Small and medium-sized enterprises (SMEs) in the information and communications technology (ICT) sector—for which digitalization is nothing new—are increasingly becoming the focus of acquirers. This is shown by a study conducted by KfW Bank. However, most acquisitions targeting small and medium-sized enterprises (SMEs) are not carried out by financial investors but by ICT competitors, according to another finding of the study.
In this context, one telling figure demonstrates that Germany is not yet well-positioned when it comes to digitalization. Between 2014 and 2016, only one in four SMEs successfully completed a digitalization project. Approximately 13.9 billion euros were spent on this type of project in 2016. By comparison, 169 billion euros were spent on investments in machinery, buildings, and equipment during the same period.
Digital Expertise in SMEs Is in High Demand
A joint study by KfW Bank and the Center for European Economic Research (ZEW) shows that the main obstacle to digitalization is the lack of IT skills among employees. The study’s authors point out that acquiring a business in this sector offers the opportunity to bring not only new technological solutions but also digital expertise into the company.
The number of company acquisitions in the ICT sector fluctuated significantly during the period under review, from 2005 to 2017. The fewest deals took place in 2010, when there were 150. The highest number of acquisitions occurred in 2008, with 250. In 2017, there were 170 deals in the ICT sector. Thus, no sustained upward trend has been observed since the mid-2000s.
Offers for Business Acquisitions
Similarly, the share of M&A deals limited to the ICT sector out of all M&A deals in the German SME sector has tended to move sideways rather than follow an upward trend since 2005. On average, this share was 19 percent, varying between 16 and 21 percent. By comparison, the manufacturing sector accounted for the highest proportion of M&A deals at 34 percent.
When examining this topic, however, it is essential to make distinctions. For example, the composition of M&A deals in the ICT sector has changed significantly since 2005. In 51 percent of all ICT deals between 2005 and 2008, IT service providers were the targets. Since 2013, this share has risen to 63 percent. The share of ICT M&A transactions targeting information service providers has also risen significantly—from 6 percent between 2005 and 2009 to around 16 percent since 2009. Their annual number has more than doubled during the period under review—from an average of 13 in 2008 to 32 between 2013 and 2017.
Acquisitions of SMEs, mostly from the IT sector
As the study further shows, the buyers are generally also IT service providers seeking to drive inorganic growth for their companies through acquisitions. As a result, the market in this industry is consolidating. However, other industries are also eyeing the acquisition of ICT firms. Take financial and insurance service providers, for example: since 2013, approximately 7 percent of M&A transactions have involved an IT service provider as the acquisition target. However, the acquiring firms are typically private equity firms or investment funds that have less of a strategic interest. In contrast, the manufacturing sector appears to rely only to a limited extent on investments in medium-sized ICT companies as part of its digital transformation. The share of IT service providers in the manufacturing sector’s target group mix rose only moderately during the period under review, from three to just over four percent.
Another finding of the study is that when acquirers come from abroad, they are often from the United States. Between 2005 and 2008, the share of domestic investors averaged 76 percent. Since then, interest from foreign buyers has increased significantly. Since 2013, the share of European buyers has been around 24 percent, while that of U.S. buyers has been 13 percent.
