The Market for IT Services companies

The market for Australian IT Services M&A remains buoyant as we head towards FY16.
Demand remains strong at all scale levels — but the dynamics and players change considerably.

At the entry level there are a large number of sub $5m revenue  IT Services businesses,  there are low barriers and it is relatively easy for small groups of technical founders to set up shop under a new brand.  The majority of trades sales in this sector are ‘equi-hire’ deals where a mid service cuts a deal with the founders to fold their teams into a larger organisation, the founders get a good salary, a bit of money upfront with an earn-out deal.  Buyers will typically pay somewhere in the region of 3X to 6X EBITDA,  many of the buyers will have an in-house template for these types of acquisition.  Very occasionally we’ll see bigger numbers if the seller has a hard to source expertise that the buyer for their own commercial reasons needs to fill in a hurry. 

At the small $5m to $15m revenue segment the numbers of available acquisition targets reduces a bit as not every organisation can make the transition from founder-led to professional-led sales.  The buyers at this scale are still mainly domestic organisations looking for extra scale,  geographic coverage or bolstering a specific technical capability.

In the $15m to $30m range the buyer market starts to include a few offshore players looking to buy a local presence as well as local listed companies looking for bulk-up opportunities.

At the $30m to $100m sector the market gets very interesting with lots of overseas buyers,  a whole range of small ASX companies looking for back-door listing opportunities plus a range of other organisations seeking to add or extend their IT Services capabilities.

At this point in the market,  domestic demand for IT services continues to be strong as organisations from large to small are looking to reinvent themselves as ‘digital organisations’.   We are seeing on-going demand for mid-sized IT services businesses from offshore buyers seeking to increase their presence in ANZ markets and the low Aussie dollar makes deals look relatively affordable. 

Author: Neil Bourne