A Fragmented Irish Systems Integration Services Market Must Consolidate or Get Left Behind

December 2020 A Fragmented Irish Systems Integration Services Market Must Consolidate or Get Left Behind 1

Whilst Monty Python never expected the The domestic SIS market incorporates hardware reselling, Against this backdrop, the domestic SIS market is comprised software licencing & enablement, consultancy & support of 85 companies, largely founder owned and predominantly Spanish Inquisition, in the fragmented across the application layer spanning the CRM/ERP domestic market focused with on average c. 90% of total domestic Systems Integration Services spectrum, cloud transformation & hosting services, managed revenues derived from the Irish market. IT services, managed print, integrated VOIP services and IT (“SIS”) market an accelerated rate of At the mid and upper tiers, the industry competes over resourcing. Central to these services is the IT security layer. approximately 450 key accounts spanning government and consolidation, presenting both commercial The COVID-19 environment is a once in a generation catalyst enterprise horizontals where in any twelve-month period, opportunities and clear competitive which has elevated the digital transformation agenda at approximately 100 to 150 accounts are actively engaging in board level with digital capital expenditure now prioritised threats for incumbents, is inevitable. IT procurement. within corporate IT budgets. In 2019, domestic SIS companies generated revenues of c. EY’s analysis in this article is primarily focused on the €1.1 billion in the domestic market and c. €1.3 billion in indigenous private SIS operators. Consequently, our total. Domestic revenues grew by c. 16% annually, reflecting analysis excludes companies who are primarily IT a c. 13% CAGR over the preceding three-year period. This wholesalers, communication providers (including VOIP) and compares favourably to a UK market which we estimate international IT consultancy practices such as EY, grew at c. 10% in 2019 albeit with a considerable larger total Accenture, BearingPoint and FTI Consulting (amongst addressable market (> 10 fold). others). The top six domestic firms accounted for c. 51% of the The key global trends affecting the market. Beyond these leading players, six further companies sector encompass: accounting for c. 16% market share had revenues in excess By Robert Hussey of €20 million. A further 25 companies accounting for c. ► Mobility and BYOD (Bring Your Own Device); 24% market share had revenues between €5 million and €20 Head of the Technology M&A Team in EY Ireland million and at the lower tier of the market, in terms of scale, ► Increased adoption of cloud-based integration solutions; 48 companies accounting for c. 10% market share had Direct: +353 87 682 0174 ► Rapid acceptance of big data and data analytics revenues of under €5 million. Email: [email protected] integration services; Consequently, there are clear and distinct market tiers ► The utilisation of hybrid integration models supporting defined by scale that can be established with each requiring legacy systems, on-premise software & cloud native distinct future positioning strategies in the context of applications under a unified framework; and consolidation.

► An increased reliance on IT support outsourcing. On a profitability basis, the average gross margin generated within the sector in 2019 was c. 33% and the average Bigger is certainly better as IT OEM’s and software vendors reported EBITDA margin (earnings before interest, tax, are increasingly focused on driving scale and economies depreciation and amortisation) was c. 9%. within their distribution and partnership channels. Target revenue requirements for ‘gold' partnership status with top This provides several interesting data points in assessing the technology providers (hardware and software) are revenue composition of incumbents, the domestic increasing. Indeed, mid to larger customers themselves are progression of digital transformation strategies and Michael Murphy progressively demanding single 'end-to-end' RFP/tender international benchmark profitability comparisons. ownership and project management. Manager in the Technology M&A team in EY Ireland Direct: +353 87 218 9921 Email: [email protected] A Fragmented Irish Systems Integration Services Market Must Consolidate or Get Left Behind 2

