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Whether you are a potential seller or a possible acquirer the transaction value is of considerable importance but putting the appropriate worth on a business is challenging. In this Market View we take a look at the current state of the market particularly for small and mid-market software and service companies, an area where we have the most knowledge and transaction experience.
Billions of pounds change hands every quarter in technology M&A dealings. In Q2, 2016 alone around £46 billion of European TMT M&A was transacted in more than 950 transactions with over 40% being software and IT services related. This is a high level of activity still below the levels of the same quarter both the previous two years. Many were big ticket deals: in all, China acquired over £16 billion of a total cross border disclosed value close to £29 billion and three of those were big ticket transactions. Noteworthy too was that American buyers were fairly inactive in the quarter. One of the more headline grabbing transactions is the still to be completed Japan’s Softbank £24.6 billion acquisition of ARM an example of why we shall continue to see continuing high activity.
How relevant is all this activity to the small and mid-market business owner? First it is relevant in the sense that such a high level of activity demonstrates business confidence and the financial sector’s ability and desire to fund M&A activity. The valuation multiples also influence both buyer and seller expectations in smaller transactions although this can be misleading as very large transactions attract large premiums because of their scale, market position of the acquired company and Intellectual Property owned to mention just a few influencing factors.
A major driver of market activity will continue to be the development of disruptive technology and technology-enabled solutions. Big data analytics and IoT (“Internet of Things”) have been leading the way for a while but also significant are Cloud Computing (especially SaaS), Gaming, Payments, Healthcare Information System and Financial Services. The sector’s interest in the application of cognitive computing is high and forecast to grow with Deloitte’s reporting that in 2015 there were over a hundred USA acquisitions alone. If you are not participating or plan to be or simply do not have the desire to be perhaps you should consider exiting now before you become a victim of new and more able competitors utilising these techniques. Or, if you have the capability, perhaps that is where you should focus some of your acquisition activity?
What are buyers willing to pay? Their offer will be greatly influenced by:
The IT sector is undergoing major transformation and that is why we expect the foreseeable future be a busy one for technology M&A even with the uncertainty over Brexit, volatile stock markets and other global concerns. Not only will it be driven by the disruptive technology changes but also by Buyers’ continuing need to accelerate growth, acquire new lines of business, expand their customer base, extend their geography and perhaps too to become a more strategic and attractive acquisition target themselves. Sterling’s decline should also attract foreign buyers seeking value.