For more than a year, pandemic-related lockdowns forced a sharp, sudden recalibration of businesses. Everything done in person, almost overnight, had to be done virtually. Companies have explored myriad methods to connect with their customers and employees. Call it the great “digital acceleration.” This boom-trend was exemplified by some of the largest transactions of 2020, when information technology took center stage, from cloud storehouse Snowflake Inc.’s record-setting initial public offering in September to CRM Salesforce.com Inc.’s announcement in December that it intended to acquire workplace messaging software developer Slack Technologies Inc. The tech M&A streak is expected to accelerate in 2021.
Massive Upgrade Cycle
Digital transformation and mass migration to the cloud are the two dominant IT sector themes that took hold across the business world in 2020, and these themes are expected to continue to play out in the slow return to normalcy in 2021. Many economically ravaged sectors, such as hospitality, are fighting for survival, and scrambling to make up lost ground. To adapt in a post-Covid world, they’ll need to run more efficiently while adapting to new consumer habits and expectations, as well as supply-chain reconfigurations. Heady stuff for industries accustomed to a pre-Covid playbook.
Regardless of whether a particular sector or company is teetering because of pandemic shutdowns, or rocketing upward, or reversing course with the reopening, there is “a massive upgrade cycle, with a ton of cash going to enterprise IT,” said Morad Elhafed, a general partner at Battery Ventures, a Boston firm that makes both venture capital and private equity investments in tech companies.
The pandemic was a seismic event for global corporations. Most professionals found themselves conducting business from home. Interactions with customers, likewise, jumped to just clicks and practically no bricks and mortar.
With this new remote reality came a sudden flood of IT infrastructure investments.
“We had years’ worth of digital transformation compressed into a matter of mere months,” said Patrick Mastan, who heads software mergers and acquisitions advisory for KeyBanc Capital Markets. “The pandemic reshaped the way business was done.”
KeyBanc was an advisor on the recently announced Accenture acquisition of Infinity Works, a UK-based cloud and digital transformation consultancy; KeyBanc also advised IT management software vendor Fiix in its sale to Rockwell Automation Inc. in late 2020.
IT budgets have been growing steadily for decades, but with the pandemic, many of these have skyrocketed. Behind every company’s IT transformation lies a fleet of software vendors, and behind them, a river of capital.
Battery Ventures’ Elhafed, who leads growth and buyout investments in enterprise IT/software companies, has kept his analytical lens trained on post-pandemic trends. He helped tee up a well-timed opportunity for Clubessential Holdings, one of Battery Venture’s Software-as-a-Service-steeped portfolio companies. It’s a hospitality-sector SaaS vendor. (Yes, there is such a thing as club membership management software.)
As the first wave of the pandemic abated last spring, golfers flocked back to courses. Only they did so differently. Some adopted safety protocols (driving their own carts) and, in an even more dramatic habitual shift, booked tee times online. Battery jumped on this trend in February by adding ForeUp, a cloud-based vendor of public golf club management software, to Clubessential’s business.
“When the pandemic is over, the way we now book golf outings, how users experience the course, with interactions on their phones, that’s all changed now forever,” Elhafed said.
The Salesforce Permutation
A downright frantic year for IT-focused dealmakers and advisors was capped off in December with the announced acquisition of Slack by Salesforce for $27 billion.
Over the past several years, Salesforce has built an enterprise software empire via dozens of acquisitions of companies specializing in everything from AI integration to the cloud, in all of its many splendors: industry cloud; commerce cloud; and cloud verticals aimed at marketing, service and, obviously, sales. The list of possible Salesforce targets is its own dealmaking ecosystem, with PE firms targeting independent software vendors that do business with, and could possibly be acquired by, Salesforce.
For instance, digital engineering company Infostretch in March acquired Saggezza, a Chicago-based global technology provider and Salesforce cloud partner.
Not all roads lead to Salesforce. However, in IT they do all lead to the cloud.
For bank-based advisors and agents, digital transformation brings greater data needs. Storage for large data sets drawn from client interactions and internal operations inevitably lead to cloud integrations.
Some 71 percent of financial services IT leaders who took part in BDO’s 2020 Digital Transformation Survey were already deploying cloud capabilities, with cloud as the single biggest segment for anticipated near-term investment.
