The Covid-19 pandemic is an unprecedented global crisis in the history of humankind and one that caught billions of us across the globe, off guard. While we continue to struggle to come to terms to the“new normal”, amongst all the havoc, the digital transformation space has been an exciting one to be in the post-pandemic era. In a McKinsey survey, over 59% of surveyed organisations have accelerated their digitization process, not as a choice but as a means to survive the pandemic. Digitization comes as a glimmer of hope in the otherwise overcast environment, giving businesses of all sizes and scale a platform to operate and engage with their stakeholders considerably normally in this “new normal”.
With the acceleration of the pandemic the need for digitization is no more limited to being a cost-saving mechanism. Instead, organizations have been forced to look at it as a method to modernize business capabilities, gain competitive advantage and to create a business culture that is focused on digital technologies.Companies and institutions that wish to prioritize employee safety and public health have turned to digitization as well.
A report from the Harvard Business Review stated, “The stakes for digital transformation have increased dramatically. Now, digitizing the operating architecture of the firm is not simply a recipe for higher performance, but much more fundamental for worker employment and public health.”
The sudden change in the role digitization began to play for their client organizations in a post-pandemic world, from being a choice to a necessity, gave limited time for the IT consulting firms to fundamentally bring about a change within their organizations’ organically. This has prompted them to look at other avenues, leading them to consider strategic deal-making to augment their digital capabilities. Companies having existing strong capabilities in helping their clients move to digital environments became worthy targets for the IT consulting companies that have been trying to up their digital play.
Chart 1 (A) & (B) below for the percentage digital vs non-digital business generated by top-tier and mid-tier Indian IT consulting firms.
Following this trend, the post-pandemic world has seen plenty of rich valuations and intense competition for many digital or technology-based assets. In a recent survey conducted by PwC, 53% of business leaders indicated they would allocate more to M&A activity as a way to achieve their key digital transformation priorities.
As expected, this has led to a fierce demand for digital and technology companies or companies with transformational and disruptive industry impact, creating an urgency among buyers in the market to gain first mover advantage. Global Technology M&A deal volumes saw consistent growth post pandemic in all major geographies (Chart 2 below) and currently at an all-time high.
The big-ticket transactions with eye-popping valuations such as the Hitachi-GlobalLogic deal bears testimony to the fact that industry leaders highly regard digitization and realize that it could result in massive gains in productivity, which will then lead them to strong competitive positions, making it worth the investment.
In conclusion, the COVID-19 crisis has significantly accelerated the shift to digital and fundamentally redefined the business landscape. Customer behavior and human interactions are dramatically changing, and while they are likely to continue to evolve, the digital transformation we are witnessing will continue apace and will lead to many more acquisitions as IT consulting firms scramble to get hold of the right set of digital capabilities.
Strong demand for these capabilities and a relatively limited supply is surely going to make the entrepreneurs (that have founded such organizations focusing on delivering new-age, digital capabilities) laugh their way to the bank.
(The author Sandeep Gogia, Director – Technology Domain (Investment Banking), Equirus and the views expressed in this article are his own)