2023 was a tough year for the UK Tech Sector. But in 2024, things look completely different with a huge 299% increase in deal value.
In the first three months of 2024, the UK Tech Sector saw M&A activity jump by 55%. Compared to the same period in 2023, the rise was an astonishing 299%. This shows the sector’s strength and the many opportunities for mergers and acquisitions.
Experts like Rothschild & Co, Canaccord Genuity Group, and Deutsche Bank played key roles in these deals. They made the most of the sector’s prospects. Legal experts from firms like Addleshaw Goddard, Osborne Clarke, and CMS Legal Services EEIG were also crucial. They helped navigate the complex deal-making process.
US companies are now showing more interest in the UK tech market. With expectancies of favorable evaluations in 2024, there’s excitement around future deals. Investors are ready to fund promising tech companies. They believe in the sector’s potential for growth and efficiency.
The focus on digital transformation and ESG is creating opportunities in the UK Tech Sector. Its ability to adapt to changes like high-interest rates and new regulations is notable. This makes it a prime spot for strategic mergers and acquisitions, pointing towards a future of growth and innovation.
Overview of the UK Tech M&A Market
The UK Tech M&A market is showing signs of cautious hope as it moves towards stability. After facing economic struggles and global uncertainties, 2023 brought a slow but steady recovery. Businesses are now using this chance to plan exits and look for new investments.
The TMT sector was a standout in 2023, leading in deal activity. With 955 deals, it made up more than a quarter of all deals. This shows its strength and the high interest from investors, especially private equity, which made up 42% of deals.
However, the Energy, Utilities, and Resources industry saw deals worth over £18 billion, a 24% fall from last year. The Financial Services also experienced a big drop, with deal value 51% lower at just under £18 billion.
On the other hand, the Health Industries sector saw an impressive rise. Its deal value reached £15 billion in 2023, an 80% increase from the previous year. This growth underlines the growing importance of healthcare and continued investor interest.
Even though the total number of deals in the UK fell by 17% to 3,628, the market is still strong compared to before the pandemic. The total deal value may have dropped to £88 billion from £150 billion last year, but investor engagement remains solid. The closing gap between buyers’ and sellers’ expectations also points to better chances for prepared investors and businesses.
Key Trends in Tech Mergers
The tech merger scene is changing a lot, thanks to several big trends. For the last decade, large companies like Warner Media, Amazon, Google, and Facebook have been busy making deals. They’ve been buying smaller businesses in London that know a lot about things like streaming, data analysis, and social media.
London is known as Europe’s tech hub, partly because of these mergers and acquisitions. Examples include Amazon buying Deliveroo and Apple taking over Shazam. These moves show that big tech firms want to add smaller companies to their ranks to grow their tech skills and reach more customers.
But, getting these deals done is taking longer these days. This is because the people involved are looking more closely at the details and regulators are watching more closely. An example is Fox’s difficulty in buying Sky, which showed worries about privacy, fair competition, and too much power in a few hands.
Also, there’s more focus on things like the environment, society, and how companies are run (ESG). Adevinta ASA, for instance, bought Shpock in London while caring a lot about sustainability and being responsible. This highlights how important these values are becoming in making deals.
Even though there were more tech deals in 2023, they weren’t worth as much money, almost 60% less than before. This drop happened because of tighter money rules and changes in regulations, slowing down deals in the second half of the year.
The software industry is attracting lots of investors, particularly for its subscription services. The first half of 2023 saw over 5,000 software deals, with PE firms being a big part of this. But then, the numbers went down a lot, showing how unpredictable the tech mergers market can be.
In 2024, investors are expected to focus more on how much profit companies can make, influenced by the current trends in tech mergers. The market might see more rules to follow and a higher demand for new investment chances, possibly leading to more companies starting to sell shares to the public.
Growth of M&A Activity in 2024
The UK tech market’s growth in 2024 looks good, despite past difficulties. M&A activity fell notably before, with 2023 seeing an 18% drop from 2022. Also, deal values fell to £83bn in 2023 from £269bn in 2021.
