Where financial tides ebb and flow in the dynamic world of Mergers & Acquisitions, fewdomains have witnessed a transformation as profound as that of Digital Transformation.From Silicon Valley to Bangalore and from Stockholm to Singapore, companies areacquiring in smaller-scale acquisitions to complement their existing strengths or to breakinto new markets.Over the past five years, a quiet revolution has been taking place, driven by M&A dealswith values under $100 million. The underlying philosophy is to adopt a more targetedapproach, leveraging the unique competencies of these smaller entities.

In fact, while deal values overall have declined globally, M&A for small companies in2022 compared to pre-pandemic levels (2015-2019), according to data published by EY.

“We expect to continue to see this strong flow of smaller deals throughout 2023,as CEOs remain cautious as a result of ongoing geopolitical tensions andheightened uncertainty. Deal financing challenges on the back of higher interestrates, increased costs of financing, and regulatory scrutiny will also makesmaller deals more attractive,” says Andrea Guerzoni, EY’s global vice chair ofstrategy and transactions.

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While high-value mergers and acquisitions (M&A) deals often grab the headlines,there's a compelling story unfolding on the sidelines: that ‘less is more’ when it comes toM&A in the Digital Transformation space.

But what drives this financial crescendo?

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Small Deals in Digital Transformation – Potential Returns

At the heart of this crescendo lies the allure of building capabilities for your companywhile optimising the strategic deployment of money in hand, and at the intersection ofthese objectives lie small M&A deals.

Just as a promising stock captures the attention of investors, small-token deals in digitaltransformation have captured the interest of IT Services acquirers. Their potential forflexibility, agility, and innovation has drawn investors willing to make substantial financialcommitments to harness their transformative capabilities.

Of the ‘Build v/s Buy’ approach, companies have massively begun relying on the latterto gain capabilities, enter into new markets, gain nearshore delivery, and bolster overallbrand positioning within the swiftly evolving and digitally-driven landscape spanningacross all industries, including but not limited to IT Services.

Of the ‘Small v/s Large’ approach, companies are gravitating towards the former assmaller deals not only allow for quicker assimilation of talent and technology – whichcan be instrumental in staying ahead in a rapidly changing industry – but also facilitatethe integration of specialized knowledge, enabling larger players to remain at the cuttingedge of the market.

What has guided these small-token M&A deals in the digital transformation arena?There are a few patterns that have emerged over the last five years

Patterns Emerge: 6 reasons why smaller deals make more sense inthe Digital Transformation space

1. Flexibility, Agility, and Speed to Market

Smaller value deals offer a level of agility and speed that is mostly lacking in largertransactions due to the nature and size of the deals. In the rapidly and ever-evolvingdigital transformation space, being able to pivot and adapt swiftly is a significantadvantage and a luxury that’s often lost in larger acquisitions.

Cognizant, a multinational IT services company, acquired Servian, an Australian-baseddata and analytics consulting firm, for an undisclosed amount in 2021.

This deal enabled Cognizant to quickly expand its expertise in the data and AI niche.Servian, being a specialized firm, brought in-depth knowledge of data and AI solutions,helping Cognizant adapt swiftly to the evolving digital landscape. The seamlessintegration of Servian’s expertise with Congnizant’s own offerings positioned them tooffer a broader range of specialized services to clients much faster than if they haddeveloped these capabilities in-house. This speed to market proved crucial inCognizant’s success in the rapidly evolving field of data and AI services.

2. Specialization and Niche Expertise

Smaller deals often revolve around highly specialized companies that offer a uniquevalue proposition – they are growing in demand so much so that larger companies aretargeting them almost exclusively to enhance their competitive edge. The smallerentities, on the other hand, find solace in the protective umbrella of established players.

For instance, when Accenture acquired Enaxis, they gained a team of experts in digitalstrategy and transformation, enhancing their offerings without a colossal price tag, whileEnaxis found the stability and global reach they needed to take their expertise to a wideraudience.

In fact, Accenture is a proponent of the ‘Buy’ approach in building capabilities and hasbeen quite bullish in terms of M&A for the last five years. While the financial terms ofmost of its deals have been undisclosed, it is estimated that at least half of its 268+acquisitions were small-token (up to $100 million).

In 2020, Accenture acquired Storm Digital, a digital marketing agency based in theNetherlands.Storm Digital's niche expertise in helping clients optimize their digital marketing effortsand enhance their online presence, brought valuable insights and skills to Accenture,allowing them to enhance their offerings and provide more comprehensive services toclients.

