What will happen to the CEE software development industry under the quarantine lockdown?
Before the COVID-19 epidemic expanded globally in 1Q 2020, the industry has been performing strongly.
Growth 4-5x faster than globally. CEE outsourcing grows much faster than the global average: 20-25% y-o-y vs 5% globally.
Consistently high M&A activity in 2018 and 2019. The peak number of M&A investments in CEE in 2018-19, with 24 deals announced in 2019 and 31 in 2018. Key valuation principle in most deals: single-digit EBITDA multiple for <$50M revenue companies and double-digit EBITDA multiple for $50-100M+ revenue companies or those with strong vertical focus and high gross margin profile.
«Seller`s» M&A market in Ukraine. A limited number of companies put for sale with more demand to acquire than interest to sell until 1Q 2020.
As of late March 2020, many companies report fewer leads, new clients, and more positions cancelations. The industry, however, is likely to continue growing but at slower than usual (20-25%) pace within CEE.
The decline of growth-focused R&D (Research & Development) activities for global clients
Global clients, leveraging CEE R&D capability for growth, delay expansion and innovating plans, which results in less inflow of new clients or scale-down and freeze of some of the existing contacts.
Cost rationale to remain strong
Proven by previous recessions, IT outsourcing space could recover fast during this crisis due to the strong cost-cutting rationale the offshore industry offers to its global clients.
Temporary wages decrease
As clients ask for bill reduction, the wages for IT workers can freeze or decrease, at least temporarily
Vector for optimization
Companies have started cutting costs to get into leaner shape, operational and financial. The jobs of marketing, recruiting, and sales professionals, as well as those on a bench, will be first to get out.
The slowdown in M&A activity in 2020
Both financial and strategic investors are likely to postpone any M&A activity until more certain times. For well-founded players, however, the crisis presents an opportunity to buy assets likely at lower multiples.
Usual productivity amid remote conditions
As most: IT service companies are used to managing work remotely, there is likely to be minimal impact on the productivity under the quarantine lockdown.
Amid the COVID-19 outbreak, the stock of public companies is down significantly starting with March 2020. The public companies are likely to miss quarterly and yearly earnings targets.
The CEE region in numbers
$13bn+ — Total IT exports generated by Poland, Romania, Ukraine, and Belarus.
580K+ — Software development and technical specialists
60K+ — Technical graduates from 200 local universities and colleges annually
76 — Count of IT Service M&A transactions in four countries in 2015-2018
However, the crisis presents an opportunity to find new ways for business and sales development.