Magazine
12:41 20 March 2019
Post by: WBJ

Tech market / M&A spikes in IT across Eastern Europe

While software development companies in Poland, and Eastern Europe in general, are increasing their IT outsourcing output, the sector has been experiencing a wave of M&A deal over the past four years. With the still largely fragmented market and companies competing for IT talent, more M&A deals are definitely on the cards. By Beata Socha

Tech market / M&A spikes in IT across Eastern Europe


Despite an overall drop in M&A activity in Poland last year, one sector seems to stand out. The IT industry in Poland, and in the Eastern European region, has seen an unprecedented surge in acquisitions over the past four years, particularly in 2018. Poland, Ukraine, Romania and Belarus combined completed over 70 M&A transactions between 2015 and 2018, 28 of which were closed only last year, according to a recent report “Software Development in Ukraine, Poland, Belarus and Romania in 2019” prepared by AVentures Capital, Aventis Capital and Capital Times, three M&A advisories active in these markets.

“We are seeing an upcoming wave of mergers and acquisitions. Small and mid-sized companies will find it harder and harder to compete for employees while maintaining competitive rates and level of quality,” said Marcin Majewski, Managing Director at Aventis Capital. The trend is can already be seen, as two large private equity groups have been consolidating the market expanding their “platforms.” The two growing corporations: Intive, recently acquired by Mid Europa Partners; and IT Kontrakt, backed by Cornerstone Partners and Oaktree, both act as vehicles for acquisitions. “We expect this strategy will be embraced by more companies in the near future,” Majewski added.

SMALL, BUT GETTING BIGGER

The factors contributing to the growing M&A activity in the sector is the fact that the IT market is still highly fragmented, with only a handful of companies earning annual revenue of $200 million and above. Out of an estimated 470 software development companies with 50+ employees operating in these four countries, 28 have over 1,000 employees and 250 have over 100. Those that have become large enough are now ripe for plucking. “We can see increasing activity of financial investors as a result of software houses reaching the scale sizable enough to meet their investment criteria,” said Krzysztof Śliżak, Analyst at Aventis.


Still, the market is still mainly a playground for sector investors. The majority of transactions were completed by strategic investors, accounting for 79 percent of transactions; while financial institutions completed 21 percent of the deals.


As there are hardly any industries as international and easy to globalize as IT, many homegrown tech companies are also eager to move outside their domestic market. In fact, 63 percent of transactions were domestic (both buyer and target were located in Poland), while 37 percent were cross-border deals, with either the buyer or the target from abroad.

Despite raising interest of global players, Polish M&A deals were dominated by domestic investors (74 percent of all transactions).
Some do it to broaden their service portfolio and tap into new industry verticals. One of the biggest drivers of the M&A activity, however, is the tend to “acquihire,” where larger companies acquire smaller ones to tap into their human resources. This trend has been particularly strong in IT over the past few years, as the shortage of high-quality software engineers is becoming increasingly palpable.

ON THE MAP

The global demand for software development services is also why IT outsourcing has flourished in Eastern Europe in recent years, with $13 billion worth of IT services exported in 2018 by four countries: Poland, Ukraine, Romania and Belarus, according to the report.


It is the growth of outsourcing in CEE at 20-25 percent per annum, coupled with superior profitability, that has made the IT sector a hot spot in M&A activity, AVentures Capital stated in its report. “The outsourcing market displays steady growth. It will continue to provide global companies with specialists and boost the development of the global tech ecosystem,” Yevgen Sysoyev, managing partner of AVentures said.


And even though it is still a drop in the ocean compared to what India and China (which jointly fulfill 80 percent of global demand for software development), it has put the region on the map, giving Eastern Europe a 5 percent piece of the global market share. “The four countries are becoming a large and expanding regional competing force,” the report stated.

GLOBAL IT OUTSOURCING DEMAND AND SUPPLY (2017)


There are some 700,000 IT professionals in these four countries. Poland offers the largest pool of 255,000 IT professionals, followed by Romania with 185,000 specialists, Ukraine with 172,000 and Belarus with 105,000.


Due to still slightly higher salaries in IT compared to other Eastern European IT powerhouses, and with a more significant difference for experienced managing positions (IT Project Manager), Poland has also been quite successful sourcing employees from Belarus, Ukraine and Romania. Still, the differences are not as significant as those compared to e.g. neighboring Germany. Polish IT professionals earn around 46 percent less than their German counterparts, which is also what fuels IT outsourcing services.


Despite a sizable labor pool, and constant influx of new computer science graduates, the IT market still displays strong imbalances, across all four Eastern European IT hubs. Even the 200 universities and colleges which churn out 60,000 IT specialists each year can barely keep up with the constantly growing demand, creating a bottleneck to further growth of the sector. The need to quickly train more programmers has created a good business opportunity for specialist programming schools. Coders Lab, the largest programming school in Poland according to Forbes, has already trained 3,000 IT specialists and is already present in nine major Polish cities. It is also moving across borders: the company has recently launched a franchise in Romania, in partnership with eJobs, part of Swiss media group Ringier AG. “Currently, IT specialists are one of three most pursued professions in Romania. Companies offer more jobs than there are candidates. … At the moment the market could easily absorb even 20,000 IT specialists,” said Bogdan Badea of eJobs, Coders Lab’s franchisee. Poland’s IT market has as many as 50,000 vacancies, and the niche to be filled is only getting bigger.


As the IT outsourcing in Eastern Europe keeps growing, and more global firms decide to offshore their software production to the region, competing for human resources will remain a major driver for companies to tap into talent pools through acquihiring deals.

it outsourcing
m&a deal

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