Wave of consolidation in the IT market is gaining momentum

The wave of consolidation in the IT market has gained momentum. Partly due to the recovery of the economy, the rapid turn to digitization due to the corona crisis, a lot of dry powder in both strategists and private equity, internationally historically low interest rates and real estate that has increased in value rapidly, more and more investors and strategists are seeking refuge in ‘safe havens’ such as the IT market.

Which IT segments are most in demand among buyers and investors. What drives their investments? And how will the deal market develop towards the future? We asked Rik Stikkelbroeck, Managing Partner and co-founder of Hogenhouck, an M&A boutique that is mainly active in the IT and software segment.

How do you look back on the first half of 2021?

The pace and especially the number of acquisitions in the Dutch IT market in 2021 has once again exceeded my expectations. Things went particularly fast in the managed services and hosting market. Both the pace and the willingness to buy of private equity in particular in those sectors turned out to be high.

It is striking that increasingly more private equity parties are focusing on this domain. This concerns both private equity parties with a traditional focus on other sectors and new players, such as Ice Lake Capital and Gate (from founder Paul Vermaat).

The first half of 2021 was a good six months for many M&A parties with a focus on IT, as the impact of Covid-19 in this sector was minimal. The deal activity has exceeded my expectations.

In which IT domain did consolidation take place the fastest in 2021?

A number of IT pillars were consolidated this year at an accelerated pace. I personally think the hosting market stands out there, because in 2021 there are really few substantial independent players left. For example, medium-sized players such as Antagonist (sold to Cinven to which One.com and Hostnet already belong) and Hipex found another shareholder (TeamBlue).

In addition, the managed services domain is in full swing, where the platforms are steadily building.

What was the most eye-catching transaction for Hogenhouck in 2021?

With every answer I give, I may take away importance of other transactions from our team. Besides, it’s only August. But I certainly found the exit of Central Point to the listed Dustin to be a striking transaction.

We were able to shape the entire buy-and-build strategy with Infotheek Group (the parent company of Central Point). From a player with a turnover of approximately €50 million when we were introduced in 2008, the group has grown through more than ten targeted acquisitions (including Central Point and Scholten Awater) to almost €1 billion in turnover [betreft Central Point en Flex IT bij elkaar]. A fantastic journey that we have been able to experience and that has given us many insights into the IT market in Europe.

What do you notice about the issues that growing IT companies face?

One of the interesting aspects of our profession is the diversity of strategic choices entrepreneurs face. Various IT companies are run by relatively young entrepreneurs – the median age of our IT clients is around 40 years old. Those entrepreneurs often have the ambition to do great things in business; the majority of our clients want to accelerate growth along the axis of quality.

We are happy to discuss the axes of independent growth (mezzanine, bank, preservation of equity), combination with private equity (accelerated takeovers) and, in time, the strategic exit (the spot on the horizon). In short, making the right choices for now and the coming years: where is the spot on the horizon, how to get there.

An example of independent growth in combination with acquisitions is, for example, our client Urban Gym Group (including the labels of TrainMore, Club Sportive and High Studios), where we specifically explored the market and initially raised €26 million in growth financing (mezzanine).

In addition, in the recent past we have been able to guide the owners of Wortell during their growth path. The combination with sponsor Holland Capital turned out to be a hit, resulting in a growth from 150 to more than 500 employees in three years.

This year, after an extensive analysis, we assisted the owners of OfficeGrip in their merger with Strikwerda, the owners of Databyte in the sale to Interstellar (Quadrum) and the owners of Intercept in the sale to Holland Capital. In short, you can see that there is still a lot of energy in entrepreneurial IT of Netherlands and that the consolidation is partly translating into the building of new platforms and thus challenges.

What are your predictions for 2022?

Without claiming to be able to look into a crystal ball, I expect that consolidation will continue to take place and that the managed services, digital agency and SaaS market in particular will occupy an important position there.

The managed services market will accelerate consolidation because of the platforms that have emerged. Think of an Interstellar (including Solimas, CSN Group, Databyte), Strikwerda (including OfficeGrip and NEH), Vortex (with Hallo and Loko on board) and Holland Capital (Wortell). A number of these will already be working towards a cross-border exit in 2022.

The digital agency market is also strongly subject to consolidation with active buyers such as Intracto (Waterland), Dept (Carlyle) and, in the somewhat smaller segment, Happy Horizon. Intracto and its Waterland team have, of course, previously gained this experience with Dept, which was sold at the end of 2019 for a double digit multiple to the American top three private equity firm Carlyle (also known in the Netherlands as the new owner of HSO).

Third, the SaaS market is accelerating consolidation. Various private equity parties (well-known names such as Main, Strikwerda and newcomer Icelake and Gate) and many strategists (Visma, Exact) are active in that market, which in turn have sponsors (HG and KKR).

In short, the wave of consolidation that I previously predicted would peak in 2021 may well last another two years. So these remain interesting – and busy – times for dealmakers in the IT segment.