Consolidation in the small IT outsourcing market: Khmelnytskyi and Gorovoy company buys shares in two outsourcers and merges with the third

InSoft Software, a joint venture of investment companies UFuture of Vasyl Khmelnytskui and InSoft Partners of Vitaly Gorovoy, has closed two deals and merged three assets under the new brand. AIN.UA tells the details.

Deal details

InSoft Software increased its stake in Rozdoum, an outsourcing company in Kharkiv, and bought a controlling stake in Kyiv-based Rademade. According to AIN.UA, as a result of the deals InSoft Software owns:

  • 70% in Rozdoum;
  • 53.2% in Rademade.

Rozdoum and Rademade are already in the process of merging with each other and with a third company – This is an outsourcing company in Kyiv, 55% of which InSoft bought a year earlier, in October 2018.

The amount of the deals is not disclosed. According to AIN.UA, three assets cost about $1.5 million.

The common brand of the new holding is ITernal Group.

Reasons for the deal

The idea of creating a single brand for sales in the West, under which not one but a group of IT outsourcing companies will operate in Ukraine, is not new: in 2003, such an attempt was made by Andrii Kolodiuk with his TechInvest company. And a few years later, Dmytro Lysytskyi also tried.

It was problematic to receive orders from serious clients for still the young Ukrainian IT outsourcing industry.

It’s not difficult to guess which contractor, let’s say, hypothetically, Ericsson will choose when receiving two offers: from a Ukrainian company with 200 employees and an Indian company with 20,000 people and a portfolio.

Therefore, the merging of companies into consortiums and syndicates looked and looks like a reasonable step. However, none of the well-known initiatives has achieved success up to date.

By 2019, independent large outsourcing and outstaffing companies, as well as the offices of large non-Ukrainian players from this industry, became successful in Ukraine long ago.

According to information of Vitaly Gorovoy provided to AIN.UA, under these circumstances InSoft Partners had decided to make again an offer to the small Ukrainian outsourcing company [Editor’s note: up to 200 people] to merge applying it as a competition method:

A small outsourcer needs a lot of money or luck for a significant breakthrough and growth to consider, attract, and cling to a unicorn among customers.

According to Gorovoy, their project with Vasyl Khmelnytskyi distinguishes them from their predecessors in that that they own a controlling stake in all the companies included in the holding. The second feature is that InSoft considers the idea of combining companies at the level of teams and processes to be erroneous. In the ITernal Group, the merger takes place at the level of the owner and sales team.

The holding said that they continue to collect offers from small outsourcers and plan to grow by 2-4 companies per year.

What about medium outsourcing

According to Gorovoy, InSoft is considering deals with medium-sized outsourcing companies [Editor’s note: 200-800 people]. But no deals are expected in the near future.

According to the AIN.UA editorial board, the reason is the discrepancy between the expectations of the owners of the average outsourcing and offers of investors and buyers. The AIN.UA team is not aware of deals with average outsourcing companies in the Ukrainian market over the past year.

Unlike a product company, outsourcing company does not have a specificity that affects the price compared to competitors. Due to the relatively low margins and growth rates of small and medium-sized outsourcing companies, for their owners the price calculation by the EBITDA multiplier is unattractive. And prices of 1-1.2 annual revenue are not justified for the investor. Thus, deals with average outsourcing on average in the market are justified for distressed assets.