Private Equity (PE) played a big role in M&A growth, making up 42% of deals by number. They focused on sectors like Technology, Media, Telecom (TMT), energy, pharma, and healthcare. This shows a strong investment plan for M&A’s future.
Also, 56% of top bosses say deals are key for competition. This shows firms depend on M&A for change. With steady interest rates and falling inflation, many look forward to more M&A activities. The value of deals went up from 6.5x to 8.9x by end of 2023.
Yet, we must not overlook ongoing economic challenges. Issues like high consumer debt, geopolitical risks, and disrupted supply chains exist. But, PE firms are still investing. They have over $160bn ready after a big funding round in 2022. This sets a strong foundation for investing in tech in 2024.
Notable M&A Deals in the UK Tech Sector
The UK tech sector ended 2024’s first quarter with 156 M&A deals. This number is in line with the last quarter of 2023. A notable increase in private equity investments marked this period, with 71% of these deals involved. It shows a major move towards private funding in tech.
Deals in cloud-based IT services made up 37% of the quarter’s transactions. This is a rise from 30% in the previous quarter, showing growing interest in cloud services. High-profile deals included LDC’s sale of Kerv to Bridgepoint and Bowmark Capital’s Focus Group making three buys. Focus Group is also eyeing a sale to Hg Capital, worth about £800 million.
The M&A activities boosted market performance, with significant indices seeing gains. For instance, NVIDIA’s shares jumped by 88% in early 2024, while Atos faced a 73% decrease. These shifts highlight the market’s dynamic nature.
Looking back, the UK tech M&A landscape has dramatically evolved. Despite a 10% decrease in 2011 compared to 2010, notable purchases stand out. These include Autonomy’s €8.2 billion sale to Hewlett-Packard and Intel’s $7.8 billion acquisition of McAfee. More recent deals, like Vista Equity Partners buying Kondor from Thomson Reuters and HTC’s acquisition of Saffron Digital for £30 million, underscore the UK as a crucial target for tech investments. UK’s leading role in chip design is a significant draw for global investors.
Role of Financial and Legal Advisors
In the UK tech world, advisors are key for M&A success. Giants like Rothschild & Co and CMS Legal Services EEIG lead in financial and legal advice. They handle everything from making deals to checking details and getting finance sorted.
The UK tech scene keeps buzzing with big deals, despite fewer overall. With moves like Microsoft’s bid for Activision Blizzard, M&A stays lively. The shift towards eco-friendly energy might spark more M&A work.
New rules by the British government and the EU make mergers trickier. Corporate lawyers play a huge role in ensuring everything is by the book. They help with finishing the deal and offering vital legal advice.
US law firms are growing their M&A teams in London, with nine new partners since 2020. Leading firms such as Skadden shine in the M&A guide. Latham’s London team now exceeds 500, highlighting the need for expert advice.
Private equity’s role in M&A has hit new heights, setting a record with $608.7 billion in 2020. Skadden stands out by advising a third of FTSE 100 firms and holding numerous corporate counsel roles.
As M&A changes, financial and legal advisors stay crucial. They are the foundation for success in the UK’s tech sector.
Challenges in UK Tech Sector M&A
The UK tech sector faces many M&A challenges, mainly because of economic pressures. Rising interest rates have pushed up the cost of capital. This affects how much companies are worth in 2023 and might even affect 2024.
The increase in borrowing costs has slowed down M&A deals, both public and private. The higher cost of capital means companies are valued less. This leads to a gap between what buyers want to pay and sellers’ price expectations.
High-interest rates are likely to keep affecting M&A deals through 2024. Expectations between company founders and buyers need to align better. Challenges are not just about money. The hard and detailed checking processes and complex debt markets are big hurdles too.
Still, B2B tech companies with strong core tech and market presence are attractive to investors. These companies can better handle interest rate changes. Their worth is mostly based on how well they can carry out their business plans.
The UK government’s support for the tech sector is strong and will continue, even after the 2024 elections. Support, along with different programs and tax benefits, helps keep money flowing. This also supports jobs and productivity in the sector.
