John Holland, managing director of Corporate Finance Associates, says there’s a lot of ‘pent-up demand’ for private equity firms to sell some of their IT services businesses, which he said is likely to happen this year and in 2025.
Although interest rates skyrocketed in 2023, the IT services industry saw 100 more M&A deals than before the COVID-19 pandemic.
“To a certain extent, I think the IT services industry defied that gravity of higher interest rates,” said John Holland, managing director of Corporate Finance Associates.
Laguna Hills, Calif.-based Corporate Finance Associates is an investment banking firm with decades of experience in executing mergers and acquisitions in the IT and telecom services industries.
In North America there were 435 IT services mergers and acquisitions in 2020. In 2023, there were 537 deals.
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“Compared to 2022, it went down by 22 percent, but 2022 was just an extraordinary year with low interest rates,” Holland told CRN.
However, the aggregate value of M&A transactions reported by publicly traded IT service companies declined by 73 percent from 2022 to 2023. The same could be said for private equity-backed companies as well, as Holland noted that these firms may be looking to sell more companies in the next few years.
“For some reason, the private equity firms’ volume of selling businesses in 2023 was way down,” he said. “The private equity firms are holding the companies that they own longer. The theory is that higher interest rates reduce the value. So these private equity firms just want to wait to sell these businesses until interest rates come down and the value will go up.”
He said there’s a lot of “pent-up demand” for private equity firms to sell some of their IT services businesses, which he said is likely to happen this year and in 2025.
“There will be a lot of private equity sales of businesses in the near future,” he said. “I’m optimistic for 2024. That’s coupled with the fact that it’s highly likely that the Federal Reserve will lower interest rates this year.”
Interest rates are expected to be cut three times this year, CBS reported, which Holland said is like “rocket fuel” for acquirers.
“I’m also very optimistic for 2025 because I think the Federal Reserve will probably continue to reduce interest rates in 2025, but it’s anyone’s guess,” he said.
There were also more IT M&A deals in 2023 than in 2019. In the U.S. alone, there were 383 M&A deals in 2019, 392 in 2020, 612 in 2021, 620 in 2022 and 485 in 2023.
“I would attribute [the spike in 2021 and 2022] to the interest rates being so artificially low,” he said. “It could be that suddenly private equity firms were more focused on acquiring IT services for one reason or another—there are different trends sometimes. But the obvious thing is that interest rates were artificially low at that time because the government was trying to stimulate the economy due to the pandemic.”
The fourth quarter of 2023 also saw the highest number of M&A deals with 142. The second highest was the first quarter of 2023 with 139 deals.
