Development Strategy. Subtle Signs that IT Companies Should Consider M&A Tools

In February of this year, the volume of IT exports from Ukraine decreased by 5.3%. Analysts observe a devaluation of nearly all global IT giants. Under such conditions, M&A becomes arguably the only scenario for business development during challenging times.

At Capital Times, we hold several mandates for the acquisition of national IT companies of various sizes: European players are actively looking for merger and acquisition targets. We see that now is the time for Ukrainian owners to capitalize on their business creation efforts, find a favorable deal that will allow them to weather the tough times of recession without losses.

Should you immediately look for M&A opportunities, and what will you gain from the deal? Here are a few key indicators that may signify the need to consider a merger and acquisition strategy.

A decrease in budgets for IT services in Ukraine reaffirms that this market is contracting. Of course, one reason may be that some Ukrainian companies have relocated their offices to Europe, but the global trend is clear. It is most challenging for small companies with up to 300 employees to secure new orders. If an IT company observes a decline in revenue growth, market share, or customer base, this is a sign that it is necessary to review the strategy. In this case, M&A serves as a strategic tool for the owner, enabling them to preserve the business or receive a fair reward for years of work on the company. Mergers and acquisitions provide a fast way to access new markets and clients.

This issue is not about following trends, but about a complete restructuring of business models influenced by the development of artificial intelligence. Modern technologies are taking over the market, significantly impacting IT companies. We will see less competition for personnel among companies in the future, and the interest in “growing” talent from scratch is waning. Business models should be changed now, adapted to today’s realities and looking several years ahead. This is essential if a company wants to develop and enhance its competitiveness.

High costs, low efficiency, or redundancy of functions can be indicators of operational inefficiency. The business model of any IT company always includes a portion of people (nearly 10%) who do not work on client projects but are involved in scaling the business. In times of crisis, this part of the workforce becomes “ballast” for the owner, who must lay off staff, focusing exclusively on serving clients. This is what we are currently observing in the global market. However, this “survival strategy” often does not yield the expected results. Refusing growth is the same recession, only postponed. In such cases, it is worth considering M&A as an opportunity to optimize business processes, reduce costs, and increase efficiency through the combination of resources, rather than through staff reductions.

What used to be acceptable is now becoming a significant problem for IT companies. Focusing on a single product, market, or client during recessions significantly affects a company’s operational efficiency. In this case, joining a larger player can enable the diversification of the existing model, diversify the product or service portfolio, reducing risks and promoting sustainable development.

High levels of debt, reduced profits, or a weak financial position may necessitate the search for new sources of capital and financial resources. The options are either to attract investments or to join larger companies. Both paths are viable, but each has its pros and cons. In my view, seeking an investor is a more resource-intensive procedure than a well-constructed M&A process. In this case, mergers and acquisitions can provide the necessary funds and improve the company’s financial stability.

Intense competition or the threat from new market entrants may force an IT company to consider M&A as a strategic step to preserve or strengthen its competitive position. This is particularly relevant for small IT companies, which find it harder to withstand competitive pressure during periods of change. At Capital Times, we observe how the requirements for Ukrainian IT companies have changed. The buyer is moving away from assessing standard metrics and instead looks at the company’s client portfolio and their relationships. The presence of big names, long-term relationships with clients, how relationships are built, and the ability to get feedback from customers—all become the main competitive advantage for IT businesses and a springboard for profitable sales.

Analyzing these signs can help IT companies identify the need for M&A and determine optimal strategies for achieving their business goals. If you, as an owner, believe that your company exhibits two or more of these, I advise you to consider mergers and acquisitions. Besides the benefits already mentioned, an IT company can gain other advantages from M&A.

In particular:

  • Access to technologies, talents, patents, and expertise, enriching the staff with highly qualified specialists who will become valuable resources for business development;
  • Beneficial synergies and process optimization that will lead to cost reduction and productivity enhancement;
  • Creating a competitive advantage by forming a unique proposition.

To summarize, M&A is a powerful tool for the strategic development of IT companies, helping them to strengthen their market position, gain access to new technologies, market segments, expertise, talents, and resources.

M&A can help optimize business processes, reduce costs in production, marketing, and distribution, and create new opportunities for business development through geographic expansion, diversification of the product portfolio, or entering new markets.

In times of downturn and stagnation, mergers and acquisitions should underpin a new strategy that will lead the company to a new phase of development and ensure sustainable growth in the future.

Author: Serge Hancharevich, Managing Partner at Capital Times for AIN.UA

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