For the past years the IT sector has become the main growth engine of the Bulgarian economy and already forms a sizable part of the country's GDP. Similar to the global trend, the growth of the Bulgarian IT industry has been supported by venture capital funds, business angels and other equity investors, who play an important role for its acceleration as well as rapid market penetration. Recently, the mergers and acquisitions (M&A) in the sector were further stimulated by a number of factors.
The continuous striving for growth and innovation, the know-how synergy sought by the market players, the recent shortage of skilled staff and rising labor costs are demanding consolidation in the Bulgarian IT industry. An analysis of the M&A trends in the sector should always distinguish between product and outsourcing IT companies, as they face different challenges on their growth paths.
TYPES OF M&AS
Those product-orientated companies, which have already passed the critical phase from a start up to a business with clear market traction are mainly focused on two types of deals. The fi rst type relates to acquisitions of smaller (in some
cases bigger) competitors. These M&A deals could be made for the purpose of increasing the market share (extending the client base), but they are also often motivated by a specifi c product, which the target company has developed and which would perfectly match the product portfolio of the acquiring organization. The main reason why an acquiring company would be keen on such a new product is not the fact that it could not create it on its own, but the time needed to develop it. In the context of today's super dynamic digital environment time is a critical factor that could give a competitive edge. The second type of transactions that involve product companies are driven by the need of the acquiring company to increase its development potential. The main target of such acquisitions are small and coherent teams that would be easily integrated into the structure of the acquirer later on. Similar processes can be observed with respect to the outsourcing companies in the IT sector. On the one hand, consolidation is determined by the necessity to increase the volume of their HR resource in order to be able to strengthen market presence and to attract bigger clients at higher margins. On the other hand, a recently observed trend is for IT outsourcing companies to aspire to evolve into product companies. Since the development of a successful product from scratch is a great challenge, the outsourcing companies are tempted to acquire small product companies that are in the early stage of their growth and would need a push, which the outsourcing company is able to provide. In such cases, the synergy between product concepts, work force and fiances might lead to quite interesting and benefi cial results.
Depending on the type of the M&A transaction, the participants focus on a number of legal aspects. Thus, the proper settlement of intellectual property rights is always key to the successful acquisition of a product company, while in the case of a deal with an outsourcing company, the main factor to be considered is the level of qualifi cation of the expert team in the target company. The sector's typical key staff retention policies such as option pools and bonus schemes should also be considered and refl ected in the course of the deal. Last but not least, the M&A participants need to pay special attention to the choice of the most appropriate corporate and management structure of the merged company, which proves to have a decisive impact on its further growth and success. CasePro is a leading law fi rm advising M&A deals from the fi nancial and technology sector and has become a trusted legal partner of а number of VC funds and recognizable IT companies. In less than 2 years, the fi rm included in its portfolio more than 15 successfully closed M&A transactions from the IT industry and it is currently advising another 4 active transactions that are expected to be announced soon. Based on their extensive experience, CasePro Managing Partners Spartak Yovchev and Damyana Lazarova share their professional observations on the most recent industry trends.