Bolstered by recent deals, IT sector heats up M&A front

With the global demand for innovative technology on the rise, Ukraine’s startups and software development firms make up one of the most promising markets for mergers and acquisitions, various studies show, і More than $500 million was invested in various types of IT companies so •л far this year, according to AVentures Capital, an early-stage venture firm, but 80 percent of deals are not publicly disclosed in the field.

"At present, the IT sector is booming in Ukraine," says Yuriy Astakhov, investment banking director at Dragon Capital, a leading investment bank. "We are approached more and more by company owners and management seeking financing."

Andrey Kolodiuk, managing partner of AVentures Capital agrees.

"1 believe Ukraine’s IT sector could be the next tiger to boost the Ukrainian economy and not only because of 30-50 percent annual growth, depending on the sub-sector," he says. "We see more than 10 companies with more than $100 million valuations and more than 50 companies with (multi) million-dollar valuations."

Already, the sector has more than 100 research and development centers that employ more than 5,000 engineers. AVentures says the IT outsourcing market generates more than $1 billion in annual revenue, while the size of the consumer internet market is $2 billion, followed by software technology which is $1 billion.

Their statements are bolstered by a 2012 report from professional services firm Delloite and InvestUkraine, a department of the State Agency for Investment and National Projects of

Ukraine, which says Ukraine has a high potential for further growth and is becoming more attractive to foreign investors.

"The low level of IT expenditures and low share of IT services and software sales in the total market value means a high potential for further growth," the reports reads.

Kolodiuk says the country’s it sector has a positive image among Ukrainian and foreign investors. He points to deals such as Google’s purchase of Ukrainian startup Viewdle for an estimated $30 million, the initial public offering of Cupid PLC on the London Stock Exchange and the sale of e-commerce site Slando to South African media and e-commerce group Naspers as success stories often talked about by entrepreneurs and investors.

On top of those, this month there was the $400-8500 million acquisition of product development services company GlobalLogic by Арах Partners’ Funds, Kolodiuk’s fellow managing partner at AVentures Capital Yevgen Sysoyev points out.

"And more and more international funds like Bessemer, Intel, Accel, Almaz, Runa are interested in larger deals, Series В or so, up to $10 million or more. During the next three to six months we expect at least two or three new big deals to be dosed," added Sysoyev.

In Ukraine, IT development has followed the "Israeli" model whereby research and development teams form the backbone of companies registered in more developed markets.

For example, in May Korea-based Samsung Electronics opened new research and development centers in Kharkiv and Kyiv where the company will develop next generation software for many of its handheld services.

Samsung’s Kyiv center, already open for some time, currently employs about 1,100 IT professionals. Company officials in May said another goo would be added by the end of 2014.

AVentures alone plans to make upwards of 10 more investments in promising IT companies over the next two years, according to Sysoyev and Kolodiuk, which they believe will deliver more than 40 percent internal rate of return for the fund’s limited partners and investors.

There are downsides, the biggest of which might be a high mortality rate among IT startups. For example, in Silicon Valley, an established IT fund gets 90 percent of its return from one company out of eight in its portfolio. While there are no such data for Ukraine, Astakhov believes it is no better here than in the prestigious Silicon Valley.

That is because "the industry here is still in a seeding stage," he says, adding that investors need to do their due diligence before floating startups cash for development, "especially at the beginning, when (the company’s) key asset is people."

"It has become a market practice that well-educated and creative former employees of IT outsourcers leave their post-graduate studies full of ideas and enthusiasm to develop their own businesses," Astakhov explains.

And Ukrainian IT venture investors, the number of which is growing, are watching closely for attractive investment opportunities, so that they might get on board in time. They need just to act wisely, Astakhov says.