Last year Consultancy.nl (Consultancy.nl is Dutch leading consultancy online platform with close to 2 million viewers) placed an overview of the most important M & A consultants and investment bankers. In addition to the well-known players such as ‘the Big Four’ and the large investment banks, a striking number of M&A boutiques were included in this list. One of the niche players who has managed to nestle between the top is Hogenhouck. Consultancy.nl visited the office, located at the Lange Voorhout in The Hague, and asked some questions to Rik Stikkelbroeck, Managing Partner of Hogenhouck, about the developments in the M & A market and in particular those within IT and cyber security.

How do you explain the continuing pressure in M&A and with emphasis the many transactions in the IT market?

There has been a lot of movement in the market since 2014 that is actually a combination of circumstances. On the one hand, the historically low interest rates, whereby European banks even apply a zero percent interest rate, on the other hand, the pressure from strategic buyers (companies) and private equity on accelerated growth opportunities that they see mainly in SMEs. The call to companies with predictable cash flows is far from over. Both private equity (private equity firms that raise funds from entrepreneurs who want to invest in real estate in addition to investments in real estate) and strategists are active in the market. Examples of buy and build over. From strategists (think of KPN with an active buy & build in the hosting and security market) and private equity (parties like Main Capital, Waterland, etc.) we see a lot of appetite for buy and build. A large proportion of the Dutch IT companies active in the SME + market realize EBITDA levels of 10% to 15% of the turnover.

What kind of movements do you see in the M&A market with emphasis in IT?

We have seen the necessary consolidations in the IT market in recent years. Examples of such consolidations in which we as Hogenhouck itself are involved were the buy and build in the hardware market together with Infotheek Group – since our introduction in 2008 grew from € 50 million to € 750 million in 2018, partly due to organic growth and targeted acquisitions. from Scholten Awater and Central Point (both in 2017), the buy and build with IT company Finalist (acquisitions of TDC Lighthouse and Iprofs) and of course the buy and build with private equity parties in the IT Healthcare market together with Gilde Equity Management ( including the acquisitions of Impulse, Nedercare and VIR e-care Solutions). We were also involved in the acquisitions in the managed services with Greenfield (acquisitions of Advo and Stepco) and recently with Gilde Healthcare (takeover of Creaforti).

What picture do these acquisitions provide?

The preliminary conclusion seems that a number of markets will be ‘out consolidated’ in the coming years. A number of verticals within IT have been consolidated at an early stage. Examples are the (managed) hosting markets, in which a party such as Waterland has made almost twenty acquisitions in two years (including LayerThree, Jitscale, Nines, Easter Plaza, Yenlo Managed Services, Solido Hosting, Jaynet and recently Vellance (where Hogenhouck trusted advisor was, ed.), the managed services market in which various strategists actively acquire such as Vincere Group (acquisitions of Xcellent, Compromise, Domino ICT, Issys ICT, Sincerus, Switch IT Solutions and Unilogic), KPN (including IS and Netground) and Claranet (Ardenta, Diademis and Rely) are active.

Where will consolidations within the IT take place?

The endgame in the IT hardware, hosting and services markets seem to have begun. Almost all smaller players have been approached, the medium-sized independent players are known and the big players have arrived. The expectation is that the big players (> EU 200 million) will still make a limited number of acquisitions in the coming years and then change owners. On the one hand via an international exit (think of the US, Asia or yet Europe – mostly a change of private equity owner) on the other hand through an IPO.

We expect the market of cybersecurity to be the next market that will consolidate faster. This market is seen by many parties as a growth diamond, but also as complex. There are many small parties and the parties that stand out above ground level in terms of position, size and quality, change owners (KPN recently acquired Qsight, Fox IT was acquired by NCC Group). Many companies that advertise with cybersecurity earn the money with other IT services. The market in the Netherlands is very fragmented, while abroad the the big players are active (Cisco, Palo Alto).

The medium-sized players in the Netherlands (SecureLink, Fox IT, Qsight) are small medium enterprises (SMEs with turnover between € 20 and € 50 million with a maximum of 200+ FTEs). Striking in a market that in 2017 reached a worldwide turnover of $ 87 billion and in 2019 will pass the $ 100 billion mark… .. One of the few players in the Netherlands that has accelerated its position in this market is KPN, by the recent acquisitions including Qsight, Inspark and Dearbytes.

What do you think is the size of the security market?

Reliable figures about the security market are difficult to find. During the cybersecurity week (November 2017), organized by The Haque Security Delta, Hogenhouck, together with BarentsKrans (lawyers and notaries), gave an update of the sector. According to The Hague Security Delta, the cybersecurity market is growing by 5% – 8% per year. Cyber ​​security is expensive and many SME companies take an unweighted risk to invest less because of the high costs, read more exposure.

However, it is interesting to see whether companies are going to invest more quickly in security because of the upcoming European Privacy Legislation (GDPR) which companies are obliged to store and process personal data in a demonstrably secure manner (against high fines). In short, the choice to do nothing is simply no longer there.

Any M&A advice for companies?

If you want to stand out as an IT company and want to dress as a bride, it is not unwise to position yourself as a ‘cyber security guard’. It is not yet a mature market which translates into the valuations; especially based on future promise, read valuations based on multiple times EBITDA you do not see as there is simply no EBITDA. In addition, there is a great demand for security experts and this demand exceeds what is a restriction on growth and an appreciation for the company.

In addition, the development of ‘the cloud’ is an interesting one. Once the entire SME in the Netherlands is transferred to the cloud, read the leading platforms such as Amazon (Amazon Cloud), Google (Google Cloud) and Microsoft (Azure), that will bring about a change in the needs for (local) security. Then you are seen as a software vendor, then it concerns the service and the security of endpoints. Fortunately, the internet of things is a solution for parties that will focus on that. In a few years, almost all appliances in the household are connected to SIM cards and people can, for example, switch on the microwave from their work as soon as they pass the traffic jam, which is indicated by a navigation system.

Source: Consultancy.nl (leading Consultancy online platform), January 28th, 2018