Nick Johnson, Corporate Finance partner and Head of the Technology Sector Group at Ryecroft Glenton takes a closer look at the UK mergers & acquisitions (M&A) technology market.
The UK tech industry is now valued at $1tn (£764bn), a landmark milestone that has previously only been reached by the US and China. The figures, which combine the valuations of the UK’s public and private technology companies, puts the value of the UK tech industry at more than double that of Germany and almost five times larger than France and Sweden.
Despite stronger headwinds, as inflation and interest rates rise, the impact on deals in the technology sector has been modest compared to 2021 – a record year for UK tech M&A.
There were 501 UK tech deals announced in H1 2022; 6% lower than last year, but 6% higher than 2019 (pre-covid).
Deal volumes in Q2 were actually higher than Q1 (pre-Ukraine invasion), suggesting little evidence of any slowdown, while valuations remain punchy at just 8% lower than last year.
This comes despite the fact that publicly listed shares have fallen, with NASDAQ and UK listed tech shares down 30% year to date, and loss-making hyper-growth businesses being hit particularly hard.
The blow has been softened by a combination of the significant weakness in sterling (which attracts foreign buyers) and the fact that private equity funds globally raised over $1tn last year, so there is still plenty of funding available.
Private equity (PE) continues to drive activity through a heavy focus on ‘buy-and-build’ platforms across the sector, most notably in software, IT services and unified communications.
‘Buy and build’ deals accounted for 50% of all deals in 2021. Although lower in 2022, at only 30% of deals year to date, there remains a lot of unspent PE cash.
As a great example, former North-East Company of the Year, Aspire Technology Solutions announced in March 2022 that it had secured significant minority investment from LDC, the UK’s leading mid-market private equity firm, in a transaction which values the business at £85m. Aspire is one of the fastest growing IT managed service and cyber security providers in the UK and was launched 15 years ago by its CEO, Chris Fraser. The company now has multiple offices in locations including Gateshead, London and Stockton-on-Tees and employs more than 200 people.
Secondary PE transactions continue to act as the bedrock for deal activity, particularly in the software market, as established platforms trade up the PE fund size pyramid. PE houses are increasingly looking to keep a stake in existing platforms rather than exiting in full as seen in the recent Mandata deal in the North-East.
Strategic trade buyers continue to pursue tuck-in deals that can accelerate penetration of new markets. Appetite for businesses across the sector with robust revenue models and strong growth prospects remains strong.
Stock markets worldwide continue to be shaken by macroeconomic pressures, including geopolitics, slow post covid GDP growth, and the increasingly real threat of higher interest rates to combat accelerating inflation.
While tech stocks have not been immune, and there has been a recalibration of public market appetite for growth stocks more broadly, it is notable that they have since recovered much of the drop that occurred from January to mid-March across all sub sectors. With the exception of fintech, the sector remains firmly in positive market performance territory over the last 12 months. The best performing UK-listed tech companies are a mix of solid performers like Calnex (which acquired iTrinegy), Netcall, iEnergizer in the booming power sector, and Nanoco. Worst performers in UK-listed Tech sector included some of the highest-valued software companies in e-commerce, transfer payments and ID management. They have been impacted by higher interest payments, as higher discount rates are applied to value future cash flows; they include: Trustpilot, Made Tech, Dot Digital and Wise.
While public market performance may remain volatile, there has not currently been any material reset in valuation metrics flowing through to the M&A market. Valuations remain very strong for quality assets, with some easing back from the peak multiple levels seen at the back end of 2021.
The median valuation IT sector M&A has dropped from 2.5x to 2.3x, a fall of 8%. Across the IT and Communications sector valuations were hugely varied, ranging from only 1x revenues for Trustmarque (a disposal by Capita), to a massive 14x revenues for Ideagen. The sale of UK listed EMIS for 7x revenues was also a high valuation.
We expect valuations will hold for assets that have:
- a consistent three-year growth record
- proved resilient during the pandemic
- have strong levels of recurring and visible revenues, with good cash conversion
- a long-term tier 1 customer base
- potential for up and cross-selling and international expansion
There is strong international demand for UK assets, particularly from the US, attracted by resilient growth stories and increased confidence in the UK’s post-pandemic and post-Brexit economy. Cross border deals continue to drive the sector this year, influenced by the weakness of sterling; UK-Tech companies represent good value. So far in 2022, 42% of deals have involved overseas acquirers. This includes the sale of a significant shareholding of Market Dojo to Esker Inc., advised by RGCF, referenced in more detail later in this article.
