Post-Covid, Mergers, & Acquisitions at the forefront for Product Development Software and Service Providers

In 2014, I wrote an article about Mergers and Acquisitions in the Product Development (PD) domain. Post-Covid, Mergers and Acquisitions have accelerated significantly. The acceleration is due to product manufacturers aggressively moving toward Digital and focusing on providing additional services and offerings to their customers via connected products. In addition, product companies are focused on selling solutions rather than just products.?

The Digital push by clients requires product development software companies to offer much richer functions & features that can easily integrate with AI/ML, IoT, Simulation, and cloud compliance. Also, system integrators must provide end-to-end services and expand their offering footprint, leading to a significant uptrend in Mergers and Acquisitions in the PD domain. For example, in the first nine months of 2022, we already had over 18+ acquisitions compared to 15+ in 2021. A few essential insights based on acquisitions & mergers in the past 20 months.

This week, we saw Accenture acquire Inspirage, a premium Oracle System Integrator. Inspirage focuses primarily on Oracle, which has good product development capabilities with Oracle Fusion Cloud Product Lifecycle Management (PLM) platform.

Software Providers: First, the PD software vendors have primarily focused on acquiring other software vendors who provide niche skills or complement their platform. However, PTC and Aras took a different strategy. PTC sold its services business to ITC Infotech so that they could focus on its platform and move to complete Software-as-a-Service (SaaS) with the Windchill+ approach.

Aras merged with services company Minerva so they can serve their growing clients, such as Audi, DENSO, GE, Honda, and Microsoft. The lack of robust partnerships with system integrators could be the reason behind the merger. It is interesting to note that Dassault systems have not made any acquisition in the past 20 months. However, pre-covid, they acquired companies in the Life Sciences domain.?

Services:?Accenture leads the M&A race with maximum acquisitions in the services sector. We also saw larger System Integrators acquire smaller system integrators with core capabilities in one platform vendor who wished to expand into a new geography, i.e., PDSVISION acquired Sconce to expand its footprint in the US. At the same time, LTI and Mindtree merged to form LTIMindtree, which is part of the L&T group.

One thing that stood out is the focus on ER&D: Accenture, Cognizant, and Deloitte all acquired ER&D service providers in the past 20 months. For example, Deloitte acquired Dextra Technologies, a product engineering company focused on ER&D, Cognizant acquired ESG Mobility, and Accenture acquired Umlaut. On the other hand, Cyient, an ER&D service company, acquired Kreative, which has expertise in ALM, PLM, SLM & IoT, which is an excellent move for them. They also recently acquired a digital consulting company. Another ER&D company, Tata Elxsi, will be looking for acquisitions to keep up the growth.

Capgemini benefited significantly from the 2019 acquisitions of Altran, an ER&D company, and is now enjoying double digits growth. It will be interesting to see organizations such as LTIMindtree, Hitachi, NTT Data, DXC, and similar organizations’ strategies toward ER&D, as they are still not there. For example, LTIMindtree, once they stabilize, has an option down the road to merge or acquire LTTS, the ER&D company, and part of an L&T group. It will put LTIMindtree in Wipro, HCL, Infosys, and TCS leagues if they do.

E&Y announced they would spin off the Audit and Consulting unit to ease the regulatory pressure. Once split, the E&Y consulting organization should consider strengthening its Product Development consulting offering and acquiring a Product Engineering company.

As the market softens, I foresee record acquisitions and mergers to continue for the next 24-36 months. I also believe the ER&D organizations will expand and move up the value chain and focus on digital space acquisitions due to client demands. If they do not, they will start to lose out to larger System Integrators who are building these capabilities.

Management and System Integrators companies will continue to focus on ER&D and Digital capabilities. Accenture will continue to lead the Merger and Acquisition race. There are some of the smaller niche service companies are up for grabs. Let’s see who makes the next move.?