Venture capitalists used to focus more on a company’s revenue growth. Now, they’re more interested in how a company uses capital and makes a profit. This shift is key for overcoming M&A issues in the UK tech scene in the future.
UK Tech Sector M&A: Opportunities for Investors
The UK tech sector is ripe with investor opportunities in tech M&A. In the first half of 2023, 27% of UK M&A deals were in the TMT sector. Deals reached £10bn in value, showing the sector’s growth and profit potential.
US companies are eyeing expansion abroad, boosting the venture capital scene. Venture capital insights highlight a trend towards automation and digital solutions. AI, mobile, and cloud tech are central to this efficiency drive.
There’s a strong push towards growth and efficiency, creating a great environment for M&A. The software, IT services, and telecom sectors grew significantly in 2023. This prepares them for further advances and highlights the support needed from both early financing and mature capital markets.
Now, ESG is key in investment decisions, with an eye on how private equity funds perform on these fronts. As understanding of ESG laws grows, now is a perfect time for investment.
2023 was challenging, but the tech sector is bouncing back. With realistic funding goals, tech companies are aligning with investor expectations. Even with potential high-interest rate impacts, B2B tech firms hold strong growth potential.
Post-2024 Election, government support for the tech industry is expected to increase. Along with venture capital’s focus on profits, the future for investor opportunities in tech M&A looks bright.
Venture capital insights
forecast continued M&A activity, driven by strategic buys, ESG shifts, and digital breakthroughs. These factors create many chances for investors to thrive in the changing tech landscape.
Impact of Regulatory Changes on Tech Mergers
Regulatory changes have deeply affected tech mergers recently. In 2023, the total value of M&A deals in the tech sector plummeted to $387 billion from $995 billion in 2021. This 61% decrease is mainly due to tougher regulations.
Notably, Adobe had to drop its $20 billion deal to buy Figma because of UK and EU regulators. Similarly, Amazon’s $1.7 billion bid for iRobot in January 2024 was stopped by the EU.
AI-related deals, like Microsoft’s involvement with OpenAI, are closely watched by regulators. The Foreign Subsidies Regulation (FSR) also forces the European Commission to check tech deals more strictly. This means big companies like Apple and Microsoft might face more obstacles, especially in buying hardware businesses.
The European Commission now also looks at grants, tax reductions, loans, or deals from outside the EU over the last three years. Deals that fall under these rules are reviewed within 25 working days. This period can be extended to 90 days for a more thorough check, delaying the deal.
There has also been a rise in the number of countries reviewing foreign investments closely because of the EU’s FDI Screening Regulation. Now, over 20 countries have such checks, up from 11 in 2019. Failing to notify these deals properly can lead to big fines or even criminal charges against bosses. The EC can still review deals that don’t meet the usual merger notification thresholds, as seen in the Illumina/Grail case. This makes it crucial to follow merger rules closely.
These regulatory changes mean businesses and investors must be very careful when planning tech M&As in the UK. The changing rules are reshaping how tech deals are made.
Conclusion
The UK Tech Sector’s M&A outlook for 2024 looks hopeful yet cautious. More high-quality businesses are entering the market, offering great choices for both UK and global buyers. Even though deal values dropped to £109 billion in 2023, the market’s strength is clear. Energy, tech, and pharma sectors are booming, showing high activity levels and keen interest.
Changes in regulations and the economy, including steady inflation and the Bank of England’s interest rate of 5.25%, create a stable financial scene. This stability helps with making smart investment choices. Fearing a rise in Capital Gains Tax after the election, business owners are speeding up their sale processes. Also, differences in how businesses are valued have sparked creative deal setups like earn-outs and escrow accounts, making transactions more appealing.
Private equity is making big moves, especially in selling and buying IT services. There’s a lot of excitement around cloud solutions and AI in M&A activities. Even with ongoing challenges like regulatory issues and high interest rates, the UK tech sector remains in a strong position. With the help of financial and legal experts, it’s all set for successful and strategic investments, promising a dynamic M&A scene next year.
