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Q1 private company M&A volumes drop as IPO market rises

An extremely active IPO market has impacted on UK private company mergers and acquisitions (M&A) resulting in a slow start for 2014 deals.

This has been further compounded by the ongoing political stand-off in Ukraine, which has led some investors to defer decisions in the short term, according to the latest quarterly PCPI/PEPI index from BDO Corporate Finance.
 
The index tracks the relationship between the enterprise value (EV) to earnings before interest tax depreciation and amortisation (EBITDA) multiple paid by trade and private equity buyers when purchasing UK private companies.
 
Despite widespread expectations that the growing confidence witnessed at the end of the 2013 by dealmakers would continue into the new year, trade deals fell 466 to 355 (24 per cent) and private equity deals fell 84 to 74 (12 per cent). The rise in the IPO market is a positive sign of investment in the UK, although the figures clearly show that it has taken deal flow away from private company deals.
 
Tim Clarke, partner, says: “What we have witnessed is a great revival in the UK stock market, but along with the events in Eastern Europe, there has been a diversion of capital away from mergers and acquisitions.
 
“We do expect this to rebound towards the end of this year, however, as institutional allocations for new IPOs has become saturated, and companies once again turn to M&A to complete their deals.”
 
One bright spot for M&A has been the software and IT services sectors, which have maintained the upwards trajectories they have been since as far back as 2009. Indeed, during that time, the average EBITDA transaction multiple has risen from just below 7 times to 8.75 times today. For software during the same period this has been even greater, rising from 7.5 times to 9.75 times.
 
Notable recent deals which have driven valuations include Alternative Networks’ acquisition of cloud infrastructure services provider, Control Circle, for a reported current year EBITDA multiple of close to 20 times.

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