July 20, 2016 – Solganick & Co. has issued its latest IT Services and Cloud M&A update for Q2 2016.  The following summarizes the report:




Key Trends in IT Services and Cloud Computing M&A


Against a backdrop of uncertainty in the global economy, including the fallout from the surprising UK vote to separate from the EU, mergers and acquisitions activity continues to remain strong across information technology services and cloud computing.


IT services and value-added distribution was the second most active subsector in the technology-enabled services space. The headline deals in the second quarter of 2016 included CSC’s merger with the enterprise segment of Hawlett Packard. This merger is expected to create the largest IT services unit and bring about $1 billion of synergies post closing.


Social, mobile, cloud and analytics (SMAC) continue to be the primary drivers of the growth in the information technology service sectors.


The use of smartphones and social media, along with the adoption of cloud computing is creating new growth opportunities for information technology (IT) service providers. This has in turn caused corporations to reach out to industry vendors to develop new digital strategies that allow them to interact with clients within these new mediums. Thus, demand for consolidation and mergers remain strong due to the strategy focus. 


Internet of Things leads M&A activity in the information technology space


In the first half of 2016, there were nearly two dozen merger and acquisition deals in the Internet of Things (IoT) space and related market segments such as Big Data Analytics, connectivity and wireless. IoT vendors are especially eager to acquire companies in hot vertical segments including: Automotive; Consumer Wearables; Healthcare; Industrial IoT; Manufacturing; Retail; Smart Home; and Transportation. Well targeted and executed IoT M&A will provide vendors with immediate tactical and strategic opportunities to gain market share, increase customer base, boost revenue, advance IoT goals and increase influence. A focused M&A has the added benefit of consolidating the industry and reducing the number of competitors.


M&A activity specially in IoT is increasing due to the rapid rate of technology development and the need for companies to increasingly have the latest capabilities. In addition, M&A presents new streams of revenue for companies that may see their traditional sources of income contracting. The increasing purchase price for these deals is indicative of the high value IoT can potentially bring to a company.


Valuation steady as ever despite increased volume


The deal volume in first half 2016 reached 2,234, a historically high number since H1 2014. The increased transaction volume is correlated with the lower valuations in the technology space. At the same time, the IT services and cloud computing sector remains a crowded marketplace but with solid business demands. Thus, the transaction multiples remain strong with a 1.1x Enterprise Value (EV)/Revenue and 11.2x EV/EBITDA for systems integrators and IT consulting firms. For cloud and hosting services firms, we noted transaction multiples averaging 1.9x EV/Revenue and 7.0x EV/EBITDA (although we believe the EBITDA multiples are much higher as most of the transactions were private and did not report transaction data.


You can download the complete report here: Solganick IT Services and Cloud M&A Update (Q2 2016)