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The AIdea of India: Generative AI's potential to accelerate India's digital transformation.
In late 2022 and early 2023, the pace of deal making decelerated due to the steady increase in interest rates, geopolitical uncertainties, and a reduction in technology spending. However, the global technology services M&A market remained resilient in terms of volume, with 740 deals in 2023 compared to 770 deals in 2022. The deal value, however, dropped to US$9.7b from US$34.0b. Notably, large strategic buyers opted for tuck-in acquisitions while mid-market strategic and PE buyers accounted for higher proportion of deals. As a result, large deals1 were inconspicuous, with only 15 deals exceeding US$250m and none above US$1b.
The narrative of technology services M&A has evolved from filling in white spaces in digital capabilities during pandemic years to now building tech specialism and differentiation. Data Engineering and Analytics assets are also experiencing an increased demand as end-customers focus on “scaling-up” the use of GenAI, getting data and security strategies right, and building a digital core. The increase in cloud adoption has led to higher spending on cybersecurity, resulting in a 30% growth in cybersecurity M&A as companies strengthen their offerings and address evolving threats.
In addition to enhancing their capabilities, dealmakers also prioritized expanding their market presence by exploring new territories. Europe saw a spurt in activity, surpassing Americas for the first time in the last several years as the favored target market. IT services companies opted to de-risk their end market by shoring up presence in Europe. Furthermore, the region also experienced a stable IT spends during the year in its bid to narrow the gap with North America’s digital adoption and use of GenAI.
PE activity, both direct investments and roll-ups, made up a significant ~46% of overall deal volumes. While 2023 may not have witnessed a flurry of large-scale PE deals, growth investments and entry of new funds validated the long-term potential of the sector. Addressing the high debt financing costs, PEs recalibrated their strategy and executed deals with larger equity contributions, seller rollovers and alternative forms of financing like GP and LP led secondary transactions and continuation funds.
The second half of 2023 leaves behind a trail of cautious optimism for 2024. Deal activity is expected to remain steady, driven by strategic players pursuing scale-led M&A to hedge against growth uncertainties. Buyers will also double down on a ‘specialist’ strategy and focus on verticalization, especially in Healthcare & Life Sciences (HLS). Additionally, quantitative easing measures could further stimulate the market, with a higher number of PE exits, leveraged buyouts, and the opening of US IPO markets.