3. Risk Mitigation

In an era marked by uncertainty, smaller-value deals inherently involve lower financialrisks. Large acquisitions can strain finances and lead to unforeseen challenges. Smallerdeals allow companies to test the waters before committing to more substantialinvestments.

In 2020, Infosys, a global IT services and consulting company, acquired GuideVision, aEuropean ServiceNow partner specializing in enterprise service management, for $32million.Infosys opted for a smaller, specialized acquisition to test the waters in this niche ITservice segment, avoiding substantial financial commitment to a new practice. Thisapproach allowed it to evaluate the synergy between its IT services and GuideVision'sexpertise in ServiceNow solutions, enhancing its capabilities in a specialized IT servicesegment.

4. Seamless Integration & Strategic Synergy

The argument for smaller M&A deals in the Digital Transformation space goes beyondthe numbers – it's not just about cost-effectiveness; it's about strategic synergy. Smallerdeals are often more manageable when it comes to integration as cultural alignment,system integration, and organizational synergy are easier to achieve in thesetransactions. This seamless integration can lead to a smoother transition and fasterrealization of the deal's benefits.

Accenture acquired Enimbos, a Spain-based cloud optimization company, in 2020.The smaller size of the deal allowed Accenture to quickly integrate Enimbos' cloudoptimization expertise into its existing suite of services, fostering better culturalalignment and smoother system integration. The deal dually benefitted the acquirer andthe target through a seamless strategic interlay – Accenture was able to enhance itscloud optimization capabilities, and Enimbos gained access to a global platform todeliver its services.

5. Focused Innovation

Smaller deals allow companies to maintain a sharper focus on innovation. With aconcentrated allocation of attention and resources, entities can foster a climate ofexperimentation and growth, ensuring they stay at the forefront of technologicaladvancements.

Cognizant acquired Zenith Technologies, a company specializing in digitalmanufacturing technology services, in 2019.

Zenith Technologies had established itself as a leader in providing digital manufacturingtechnology services. By acquiring Zenith, Cognizant gained direct access to thisspecialized knowledge base and combined its existing capabilities in IT services withZenith's domain-specific expertise in digital manufacturing. With this newly acquired andintegrated capability, Cognizant could direct its attention and resources towarddeveloping innovative solutions tailored to the unique challenges and opportunitieswithin the digital manufacturing sector and ensure its position at the forefront of thisfield.

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6. Targeted Geographic Expansion

Smaller acquisitions also allow companies to strategically expand their footprint. Bymaking smaller acquisitions in these chosen areas, companies can reach newcustomers and establish a stronger local or regional presence. This approach isparticularly effective when entering markets with unique characteristics, customerpreferences, or regulatory requirements that benefit from a more localized approach.

To expand its presence in Latin America, Wipro bought Brazilian IT firm InfoSERVARSA, which provides custom application development and deployment services to clientsmostly in BFSI, for $8.7 million in January 2017. Latin America has unique marketcharacteristics, customer preferences, and regulatory requirements. To effectively servethe Latin American market and gain BFSI clients, InfoSERVAR's local expertise andstrong understanding of the market's design and innovation needs were invaluable forWipro's expansion efforts. This strategic approach facilitated easier relatability andstronger relationships with local clients in a market with specific demands in design andinnovation services.

These cases are not isolated incidents – there have been numerous deals valued under$100 million, each with its unique story, scattered across the globe. While the allure ofbillion-dollar transactions is undeniable, the true power of M&A lies in the precision,focus, and innovation that smaller deals offer. The aim is not just to acquire assets butto unlock hidden value, which is often overlooked in large-token deals.

This shift in the M&A landscape reveals a growing consensus that, in the digitaltransformation space, it's the smaller deals that hold the key to unlocking uniqueopportunities and innovation. Naturally, it’s also these deals that have set the stage fortransformative trends and strategies, reshaping the industry in the last five years.

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Conclusion

Thedigital transformation landscape is dynamic, demanding agility and innovation.Gone are the days when mega-mergers dominated the headlines. Today, smaller,strategic acquisitions are emerging as the driving force behind innovation andmarket expansion. A quiet revolution is unfolding: small-token M&A dealsunder $100 million are driving significant change.These targeted acquisitionsor strategic acquisitions offer numerous advantages over larger transactions,including flexibility and speed, specialized expertise, reduced risk, seamlessintegration, focused innovation, and targeted geographic expansion.The successstories of companies like Cognizant, Accenture, and Infosys demonstrate thetransformative power of small-token M&A deals. These targeted acquisitionshave not only unlocked unique opportunities but have also set the stage forindustry-wide trends and strategies.

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