All About the Cloud
As large, dynamic organizations seek out enterprise-level solutions for growing needs, strategic buyers are focusing on specific segments. According to a report published by Deloitte in December, global public cloud service revenue will reach $309 billion in 2021 and $355 billion by 2022; cloud investments are expected to double as a percentage of IT budgets over the next three years.
“Key themes in the business right now are AI, data space and data science, and all of these large data set systems ultimately lead to the cloud,” said Manan Shah, a managing director at Focus Investment Banking in Washington, D.C.
“The cloud wave cycle is still in an early stage,” he added. “We have not peaked in that segment and are not likely to soon.”
Shah is the IT team leader at Focus.The firm targets transactions between $100 million and $300 million in size, usually representing the seller.
One possible Next Big Thing under the rubric of digital transformation: a confluence of interface technology and machine learning. One example is the 2020 acquisition of Neuralify by Information Services Group. Neuralify was advised by Focus in the sale. The company assists with the automation of repetitive tasks, such as filling out digital forms. Increased spending on AI within mature sectors, like financial services, should see more such deals well into 2022, Shah said.
Banks Radically Reboot
Financial firms, particularly banks, are undergoing a dramatic digital reimagining.
For example, over the past five years, Capital One has rebooted to the point of essentially turning into a software/data company; numerous digital-first challenger banks forced its hand.
The digital revolution, accelerated by the pandemic, has pushed other banks and credit unions to follow suit. The sector finds itself adapting rapidly to meet consumer demands for free services, convenience, digital engagement and total self-service.
With mass vaccinations, society will steadily re-open. Some bank branches may not. Fewer physical locations will reduce operational costs, leading to more capital being redeployed to digital initiatives.
In January, Cardtronics, an outsourced ATM operator and transaction processing service provider, was acquired for $2.5 billion by NCR Corp., a software-and-services-led enterprise provider in the financial, retail and hospitality industries.
It’s a curious transaction – after all, ATM cash withdrawals in some regions declined by 60 percent during the pandemic. The rise of digital money, meanwhile, shows no signs of abating.
At first glance, the NCR-Cardtronics deal would seem to be a bet on the reopening of the economy.
A closer look has some analysts wondering whether NCR did something even more brazenly prescient: snapping up an aging distribution network of 285,000 physical retail endpoints primed to be modernized, perhaps to support crypto currency.
ATM fee revenue had its run. Looking ahead, banks see a new goldmine: customer data.
Their efforts to effectively tap into best-in-class technologies to solve specific challenges are dramatically accelerating, industry members say.
“Large retail banks are being more proactive about leveraging the power of their data in some cases to deliver better services to clients but also to change their entire model,” said Richard Allman, Impact Strategy Lead – Financial Services at SparkBeyond, an AI-powered platform that specializes in mining massive amounts of data for hidden insights. “The market has forced their hands to make these investments in systems and services that help them harness knowledge.”
Any digital transformation strategy must be tailored to an organization’s primary agenda right now – gearing to emerge from the pandemic, as society re-opens – taking into consideration changing customer behavior and broader market conditions.
“So much of AI is about leveraging information that is hidden,” he said. Companies need the IT capabilities to find those hidden gems, provided they know where to look. They’re sitting right there – in the digital data.
Thoma Bravo Leverages Historic Shift
“It’s not just mature industries like financial services that are in the midst of this profound digital transformation,” said Holden Spaht, a managing partner at Thoma Bravo. “It’s every sector, every company. It’s as historic a shift as we have ever seen.”
The San Francisco-based software-centric private equity firm opened its coffers in a flurry of deals in Q1. In its own version of March Madness, Thoma Bravo:
• Acquired Calypso Technology Inc., an outsourced cloud-platform provider from Bridgepoint and Summit Partners. Priority one for Calypso is helping to digitalize a financial services sector currently undergoing possibly the greatest IT upgrade since the days of IBM tabulation machines having their own offices.
• Bought Calabrio from KKR. Calabrio helps companies streamline customer service and support with cloud-based software, a huge advantage for companies that suddenly found its entire support team working from home.
• Bought a controlling stake in Appiltools for a reported $250 million. An Israel-based firm, Appiltools specializes in business-to-business AI software used in testing new digital applications, which are being created to facilitate the rise of remote interactions – at a time when just about every company on earth is experimenting with new digital touch-points.
• Took private Talend, a Bay Area firm focusing on data integrity and integration, in a $2.4 billion deal. The purchase price was an 81 percent premium above its average stock price over the previous 12 months.