Consolidation in IT market will continue for another two years
June 5th, 2018, Consultancy.nl the Dutch leading Tech website
The year 2017 was an absolute record year for mergers & acquisitions in the IT market. Driven by technological trends such as digitization and blockchain and the deep pockets of investors, the number of deals in the Netherlands amounted to almost 400 – almost double the level four years earlier. Mr. Rik H.J. Stikkelbroeck – one of the two founders of M & A boutique Hogenhouck – shares his expectations for the IT M&A market in 2018 in consultation with Consultancy.nl. We asked Stikkelbroeck 4 questions.
What do you see for developments in the M&A market as a whole, and in particular within IT companies?
Stikkelbroeck: ‘One of the most striking developments in the M&A market, and more specifically that of IT, is the accelerated professionalization of buyers. Where once the traditional strategists were in charge, you now see private equity (PE) parties operating alongside strategist in all layers of the market. One of the first largely consolidated IT markets was the IT hardware market where we, as an understatement, were involved. The recent takeover of Trust, a Dutch IT hardware giant, by investor Egeria also fits into that picture. Shortly afterwards, consolidations took place in the hosting market in which private equity parties such as dutch PE party Waterland took an ‘early’ stake, which is also reflected in recent developments, sucs as takeovers from private equity house Strikwerda (Yourhosting, Versio and Real Hosting), Main Capital (Denit, Dutchcloud) and Waterland (Sentia, including Reason Net and Vellance) and those in the managed services market (think of acquisitions by private equity backed strategist Vincere under the wings of ABN AMRO). We also see movements in data center country and now also in the cybersecurity and software market. Our consolidation cycle (picture on the website) gives a clear view on the consolidation wave in the Dutch IT market.
In your view, what are the following consolidation waves in the IT market?
Stikkelbroeck: “We can say that the consolidation in the IT hardware market in the Netherlands reached its peak in 2018. The expectation is that the consolidation wave in the managed services and managed hosting market will have reached its peak within the next two years (2020). At the moment, the large tickets reach a turnover of EUR 100 million and are therefore large enough for a next step (read: a strategic exit vs transfer to another international private equity party and possibly an IPO). The next wave is the consolidation in the cybersecurity and software market. These sectors are still developing rapidly, parties are busy tightening the earnings model and ensuring that they get body. The first acquisitions are already a fact in those markets (think of acquisitions by KPN and NCC Group). The software market is also in full swing, given the scalability that an increasing number of international strategists are joining in that market.
What does this consolidation mean for the IT sector?
Stikkelbroeck: “At the moment the acquisition appetite for both strategists and private equity is putting pressure on multiples. Classic auctions are on the order of the day. The market has become more professionalized, private equity parties approach targets proactively and strategists seek broadening. Examples too, a PCI, known as the classic managed printing party operating under the wings of AAP (ABN AMRO Participations) takes over a managed services player such as TarQ. Strategists as KPN, which broadens towards security, take over Dearbytes (software security) and Qsigt (partly cyber security) as examples. KPN is also active in other markets such as cloud services, like Spark en IS Group.
The persistently low interest rates around the world ensure continued high pressure on shareholder value and money can easily find its way to the SME+ market. Various strategists in IT, such as KPN, Konica Minolta, Leaseweb, Claranet and INfotheek Group, have an active buy and build strategy alongside the private equity parties such as Waterland (Sentia), Main Capital, Nordian, Gilde, MKB Foinds and Strikwerda to mention a few names. These activivities can logically be explainede, since the EBITD/Turnover ratios in healthy IT companies and in growing markets are between 10 and 15% and money yields less than 1.5% within financial institutions like private banks. Our expectation is that the consolidation in the Dutch IT market will continue for about two years, then the really interesting tickets will be forgiven and the cross border sales of the larger tickets will take place, for example tickets of € 100 milllion plus.
How can you, as an independent M&A boutique, stay afloat in the strong and rapidly changing market that teh IT market nowadays is?
Stikkelbroeck “One of the reasons for the rise of M&A boutiques in the Netherlands appears to be the specific indepth market knowledge. Offices such as Hogenhouck show a certain flexibility and willingness to deepen in a market. In 2008 we, as Hogenhouck, were given a huge opportunity to combine the IT hardware market with one of our clients, Infotheek Group. In less than ten years time this resulted in ten acquisititions, in 2016 the international cross border sale of Infotheek Group to Swedish investor Altor Equity Partners and in 2017 the acquisitions of Central Point (> € 100 milion turnover) and Scholten Awater (> € 200 million turnover). The experience of helping an SME (when we met Infotheek in 2008 they realised approx € 50 million turnover) to become an international player and leading Hardware supplier in the Benelux with more than € 800 annual turnover, provides knowledge and experience in a sector. In 2012 we were as Hogenhouck also active in the IT market of managed services (the merge of Advo/Stepco, the sell of Advisie, Computication and Lancom), followed by transactions in managed hosting (Netground and Vellance), later followed by transactions in business intelligence and testing (including Eclipse en Hot ITem), the software market (acquisitions with Gilde Equity Management of Impulse, Nedercare and VIR) and transactions in cyber security and managed printing (PrintControl – Itec).
In short, the flexibility and eagerness to be open as a boutique every day for knowledge and experience of playes in the market. It is nice when you represent specific knowlegde and skills in a market. We expect that the consolidation will continue for about one and a half to max two years and that the large parties will then have built up sufficient dealsize to orientate themselves towards a cross border exit. The expectation is that the multiples in the national market will cool down, to level 2008/2009 in short the boiling point is near.