EY’s analysis indicates that the Irish and Consolidation amongst the top tier players over the next 24 There are two grouping of companies we define as mid-tier months is inevitable and is likely to be fuelled by players, namely those with revenues over €20 million and UK SIS markets are broadly aligned in international strategic acquirers, domestic acquirers with the those with revenues of between €5 million and €20 million. terms of revenue growth however margin dual objectives of growth and competitive defence, large Here, we forecast the emergence of two distinct M&A delivery in Ireland is on average 600 basis consultancy companies seeking to infill perceived service strategies. Firstly, scale focused acquisitions in pursuit of a portfolio and capability deficits, telecommunication generalist strategy. Secondly, specialist niche focused points below that experienced by leading companies seeking to enhance their corporate service acquisitions delivering specific industry expertise and service UK SIS operators. Why? offering and private equity firms with substantial investment expansion. Typically, we have observed that companies ‘dry powder’ in search of ambitious management teams with breaking the €10 million to €15 million revenue seal tends to The answer, we believe, lies predominantly within the a buy and build strategy to capture a market leadership be accompanied with additional operating costs as sub-scale fragmented nature of the indigenous sector, position. formalised operating structures and roles are required to the lower margin revenue mix of incumbents and the manage growth. Consolidation can either eliminate this fact that the Irish market lags its UK peers in terms of its Indeed, Arkphire’s recently reported sale to Presidio serves requirement or mitigate the cost effect on margin delivery. position along the digital transformation curve. EY to illustrate that the starting gun for top tier consolidation Nostra, Unity, Action Point and Tekenable have recently subjectively estimates that the UK market is between 18 has been fired and there is international appetite. This been active on the M&A front and we expect this trend to and 24 months more advanced in terms of this journey stated, historically the predominant inhibitors of continue. Additionally, Client Solutions, Integrity360 and MJ and this is reflected, in part, by the comparative consolidation have centred around valuation expectations of Flood Technology are businesses with strong and ambitious enhanced margin delivery. Other factors such as founders and the identification of suitable ‘backable’ management teams and have the financial resources to owner/founder remuneration levels are also a ambitious management teams with the shared vision of position themselves as potential consolidators at this level. contributing factor to this deficit. potential acquirers. In relation to the latter, Version 1, with the backing of Volpi Capital, has considerable M&A firepower The lower tier of the market is characterised by 48 and represents a strong example of our thesis and ultimately companies competing for c. 10% market share. This degree the margin delivery that can be achieved. of fragmentation creates significant challenges over the medium term without a niche focused strategy. Vertical or In this context, we believe top tier consolidation coupled with service specialism can deliver sustainable premium margins strategic bolt-on acquisitions of mid and lower tier firms has and enhance a company’s attractiveness as a potential ultimately the ability to deliver an organisation with 15% to acquisition target. Many of these firms lack the financial 20% market share. A generalist strategy with both width and capability to acquire and consequently we believe a depth in service offering spanning a balanced cross-industry proactive and pragmatic approach to market consolidation exposure delivers multiple customer touch points across the should be adopted. In the absence of a niche strategy, these SIS chain, enabling cross selling, up selling and cross companies will increasingly become cost non-competitive in subsidisation opportunities and ultimately positions the a market driven by scale and service offering economics and company to deliver on the complete 'end-to-end’ RFP/tender will ultimately be reduced to competing at the low margin requirement with a full 'one stop shop' SIS offering. This fringes. enhances customer stickiness and ultimately customer preference and 'ownership’. At this level, companies such as PFH, Ergo and Evros are positioned to become key protagonists. EY believes that this strategy can ultimately produce gross margins in excess of 35% and EBITDA margins within the range of 15% to 20% over the medium term. A Fragmented Irish Systems Integration Services Market Must Consolidate or Get Left Behind 3

SIS acquisitions are predominantly concerned with acquiring We ultimately believe the end game for industry customers, contracts and people. There are, in general, no consolidation expands beyond Irish borders. The potential A ‘wait and see’ material tangible assets except for property and in certain exists for a pan-European play, merging systems and cases unrelated IP which are typically deal carve-out network integrators across Europe with a potential roll-up matters. In addition to these factors, valuation is ultimately play to deliver a substantial listed entity. However, today, approach is not a determined by scale, revenue mix, revenue visibility the decision facing domestic SIS business owners is whether (annualised recurring revenues), customer quality, service to consolidate, be consolidated or follow a niche strategy. offering and historic & forecast profitability levels. Standing still is the fastest way of moving backwards in a viable strategy Since 2016, the domestic market has seen 33 M&A deals rapidly changing world. recorded compared to c. 138 disclosed in the UK. Eight deals have been completed this year alone and we are aware of an additional three in progress. Combined, this is the highest number of deals experienced within the sector in recent years. Whilst EBITDA multiples are not typically disclosed, EY’s view is that lower tier transactions, lacking scale, are trading within the range of 4.0x to 6.0x EBITDA. At the mid-tier level, again highly dependent on the aforementioned valuation drivers, are being completed at multiples of between 5.0x and 8.0x EBITDA. At the upper level, we believe a range of between 7.0x and 10.0x EBITDA is realistically attainable given the scale and fragmented nature of the Irish SIS market. Premium valuations reflect the quality of the underlying asset coupled with detailed preparation, a clear knowledge of the potential acquirers and their motivations, precise positioning of the investment case and the delivery of competitive tension. COVID-19 has certainly not stifled deal activity within the sector, indeed the evidence points to the contrary. We have noted in recent technology transactions the increased usage of and reliance on vendor due diligence reports (certainly from a financial and tax perspective) coupled with the usage of warranty & indemnity insurance to facilitate deal momentum and ultimate closure in a virtual environment characterised by lock-down/open up cycles. A Fragmented Irish Systems Integration Services Market Must Consolidate or Get Left Behind 4

