With four decades of experience working in software services and global outsourcing, Steve Mezak knows his way around Silicon Valley as well as many other tech hubs in The Americas. As chief “Software Services Deal-Maker” at Next Coast Brokerage, Steve works closely with entrepreneurs and founders considering their ‘next steps’. Steve has been watching how an increase in merger and acquisition activity is influencing the trajectory of Nearshore IT services:
Q: You have been watching the Nearshore software services sector for a good number of years. What are the elements of the current market which make it particularly attractive for firms seeking to sell and acquire software development organizations?
The pandemic made remote work more acceptable, and consequently business is growing for American software engineering firms and agencies. However, there is a continued designer and developer shortage that is encouraging American service firms to look outside of North America. Hesitancy by the firms and their clients to face the challenges of using developer talent offshore is mitigated by a good experience with Nearshore firms. Rather than contract to Nearshore firms, many American companies are pursuing acquiring them to increase their talent base.
US companies previously concerned about lack of English skills and possible cultural differences are pleasantly surprised by the alignment and affinity with US business culture and language
The US dominates the hemisphere economically and culturally. Latin American countries have service firms that cater to the North American market. US companies previously concerned about lack of English skills and possible cultural differences are pleasantly surprised by the alignment and affinity with US business culture and language. From a technical perspective, Nearshore software engineering firms are proficient with agile development methods and processes that take advantage of time zone and cultural alignment to collaborate with clients in North America far easier than service firms many more time zones away.
Finally, another interesting trend is BPO/Call Center/CX firms acquiring software services & RPA firms to enhance their internal software systems and service offerings. These BPO centers typically have a presence in Latin America and can acquire technical capabilities there as well, more cost effectively than hiring in North America.
Q: Is the focus concentrated on any particular countries?
There are smart people everywhere and it is hard to single out any specific countries as leaders for software engineering skills. However, some comparisons can be made. Mexico and Colombia are known for good engineering talent and for proximity to North America and access by air.
It takes a red-eye flight to get to Argentina but it has a large number of software engineering firms focused on the North American market.
Now is the time to pursue M&A with interest rates at an all-time low and many Latin American service firms that have matured within the last two decades to become attractive targets
Bolivia has a smaller number of developers but a low-cost leader in Latin America. Similarly, Peru and Central America continue to evolve in terms of scale.
From an M&A perspective, it is important to examine the labor laws in each country during the diligence process to ensure that compliance will not put a damper on the acquirer’s financial goals.
Q: We have seen a flurry of Nearshore IT-focused acquisitions over the last two years, do you see anything on the horizon which might interrupt this momentum?
No, it will accelerate as we continue to enter a post-pandemic growth period. Now is the time to pursue M&A with interest rates at an all-time low and many Latin American service firms that have matured within the last two decades to become attractive targets.
Meanwhile investment in Latin America is rising. For example, Softbank experienced success and returns of their 2019 Latin America-focused fund have “far exceeded” expectations. The group recently announced a second Latin America-focused fund with an initial amount of $3 billion USD.
Of course, some economists fear rising interest rates and inflation in the future. Given these uncertainties, we continue to believe that we’re in the midst of an ideal environment for Nearshore deal-making.