While first and foremost a humanitarian crisis, the ongoing war in Ukraine has disrupted the global dynamics of a large number of industries from Oil& Gas, Agriculture, Automotives, all the way to Semiconductors and Technology. The Technology Services sector is one such industry that is facing these disruptions as Ukraine has emerged as one of the leading near-shore delivery centers for a lot of Global IT firms, more specifically the ones focused on the product engineering outsourcing capabilities for their clients.
The last decade has seen a number of Global IT Services firms open up near-shore delivery centers in Eastern Europe, driven by a chance to better service European clients and the large English speaking and Technical/Engineering talent pool available. Large Indian players have setup multiple offices in Eastern Europe, like HCL in Hungary, Poland, Bulgaria, Czech Republic, Infosys in Croatia, Latvia, Lithuania, Bulgaria, Tech Mahindra in Poland, Belarus, Bulgaria among others. Currently, Ukraine’s IT industry exports $6.8 Bn, making up ~4% of the GDP and employs around 100,000 people. While firms have enacted various Business Continuity Plans to help these workers, including moving them to safer neighboring countries, there is still a large supply disruption that needs to be addressed.
Addressing the Supply Challenge
Global IT firms have two paths to addressing the immediate supply shock from the war, stepping up their operations in established IT hubs like India, or acqui-hiring companies with suitable capabilities in these locations. While already in motion due to the unprecedented demand pipeline driven by the digital transformation wave triggered by the pandemic, the war has put further impetus on demand for talent in India. An estimated 55,000 jobs are expected to shift from Ukraine to India, adding to the already estimated plan of 105,000 jobs prior to the war. In such a scenario, the upward pressure on salaries is only expected to rise as even the top IT firms struggle to keep costs in line. Further, companies will struggle to retain existing employees as ‘The Great Resignation’ is expected to continue for the next year or so.
The second option of acquiring companies for capabilities is where we expect to see significant traction over the coming months. The M&A landscape is already going strong for the Technology industry, with about $12.4Bn in deal value done in India only. Companies are more open to paying a premium valuation, given the unprecedented global demand and the supply shortage. We expect multiples to expand over the next year, with companies in hot spaces such as Digital Product Engineering, Data Analytics, Platform-aligned solutions, etc. commanding a premium over other assets. Global companies that have a large Eastern Europe reliability for their nearshore/off-shore work, will have to look elsewhere to diversify their delivery base and India, given its large talent base and cost arbitrage is an obvious choice for these companies.
We expect to see a trend reversal in the M&A landscape over the coming year. Large Indian IT services that were acquiring Eastern European companies (For example, Tech Mahindra and HCL acquired Eastern European Digital Product Engineering capabilities through Com Tec Co and Starschema in Jan-2022, for $353.8 Mn and $42.5 Mn respectively), will now look to strengthen their India presence to meet the additional demand. However, they will face strong competition from other Global IT firms, like Alten, Globant, EPAM, Globallogic (now a part of Hitachi) etc. who have been steadily expanding their presence in India over the last few years. The competition for Indian talent and scaled organizations (for acquisitions) will further heat-up when various private equity backed and publicly listed mid-market IT firms that have a large exposure to Eastern Europe as a near-shore/off-shore based will start looking East.
Ultimately, the war has put a sharp focus on the Business Continuity Plans of major companies and the ability to shift resources quickly to avoid disruptions. Firms that learn from this event to be more flexible in quickly adding/acquiring resources, can truly set themselves apart from the competition in the long-term.
The above article is authored by Sandeep Gogia, Director – Investment Banking, Equirus
