Opinion

Dial M for Merger - UK Cloud companies set to be acquired predicts report

US companies are expected to be the dominant purchasers of UK tech firms with Cloud related technologies expected to be the most attractive purchases - says a report

Deloitte's biannual survey of UK technology companies, launched today, reports that technology leaders are more optimistic about the outlook for M&A in the next year 12 months. Deloitte reports an increase in optimism from 53 per cent to 60 per cent in the last six month.

Interesting. Has Deloitte found a way to measure optimism? Surely that is a bigger announcement than merger and acquisition news.

The survey looks at technology M&A and capital market trends for 2010/11 and measures forward looking expectations.

Reality alert! When questioned by research companies, many interviewees offer the answers they think they're expected to give. Which means everyone says they're going to buy ATM or ASP services, but they never do.

So when the market reports from Durlacher (to use an example of a researcher that's gone out of business) predicts that The ASP Market is going to be worth £22 billion by the end of 2009, they end up being out by £22 billion. But nobody ever remembers old market predictions.

But woe betide any journalist who gets his facts wrong on the same scale!

Still, we're sure you all want to read Deloitte's predictions, so here they are:

Summary: Deloitte technology survey: the outlook for M&A continues to improve.

•         Optimism on M&A activity has improved and valuations are expected to increase
•         Companies providing cloud related technologies will command a premium
•         Increased auction competition will drive valuations
•         Increased private equity activity is expected to continue
•         The Government's ICT strategy is seen as creating new opportunities for nimble and innovative companies
•         US companies expected to remain the dominant purchasers of UK technology firms, with increased interest from India and China

Competitive auction market

There is an expectation that there will be a more competitive auction market, with increased private equity activity, particularly focused on companies serving SMEs. Only 26% of respondents thought distress driven deals were a driver of increased activity, compared to 40% six months ago. This suggests that the time for opportunistically picking up a target cheaply may have already passed.

Conor Cahill, technology corporate finance partner at Deloitte comments: "It is encouraging that M&A optimism has increased, even if some of the significant premiums paid on a number of well-publicised deals may lead to some prospective acquirers deciding to sit things out. Cash rich corporate acquirers continue to consolidate the market with an accelerated migration towards cloud related technologies."

Hot sectors where companies receive a premium valuation

UK technology leaders singled out four areas for premium valuations: virtualisation technologies, mobile applications, analytical/ diagnostic software and security software.

Conor Cahill adds: "Valuations are expected to increase in the next 12 months as auctions become more competitive. The favoured sectors that will attract a premium are those that support and embrace cloud based solutions, while diagnostic software is particularly important to understand changes in customer behaviour. Organisations will look to address the increased interest in cloud related technologies through their M&A strategy in order to accelerate capability in this area."

Overseas interest

The survey highlights the extent to which the UK technology M&A market will continue to be driven by overseas acquirers. UK technology leaders (90%) believe that US companies will remain the dominant overseas purchasers of UK technology companies. An increase in interest from Indian and Chinese companies is also anticipated in the next 12 months.

IPOs remain challenging

The outlook for UK technology IPOs continues to look challenging. Following a difficult 2010, few technology leaders believe that the next 12 months will prove a good time to float a UK technology company. In contrast to the positive results on M&A outlook and valuations, investor confidence for new listings remain fragile with particular sensitivity around pricing on new issues.

The balance of respondents anticipating an increase in investor appetite to support the flotation of UK technology companies dropped from 33% to 16%.

John Hammond, capital markets partner at Deloitte comments: "Well publicised details of eleventh hour valuation revisions and pulled flotations (across all sectors) have not been conducive to building management confidence in new listings. Nevertheless, a compelling growth strategy and good timing may allow some companies to buck this trend."

Finally, half of all respondents believe that the coalition Government's ICT strategy will have a positive impact on the UK technology industry.

While few of the major providers to Government will have welcomed the recent round of contract renegotiations, our respondents believe that the Government refocus may create opportunities. UK technology companies will need to be both nimble and innovative to capitalise on these.  

This was first published in December 2010

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