The deal activity in the global technology services sector has softened, with over 150 transactions announced in the first quarter of 2023 compared to 270-plus deals in Q1 2022 and over 220 in the first quarter of 2021, according to an EY-Nasscom report.
The report - Mergers and Acquisitions (M&A) Trends and Outlook in the technology services sector — noted that in 2022, the technology service sector proved to be a year of paradoxes.
Despite signs of a slowdown at the end of the year and in Q1 CY23, the technology service sector witnessed a surge in M&A and private equity deals, reaching a total of over USD 57 billion in 2022, which was more than double the amount seen in 2020 (at over USD 27 billion).
On the outlook for 2023, the report said that with greater emphasis on emerging digital capabilities, the market is likely to become more cautious and adopt creative deal structures to manage risk.
"Although deal activity has softened, with 150 plus deals announced in Q1 CY23 compared to 270 plus in Q1 CY22 and 220 plus in Q1 CY21, deal activity for mid-sized companies is expected to remain strong across the broader M&A market," according to a statement outlining the findings of the report.
Select segments of strategic buyers and PE (private equity) roll-ups are expected to continue driving the deal momentum.
In 2022, the technology service sector, including IT Services, BPM (Business process management) and ER&D (engineering and R&D), saw an uptick in transaction activity, with a total of 947 deals - the highest number recorded in the past five years.
"The total deal value and volume in 2022 doubled from the levels seen in 2020, though deal value remained relatively steady throughout 2021 and 2022 (excluding two USD 10 billion-plus deals in 2021)," it said.
Private equity participation in IT services deals increased 2.5 times in 2022 compared to 2020 and dominated the large deal (USD 500 million plus) segment with a 62.5 per cent share. Notably, BPM and ER&D services experienced growth of 1.5 times and 1.8 times, respectively, compared to 2020.