let us put our experience, our industry contacts, and our proven process to work for you, whether you are thinking of buying, selling, planning an exit, or enhancing the value of your company prior to a transaction.

Industry Trends

  • COVID-19 acted as a catalyst for trends that were already emerging in 2020, and businesses are continuing to make significant investments in technology solutions that support new ways of working and living. Consequently, the pandemic did not hurt the IT service and technology sectors as much as the rest of the economy.
  • The new normal for many businesses is to focus on flexibility and resilience. For IT, that means an architecture and workflow that are adaptable and able to withstand disruptions, wherever they come from.
  • Cloud systems are now at the heart of all new IT strategies and must support the requirement for flexibility and resilience.
  • The shift towards 5G (fifth-generation mobile network) is underway and will accelerate over the next 10 to 15 years. It will enable a new world of technological possibilities that will affect manufacturing, transportation, and many other parts of the economy.
  • Cybersecurity will remain a high priority, with interest in technologies such as authentication and network access. “Zero trust” is replacing “secure perimeter” as the paradigm for secure access. That means that network and user activity must be monitored, verified, and analyzed to check for potential problems. Systems that enable this type of security, and service companies that know how to implement them, such as managed security services providers (MSSPs), will be in high demand.
  • Interest in workforce technologies to support remote workers and customers and increase flexibility and agility exploded in 2020 and is continuing in 2021. Prominent examples include Zoom, Slack, and Microsoft Teams.
  • Flexible consumption models – Technology is enabling consumption-based and subscription business models to emerge in many industries such as software as a service, streaming video, and transportation. Recurring revenue and deeper customer relationships are just two of the many benefits for companies that can “servitize” their offerings.

 

M&A Market Trends

  • Technology products and services that support new ways of working and living, accelerated by the pandemic, are attractive to investors in the public and private markets.
  • COVID-19 has acted as a catalyst for trends we expected to see later in the future. As a result, many companies are shifting to remote work for the longer term and need to pivot to SaaS-based offerings. That is making tech companies attractive M&A targets to augment the buyers’ existing capabilities.
  • Technology dealmakers are increasingly optimistic that 2021 will be an active year, with lots of M&A activity.
  • Cloud, software as a service (SaaS), and cybersecurity companies will continue to be very attractive acquisition targets. For example, software/SaaS was the leading industry for private equity platform acquisitions in 2020, accounting for 13% of PE platform deals.
  • Managed Service Providers (MSPs) will also continue to be hot, especially those that are adept at supporting the new distributed company paradigm (remote workers, customers, and suppliers). IT service companies that provide consulting and other services around cloud and cybersecurity are also in demand.
  • Cloud solution providers that can tie multiple vendor products into seamless solutions will become increasingly attractive. The most successful providers will develop their own brands that are distinct from their vendors’ brands.
  • Valuations continue to be high for IT service companies. The pandemic and associated recession may have dropped valuations by a few percentage points and changed deal terms (less cash, more contingent payments). Valuations are dependent on the size of the company, amount of recurring revenue, growth rate, etc. Companies with greater than $5M revenue and $1M earnings will have more and better options if they decide to sell or recapitalize.

 

What Buyers Want

  • Digital transformation – Buyers and investors are attracted to companies that offer technology and services to disrupt markets, drive greater efficiency, and help their customers remain competitive as the economy changes.
  • Large markets and scalability – The most attractive companies have large addressable markets, effective growth strategies, and become more profitable and “sticky” as they get bigger. Companies that have proved they can scale (customers, revenue and earnings) will get higher valuations.
  • Recurring revenue – Consistent cash flow provides a strong foundation for growth and yields higher valuations.
  • Effective business models – Business models that can scale and become increasingly profitable are desirable, such as subscription models that drive recurring revenue and lifetime customer value.
  • Strong management team – Companies with a deep bench of effective managers are more attractive investments, with less dependence on founders and owners (who could leave following an acquisition).
  • Company uniqueness – Investors look for companies that have attributes that distinguish them from potential competitors and give them some sort of advantage, such as intellectual property, exclusivity, business relationships, etc.