Software continued to be the most active tech sub sector, accounting for 53% of deals, its strongest quarter since the pandemic began. Numbers were bolstered by a high volume of smaller deals as buyers seek targets at an early point in their growth cycle, and the established PE-backed buy-and-build platforms continue to bolt on assets at an impressive rate.
Future Trends
Digital transformation will continue to drive M&A as companies look towards acquisitions and investments in tech-enabled assets to pursue their digital transformation strategies. Despite lofty valuations, buying the necessary talent or technology to enable digital transformation shows no signs of slowing down, as business leaders continue to search for deals that position them to scale their existing offerings and drive innovation. Digitisation continues to drive revenue growth in sectors like cyber, compliance, HR, health, education, and comms. We also see ongoing activity in cloud services and MSPs as businesses continue to migrate to the Cloud.
Private equity firms will remain key investors in technology companies. Global Private Equity (PE) M&A activity reached record levels in 2021, accounting for 27% of all global M&A value and 9% in volume, with 470 PE investments worth a combined USD 225.7 billion in the technology sector. This level of activity will continue, with PE firms expected to increase investment in technology companies or in acquiring divested technological non-core assets.
Tech M&A will continue to be subject to changing regulatory hurdles. Across the globe, dealmakers active in the Tech sector will face scrutiny from regulators targeting anticompetitive deals and transactions considered to pose a threat to national security. In the UK, the Competition and Markets Authority’s regulation of big technology M&A is expected to have an impact on tech mergers and acquisitions. Additionally, the UK recently passed the National Security and Investment Act, which establishes a national security regime that will likely also have in its crosshairs technology deals that threaten national security.
Investment hot spots
Healthtech
The pandemic has accelerated the digitalisation of healthcare, propelling healthtech to the top of investors’ shopping lists. Opportunities exist across the sector, including lifestyle and healthcare applications and wearables; back-office automation and workflow; and data insights and analytics.
Edtech
The fragmented nature of educational technology, government investment in post-covid catch-up resources and the ongoing digitalisation of supporting services make edtech assets attractive prospects. The sector continues to internationalise with content and curriculum resources being increasingly shared and tailored across geographies.
Compliance
As environment, social and governance (ESG) rises to the top of board and investors’ agendas, there will be an increase in activity for companies in this arena.
RG and the Tech Sector
RG and RGCF are very active in the technology sector supporting and advising many companies in the North-East region and across the UK.
Each quarter RGCF publishes an M&A Technology Sector Snapshot – together with Mercia Asset Management PLC – to provide information on national themes in the UK tech sector, as well as focusing on developments closer to home, in the North-East.
The snapshot provides an insight into key industry trends, current market data, news, and an overview of recent transactions.
The tech sector is a broad church and includes Software, IT Services, Unified Comms, E-Commerce, Digital Media, and Cyber Security.
Each quarter we shine the spotlight on a specific sub-sector within the technology industry. To date the following sub sectors have been covered: Gaming; Greentech; Biotech; and FinTech.
RGCF has advised on several completed transactions in the technology arena over recent months.
Market Dojo
In June 2022 RG Corporate Finance advised the shareholders of Market Dojo Limited (“MD”), a Bristol-based procurement software and eSourcing company, on the sale of 50.1% of the business to Esker Inc.
Based in Bristol, England, Market Dojo has 20 employees and over 160 customers, 60% of which are outside its domestic market, including France, the United States, and the Middle East.
Esker, is a global cloud platform and leader in AI-driven process automation solutions provider.
VTUK
In March 2022 RG Corporate Finance advised the shareholders of Vision Teknology UK Ltd (“VTUK”) on the sale of the business to iamproperty Group, a Newcastle-headquartered, PE backed residential auction technology business.
Established in 1989 by founder Peter Grant, Oxfordshire-based VTUK works with estate and letting agencies across the UK and provides a cloud-based property CRM software platform.
Iamproperty is the UKs largest residential auctioneer and the UK’s only end-to-end onboarding and sales progression platform.
Redu/MBL
In June 2022 RG Corporate Finance advised the shareholders of Redu Group Limited (“Redu”) on the sale of its subsidiary, MBL Solutions Ltd (“MBL”) t/a Redu Retail, to Appreciate Group plc (“Appreciate”), an AIM listed gifting and engagement company.
MBL, originally acquired by Redu in 2020, is a leading provider of gift card processing and management solutions based in Newcastle, which supports high street retailers such as Greggs, New Look and B&M in providing physical and electronic gift card programmes.
Photo by Domenico Loia on Unsplash