The Persistent Systems/Nagarro deal does not represent a new logic, but highlights excessive pessimism in IT services sector valuations

Overview

This report discusses whether Persistent Systems' proposed acquisition of Nagarro reflects a new industrial logic in the IT services sector. Bernstein's conclusion is no: the deal remains, in essence, a common industry consolidation aimed at gaining new growth avenues, new clients, new industry verticals, new capabilities, complementary products, broader geographic coverage, as well as revenue and cost synergies. What the report focuses on more is that the buyer is willing to pay a price for a listed IT services company that is significantly above its public market valuation.

Core views

The core views include: first, this deal does not represent a fundamentally new logic emerging in the IT services industry, but rather a continuation of traditional M&A consolidation logic; second, the 140% acquisition premium and 10.8x EV/CY25 adjusted EBIT multiple show that strategic buyers view IT services assets much more favorably than the public market does; third, current sector valuations are below previous recession troughs, reflecting excessive investor concern about AI disruption; fourth, Bernstein believes AI will not cause clients to reduce IT budgets, nor will it allow clients to dispense with IT services companies, and the industry is more likely to gain project volume growth by adapting to AI.

Analysis framework

The report evaluates the investment implications for the European IT services sector using M&A deal logic, transaction multiples, comparisons with public market valuations, judgments on AI's industry impact, and upcoming quarterly operating trends as its main analytical threads.

Methodology notes

• Valuation analysisComparison of M&A premiums and EV/EBIT multiples

  Assess whether market sentiment is excessively pessimistic by comparing transaction prices with public market valuations and peer transaction multiples.

  The Persistent Systems/Nagarro deal provides a strategic buyer pricing reference. The report compares it with the current multiples of other listed IT services companies and concludes that the public market is pricing the sector's quality and fundamentals too low.

• Industry structure analysisIT services M&A consolidation logic

  M&A is used to expand clients, industry verticals, capability portfolios, geographic coverage, and synergies.

  The report believes that while the deal has characteristics specific to the buyer and seller, its underlying logic is not new and still belongs to the long-standing consolidation model in the IT services industry.

• Thematic impact analysisNet impact of AI on IT services demand

  AI-driven productivity gains may be offset by growth in project volumes.

  The report believes clients will not reduce IT budgets because of AI, but will instead use the same or higher budgets to complete more digitalization and AI-related projects, making IT services companies more likely to adapt to change than be replaced.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European IT services companies

  Core research target

  Strengths

  Valuations are at low levels, while the report believes fundamentals quality and industry adaptability remain strong.

  Weaknesses

  The market worries that AI will replace service demand, and client decision-making pace may also slow.

  Comparison

  The deal's implied multiple is clearly higher than the current multiples of many listed IT services companies.

  Risks

  If AI truly compresses budgets or project volumes fail to grow, the valuation recovery thesis will be impaired.

• Persistent Systems/Nagarro deal

  Industry pricing reference

  Strengths

  Reflects the buyer's willingness to gain clients, verticals, capabilities, and geographic coverage through M&A.

  Weaknesses

  The deal itself is not an entirely new industry logic and cannot by itself prove an inflection point in industry-wide demand.

  Comparison

  The roughly 140% premium shows that strategic buyer pricing is higher than public market pricing.

  Risks

  M&A integration, synergy realization, and the reasonableness of the price paid still carry execution risks.

• Accenture

  Industry demand monitoring indicator

  Strengths

  Consulting bookings are still described in the report as solid.

  Weaknesses

  The company indicated early signs of slower client decision-making in late May.

  Comparison

  Bernstein believes Accenture is currently the only company issuing this kind of warning, so it cannot alone be treated as a strong signal.

  Risks

  If other IT services companies also show similar signs in 2Q26, the industry demand outlook may weaken.

Key data

• Acquisition premiumAbout 140%Persistent Systems' offer for Nagarro was significantly higher than the valuation previously assigned by equity investors.
• Implied transaction multiple10.8x EV/CY25 adjusted EBITThe report says this multiple is higher than the current trading multiples of many listed IT services companies.
• Nagarro revenue scaleAbout €1bn annual revenueThe report describes it as an IT services company with approximately €1 billion in annual revenue.
• Geographic distribution of delivery resourcesAbout 90% located in India, Romania, and the PhilippinesUsed to illustrate the global delivery characteristics of the acquired asset.
• Rating distribution of covered companiesAmong 8 covered IT services companies, most are rated OutperformReflects Bernstein's positive view on the sector's outlook and valuation attractiveness.

Impact & implications

The investment implication is that the public market may be pricing AI risk in the IT services sector with excessive pessimism, while strategic buyers and private equity-related entities are still willing to pay high prices for quality IT services assets. If future quarterly data does not show broad-based demand slowing, the mismatch between low valuations and resilient fundamentals could create room for sector re-rating.

Risks

• The substitution effect of AI on IT services demand may be stronger than the report expects.
• Client IT budgets or approvals for digitalization projects may slow, and particular attention should be paid to whether the client decision changes flagged by Accenture spread.
• The high premium in this M&A deal may not represent a sustainable valuation level for the entire industry.
• There is execution uncertainty around revenue and cost synergies.
• Depressed public market valuations may persist, and the timing of re-rating is uncertain.

What to watch

• Whether 2Q26 results disclosed by IT services companies in the coming weeks continue the 1Q26 trend.
• Whether Accenture's signal of slower client decision-making is validated by other companies.
• Regulatory, shareholder approval, and integration progress of the Persistent Systems/Nagarro deal.
• Whether valuation multiples of listed IT services companies converge toward the deal's implied multiple.
• Whether growth in AI-related project volumes is sufficient to offset the decline in labor demand per project caused by productivity gains.