Despite stronger headwinds, as inflation and interest rates rise, the impact on deals has been modest compared to 2021 – a record year for UK Tech M&A – says ICON Corporate Finance.
In its Mid-Year UK Technology M&A Snapshot 2022, ICON reports that 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 shares have fallen, with NASDAQ and UK Tech shares down 30% YTD, and loss making hyper-growth businesses have been 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 PE raised over $1tn last year, so there is still plenty of cash around.
Valuations in UK Tech M&A have seen falls. 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.
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.
PE/VC-backed ‘Buy and Build’ deals accounted for 50% of all deals in 2021. Although lower in 2022, at 30% there remains a lot of unspent PE cash.
The sale of Ideagen to Hg in a £1.1 billion deal achieved one of the highest valuations but the sale of UK-listed EMIS for 7x revenues was also punchy. Interestingly, there were also quite a few restructuring deals including the sale of parts of Capita (Trustmarque); part of Sungard; and the sale of a division of Datatec, called Analysis Mason.
Access Group continues to be the most active buyer, acquiring six companies this year after its acquisition of eight in 2021. Having just raised £1 billion to fund deals we expect a lot more of the same.
Digitisation continues to drive revenue growth in sectors like cyber, compliance, HR, health, education, and comms. ICON also sees ongoing activity in cloud services and MSPs as businesses continue to migrate to the Cloud.
The best performing UK-listed Techs 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, which was down 29%, 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.