Resilient trends: navigating the Benelux IT M&A landscape
Benelux IT deal activity in H1 2023 was basically flat when compared with H2 2022. Q2 2023 likely marks the trough for tech M&A, and we see an encouraging setup for a rebound moving into year-end. An adequate number of deals were still closed, particularly in the software, digital marketing, and managed services sub verticals.
The key factors likely to drive the rebound in H2 2023 are corporate buyers stepping up, gradually improving credit availability, and better alignment of valuation expectations. Even if financing large deals continues to be challenging, corporate buyers are stepping up while other buyers are sidelined.
In the first quarter of 2023, there were 130 registered deals, followed by 137 deals in the second quarter. For comparison, after both the first and second quarters of 2022, the count stood at 195 and 184 transactions. In terms of dynamics, the first two quarters of this year align more closely with the third (137 deals) and fourth (139 deals) quarter of 2022.
Higher interest rates have caused borrowing costs to soar, making it costlier for sponsors to finance their M&A deals. The tighter credit market has also impacted the multiples sponsors are willing to pay, and we have seen a stronger decrease in multiples in Europe compared with the US.
The IT market has shown a consistent trend over several quarters. While the impacts of an unstable global economy, inflation, the war in Ukraine, other military conflicts, geopolitical tensions, and the climate crisis are felt here as well, the IT market continues to perform well with healthy returns. This can also be seen in the number of investor exits. In the second quarter of 2023, 18% of transactions were private equity/venture capital exits.
The rise of add-ons continues
Regarding deal type, add-ons continue to represent the greatest share of deals so far in 2023, comprising 47% of deal volume in H1, followed by acquisitions at 28% of all deals, and buy-outs at 12%. There are some nuances within Q2 alone, where buyout strategies took some share from add-ons. However, given expectations for higher rates and continued valuation declines, we would expect LBOs to continue to fall out of favor as investors pivot towards bolt-on deals, which conventionally use less debt. Furthermore, it’s clear that private equity investors have become more critical when acquiring new platforms. They are focusing more on the target’s profitability and the feasibility of a transaction.”
The fact that the Benelux IT market is a “rich” pond to fish in is further evident from ongoing international interest. A factor contributing to this is the high level of market maturity in the Benelux: excellent cloud provisions, high-quality technology offerings, and active utilisation.
Investors from the United Kingdom also showed interest, such as Bridgepoint Development Capital, which acquired DataExpert, a cybersecurity analysis company, from the Interstellar Group, and KLAR Partners providing financial support to managed IT service provider Hallo, to aid its continued expansion. This marks the first time the London-based private equity firm enters the Dutch market.
Benelux M&A continued to benefit from cross-border deal flow
A large contributing factor to this has been the increased investments from non-European investors—mostly coming from North America—reaping the benefits of globalisation, cheap interest rates, and a strong US dollar. About 25% of the total 267 registered deals in H1 involve a foreign buyer.
Over the years, an increasing number of Belgian IT companies have expanded their horizons to the Dutch market, and vice versa. Cegeka led the way in this regard, and companies like ESC in the same sector have followed suit, recently making cross-border acquisitions such as Qexpertise (a Microsoft and Exact specialist) in February and Advisie (an original Exact partner) in early June.
Another notable case involves Trust team Group, which acquired the Dutch company Stepco in June. This acquisition strengthens the IT service provider with a MSP for SME businesses in the south of the Netherlands. The acquisition also enables Trust team to better serve its customers in the border region.
Rising stars and the new kids on the block
Well-known Dutch investment companies, including Main Capital, Strikwerda Investments, Nedvest, Vortex Capital, Fortino Capital, Waterland, Avedon Capital, Egeria, and Capital A, were active again in H1 2023. Mentha Capital is also notable in the Benelux IT market with e.g. Aiden, a SAP service provider that founded in 2021 from the merger of five partners: Serac, Meridian IT, Xperi, Asecom, and Insynq. Following this merger, there were acquisitions of ITvisors and the Belgian SAP companies Nessi and Vigor. These latter two transactions took place in the first half of this year. Aiden, with the support of Mentha Capital, aims to become the SAP specialist for the mid-market.
Lesser-known investment firms also appeared in the IT sector, such as FIELDS Group. This Dutch investor acquired the German APM system integrator Amasol. FIELDS Group is an investor focusing on medium-sized enterprises with growth potential in the Benelux and DACH regions. Previously, the fund also participated in Archive-IT (archiving software) and in Van Dinther (enterprise content management solutions for housing corporations).
IT service providers dominate recent transaction tables
The announcement of French Sopra Steria expressing interest in acquiring Ordina garnered attention. Noteworthy were also transactions involving Avedon Capital (acquiring Detron and Zetacom), Incentro (absorbing B-Synergy), Arcus IT Services (bringing in Innotius and Infradax), Ilionx (acquiring Inergy Analytical Solutions), and Techone (taking over Felloo and ThreadStone Cyber Security). The demand for IT services remains strong. Companies want to scale, both in terms of size and portfolio, which leads to consolidation.
Software dominance and digital marketing consolidation
Software companies are likely to be preferred by banks’ underwriting committees because of a favourable business model with recurring revenue, a strong value-creating record with PE owners, and deep competitive moats. And with over a year in the books since the ECB hikes began and the prospect for a moderation of interest rate volatility, we expect better conditions for buyer and seller valuation expectations to converge.
Companies offering software were also in demand during the first half of the year, as evidenced by Capital A’s involvement with AB Software & Consultancy. This company specialises in ERP implementation and software development for the manufacturing industry. Interest was also shown in strengthening platforms with add-ons.
A trend of consolidation has been ongoing in the digital marketing sector for some time now. In the first half of 2023, several transactions occurred within this domain, featuring well-known names like Dept and Happy Horizon. Dept continues to expand its international presence through acquisitions, backed by investment firm The Carlyle Group. In February, it acquired India-based Tekno Point Multimedia, a specialist in Adobe applications. Digital marketing group Happy Horizon has mainly operated locally and has expanded its reach by acquiring CF Report, a reporting expert and Get Hooked, a digital agency. Currently, the group employs over 600 people. Happy Horizon’s acquisition strategy is supported by investor MG Partners.
Forecasting the Benelux IT M&A Landscape for H2 2023
Looking forward, we expect a slight rebound on deal activity for H2 2023. Recovery may partly be supported by easier comparable bases to grow from through the year as we move past lapping peak levels of activity seen in 2022. Also, underlying PE activity could remain resilient as players take advantage of depressed asset values, with increased buying activity causing more resilience in deal value. As inflation and interest rates remain stickier in the Benelux, this environment is likely to persist, meaning investors are likely to continue preferring add-on strategies over buyouts. We therefore anticipate such strategies will continue to take share through 2023 as leveraged transactions become costlier to finance.
