Insight

Technology Services Industry Update - Q3 2022

Read more about M&A trends and activity in this sector

Ken Allen

Ken Allen

Managing Director, Corporate Finance, KPMG US

+1 617-988-5772

     

Ken Allen

Ken Allen

Managing Director, Corporate Finance, KPMG US

+1 617-988-5772

     

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.

     


We hope you find this information valuable, and as always, feel free to reach out if you would like to discuss in further detail. To read the full report, download the PDF below.     

    


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KPMG Corporate Finance LLC’s investment bankers have extensive Technology transaction and industry experience, which enables them to understand the industry-specific issues and challenges facing our clients.