The March-quarter figure is in sharp contrast to the more than 273 deals recorded in the first quarter of 2022 and around 224 in Q1 of 2021, said the report.
A lower count of 61 deals was last seen in the second quarter of 2020 amid the Covid-19 outbreak.“The extensive buyer activity across segments is what stood out in the remarkable dealmaking over the past two years,” said Nitin Bhatt, technology sector leader, EY India. “While the first quarter saw a slowdown in deal activity, both strategic purchasers and private equity firms continue to hunt for enhancing their digital and domain capabilities, expanding geographic reach, and filling white spaces in their portfolios.”
According to Bhatt, assets in areas such as cloud, data and artificial intelligence (AI), cybersecurity and digital engineering still command a relative premium and an uptick on the demand side of deals in these areas is expected.
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According to the report, in the backdrop of macro factors and reduced spending forecast, buyers appear to be in a wait-and-watch mode–resulting in selective deal-making.The global tech sector recorded 796 and 947 M&As in 2021 and 2022, respectively. The deals figure for 2022 was the highest in the last five years.
The study, however, noted that deal activity for mid-sized companies (enterprise value of up to $300 million), is expected to remain resilient across the broader mergers and acquisitions market and would likely hold true for the highly fragmented tech services industry, albeit moderated from 2022 or 2021 levels.
“After eight consecutive quarters of hyper-growth in deal activity, signs of an impending slowdown began to emerge near the end of 2022, and continued to the first quarter of 2023,” the report said.
The year 2022 marked the most number of transactions in the preceding five years, with the aim of accelerating competitive advantage in both emerging technologies and the talent market as a result of an increase in technology services investment after the pandemic, it said.
Sangeeta Gupta, senior vice president at NASSCOM, said, “The last 24 months have witnessed a significant shift in enterprise investments towards digital and business transformation.”
In FY23, according to Gupta, this transformation of emerging technologies accelerated with an urgent need to revisit the business strategy and transform existing models to unlock value from emerging opportunities. “As a result, firms have focused on capability building through M&As, partnerships, and more importantly, relook at their business strategies,” Gupta said.
The report also said that IT clients who are facing business challenges (like banks) could divest or monetise non-core businesses or captives in the current year. This is reminiscent of the 2008 crisis, when leading IT companies acquired captive businesses of Citi, ABN Amro and UBS, among others.
ET had reported in March that IT companies could eye captive arms, especially in the banking, financial services and insurance (BFSI) sector, post the US regional banking crisis.
PE activity increases
Private equity (PE) participation in IT services deals increased 2.5 times in 2022 compared with 2020 and dominated the large deals (more than $500 million) segment with a 62.5% share. Compared with 2020, BPM and ER&D services experienced growth of 1.5 times and 1.8 times, respectively.
Wipro acquiring SAP consultancy firm Rizing for $540 million, thereby giving an exit to One Equity Partners, and Bain Capital buying a stake in midcap IT firm CitiusTech and joining existing investor BPEA EQT, are some of the top PE deals of 2022.