A new report by technology-focused investment bank ICON Corporate Finance, has revealed that despite Covid causing a 50 per cent year-on-year collapse in Tech M&A activity in the second quarter, a remarkable bounce-back led to a spate of M&A activity in businesses focussed on Digital Transformation, resulting in a near record final quarter, boding well for 2021.
The report, which analyses some of the largest and most interesting FinTech deals in 2020, and which looks at trends in the tech sector, saw M&A activity rally, up 6 per cent in Q4 compared 2019, which had itself been a record year for Tech M&A activity.
In the FinTech sector consolidation in financial information led to ever larger deal sizes. This included the announcement that S&P Global was to acquire IHS Markit for GBP34 billion or 9x revenues. This beat the GBP24 billion acquisition of Refinitiv by London Stock Exchange in 2019.
ICON believes that Digital Transformation across all industry sectors, including FinTech, will continue to accelerate, driving further M&A activity in 2021, boosted in no small part by appetite from overseas investors – a major force in the 2020 bounce-back. Cross-border deals rose to a record high in 2020, accounting for 48 per cent of all UK deals.
“Normally in economic downturns overseas buyers tend to pull up the draw-bridge and re-focus. However, that was far from the case in 2020,” says Brian Parker, Co-Founder, Head of M&A at ICON Corporate Finance and author of the report.
Alongside the mainstay of buyers from the US, 2020 saw a significant widening of interest in UK tech companies from Australia, Scandinavia and Europe as buyers like Byggfakta (Scandinavia) ELMO (Australia) and MessageBird (Holland) boosted activity. It will be interesting to see if this is a trend that continues in 2021.
“There is simply a tsunami of cheap funding looking for a home, says Parker. “Many used these funds to plug the hole created by COVID, while others used the funds for M&A. As a result, there were 4,700 global tech M&A deals in 2H20, up 4 per cent YoY. That has also pushed up valuations to frothy levels with two of the largest US deals achieving more than 30x revenues.”
The report identifies that private equity acquisitions were one of the key factors behind buoyant tech M&A activity in 2020. This is likely to continue in the year ahead.
“Total VC/PE backed acquisitions accounted for 23 per cent of all deals in 2020 – similar to 2018 and 2019,” says Parker. “However, with interest rates remaining low and significant funds raised yet to be spent, further M&A activity can be expected. We have seen a wave of PE backed buy-and-build deals in the past few years and that is unlikely to change in 2021.”
Notably, all the most acquisitive UK buyers in 2020 were PE owned. The report looks at ClearCourse Partnership, Juniper Education, Advanced, Access Group, Iris and Civica, among others, who are all looking for new technology in their respective sectors.
The report also identifies growing appetite, particularly for Cloud-based software businesses, which led to a significant rise in UK tech valuations which in total have climbed towards 20x EBIT. Keysight, Byggfakta, RELX, Elmo, Tracsis and Broadridge, Ideagen and Aptean all paid over 5x revenues for UK targets.