Irish Systems Integration Services Market (Domestic Revenue Only) 2016 - 2019*

€1,200,000,000 10% 85 Companies 9% Margin expansion between FY18 and FY19 illustrates €1,000,000,000 85 Companies 9% that the domestic digital transformation journey has 8% commenced 86 Companies 7% €800,000,000 83 Companies 6% 6%

€600,000,000 5%

5% 5%

4% Irish SIS Market Segmentation (FY19) # Companies ROI Market Size (€) Size Market ROI €400,000,000 ROI revenue >€20m 12 3%

ROI revenue <€20m and >€5m 25 Average Reported EBITDA Margin (%) Margin EBITDA Reported Average M&A Deals: M&A Deals: M&A Deals: M&A Deals: 2% ROI revenue <€5m 48 €200,000,000 6 4 8 7 Total 85 1% €756,799,467 €866,540,473 €943,765,070 €1,093,726,126 €0 0% FY16 FY17 FY18 FY19

ROI SIS Market Size Average Reported EBITDA Margin (%)

Irish Systems Integration Services Companies - Estimated Market Share in 2019*

79 SIS Companies 49%

Version 1 11%

Arkphire 10%

PFH 8%

Ergo 8%

Evros 7%

Datapac 7%

* Source: Companies Registration Office. Where full accounts were unavailable for market participants, revenues were based on EY estimates. A Fragmented Irish Systems Integration Services Market Must Consolidate or Get Left Behind 5

Irish Systems Integration Services: 33 M&A Deals Recorded Since 2016

Date Target Target Description Bidder Nov-20 Cinnte Technologies Managed IT, cloud and Microsoft 365 Calligo Oct-20 IT Force Provider of IT cloud support, managed IT services and managed security Unity Technologies Sep-20 Greenfinch Technology Cloud solutions specialist, mobile applications and software for medical devices Tekenable Jul-20 Brandon Consulting Cyber-risk and compliance specialist Nostra Jun-20 Itomic Voice & Data IT managed services provider Calligo Jun-20 DNM Technology Solutions Analytics, cloud and managed service provider Deloitte Ireland Mar-20 Singlepoint Solutions Digital consulting business Version 1 Jan-20 DC Networks IT managed services provider Calligo Dec-19 Trilogy Technologies Designs and manages IT infrastructure Arkphire Oct-19 Novosco Cloud, managed and computer support services Cancom Sep-19 ONG Automation Industrial automation & manufacturing execution systems specialist INDEFF Aug-19 Sabeo (Enterprise Technology Division) Enterprise technology division of Sabeo Evros Jun-19 Baker Consultants Managed network cybersecurity company Strencom Mar-19 Enterprise Systems Consulting and IT services provider Accenture Jan-19 P2V Custom software development and other services Action Point Nov-18 Cloudstrong IT consultancy services for Microsoft cloud Arkphire Oct-18 Kerna Communications IT network and security solutions Triangle Computer Services Oct-18 Eamon Moore IT Solutions IT managed services provider Nostra Oct-18 Arkphire IT solutions and networking company Bregal Milestone Oct-18 Presidion Advanced data analytics specialist Version 1 Sep-18 Zinopy IT solutions and services Trilogy Jun-18 Client Solutions (10% stake) IT software solutions and services PFH Jun-18 Cedar Consulting IT consulting and support services (Oracle cloud) Version 1 Dec-17 Metadigm Design, implementation and support of security solutions Integrity360 Apr-17 Softech Managed, infrastructure, and document delivery solutions Eamon Moore IT Solutions Apr-17 Comsys Enterprise IT company Evros Apr-17 Version 1 IT consulting, implementation, and managed services Volpi Capital Dec-16 B-TEC Solutions Consultancy and IT services Aspira Oct-16 Beoley Mill Software JD Edwards specialist Version 1 Jul-16 NetDef IT security solutions and managed services company Novosco Jun-16 Bootstrap Networking solutions and IT services Arkphire May-16 Micromail Software licensing expert and IT consultancy Ergo Mar-16 Inspired Software IT consultancy, training, support services, cloud consultancy Evros

Source: Merger Market, Capital IQ and EY EY | Assurance | Tax | Strategy and Transactions | Consulting

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