Key Themes in Technology Services
Adoption of modern technologies is fueling a wave of Digital Transformation across business practices, products, and organizations. This Transformation will drive massive continued spend of Technology Services over the medium-to-long term, despite near-term economic headwinds.
Digital Transformation is Driving Massive IT Services Spend
- Digital transformation is being driven by a number of key technology enablers, including the transition from on-premise infrastructures to the cloud, advanced data / analytics, A.I. / machine learning, IoT, 5G, AR/VR/XR, and Blockchain / Web 3.0.
- These themes will continue to drive massive growth in IT Spending over the next 5-10 years.
- Digital transformation ecosystem spend is poised to double over the next several years to a nearly $2.8 trillion market opportunity.
Rapid Growth of Major Cloud Platforms is Driving ‘Cloud Enablement’ Services Spend
- AWS, Salesforce and Workday have pioneered a multi-decade shift from on-premise workloads to public cloud infrastructures.
- In addition to these platforms, KPMG is tracking 27 other emerging Cloud platforms driving growth of Cloud Enablement Services.
- Many of these platforms hold the potential to be the ‘next Salesforce’; key platforms to watch include Adobe, Azure, Google GCP, Databricks, Okta, Snowflake, Twilio, and UIPath.
Technology Services Strategic Activity Remains Robust Despite Economic Headwinds and a Downturn in Overall TMT M&A
- Overall TMT M&A volume was down 21% in Q3 relative to Q2, with total value down 72%, indicating significant headwinds for larger M&A deals.
- While deal volume in Technology Services declined 14% in Q3 relative to Q2, M&A in the sector has been more resilient than the broader TMT segment, with YTD (through Q3) deals up 42% versus the same 9-month period of 2021.
- A bi-furcated market has emerged, with ‘A+ and A’-quality companies finding a ready market for investment and M&A, and lower quality companies facing increased headwinds.
- Many Technology Services businesses that are aligned with the preceding Digital Transformation themes are not seeing a material slow-down in their businesses; rather, they continue to forecast aggressive top- and bottom-line expansion in 2023-2024.
A Number of Key Themes are Driving M&A in Technology Services
- Strategic and Financial buyers continue to put money to work through inorganic expansion strategies.
- Key M&A themes include expanding Digital Transformation services, acquiring Cloud Services solutions, acquiring vertical expertise, purchasing capabilities in the Government IT Services sector, expanding a buyer’s geographic footprint, financial sponsor roll-ups, financial sponsor platform acquisitions, and market expansion.
Valuations have Compressed, Varying by Sector
- The significant share price appreciation among publicly-traded peers in the Technology Services sector in 2021 has reversed in 2022 YTD
- 2021 Technology Services composite increased 38% vs. +27% for the S&P 500.
- This trend has reversed in 2022, with YTD performance in the sector declining by 31% (YTD 9/30/2022), versus a decline of 25% for the S&P 500.
- Most sub-sectors in Technology Services are trading at or near their 52-week lows.
- Overall EV/LTM EBITDA multiples in Technology Services have declined to 14.4x, 15.8% below the average multiple since 1/1/2021 of 17.1x.
- Valuations have held steady in several sectors, particularly in the Consulting and Government Consulting spaces.
A Number of Key Innovators are Driving Growth Across the Digital Transformation Landscape
- KPMG has compiled a list of key innovators that are aligned with the aforementioned growth themes, outlined beginning on page 29.
