Deals Dispatch - UK Technology

Author: Mark Allen, Partner and Pete Marshall, Assistant Manager, Corporate Finance.

This quarter we report on stable deal volumes, an uptick in average deal size and highlight the electoral pledges of the new Labour government relating to the UK Technology sector and finally a UK technology IPO to talk about!

M&A deal volumes remain below 2021 levels, but seem to have stabilised – is confidence returning?

The second quarter of 2024, has certainly been eventful with the announcement of the general election on 22 May 2024. We now have new leadership under a Labour government who won with a majority of 412 seats, which sets the backdrop for new policies and legislation affecting the UK Technology industry, and the economy as a whole. Unlike some of our European counterparts, what this now brings is stability, after weeks of debate and conjecture. Markets reacted positively to the result, with the FTSE250 opening 1.8% up on the news. We provide a deep dive into the Labour manifesto in our sector spotlight section and comment on what this might mean for the UK technology sector.

The deal volume/value chart below suggests UK Technology M&A is experiencing a period of consolidation above pre-pandemic levels, but still below 2021. We hope this promotes optimism in the sector after what’s been a tough market over the past 18 months. We’ve also seen the return of some larger deals in the quarter across both Private Equity (PE) and trade, with an uptick in average deal size across both software and services.

The stats for Q2 showed deal volumes down only 3% on Q1 2024 but total deal value improved, up 56% on the previous quarter to £13.4 billion, with an average deal size of £80 million.

Anecdotally, we have seen a noticeable increase in PE and lender appetite for deals, which should give vendors reason to be more cheerful. We’ve also seen the continued strength of technology stocks in the US, driven largely by positive sentiment around AI.

Observations

• An uptick in average deal size: the average deal size for the quarter was up 46% on Q1 2024, due to several large deals across both software and services.
• PE assets likely to be up for sale: PE hold periods have extended due to tougher market conditions in the past few years. We have seen an increase in appetite for larger buy-out funds looking at SBO opportunities.
• Technology sector share prices continue to outperform: US technology stocks continue to soar fuelled by developments in AI, positive inflation data and continuing to hit profit expectations.
  
   

Capital Markets

Despite the uncertainty around structural problems in the UK capital markets - the City’s listings drought could soon be quenched, as several companies draw up plans to debut on the London Stock Exchange in the coming months. This was amplified by the IPO of computer-maker Raspberry Pi and Chinese-founded fast-fashion giant Shein is set to file an IPO prospectus with the Financial Conduct Authority. The London Stock Exchange, which has been starved of new tech listings in recent years has told the new government that it must prioritise opening the UK’s markets to new capital, if the City is to act as an engine for economic growth.

Key highlights

• Over the second quarter net fund flows to the US slowed down after a strong end to 2023, and net fund outflows from the UK markets slowed modestly, painting a more positive picture.
• There were also some significant Listing Rule changes announced which many consider to be the “biggest change to the listings regime in over three decades”. Under the new rules set out by the FCA, listed companies will no longer require votes on significant transactions and will have more flexibility in voting rights policy. The purpose of these changes is to make it simpler for those looking to list in the UK, with the number of listed companies falling by 40% since 2008. Between 2015 and 2020 the UK accounted for just 5% of global IPOs.
• We, of course, also saw the IPO of Raspberry Pi as mentioned in our key highlights above.

The theme of public to privates continued with US PE firm Thomas Bravo taking cyber security software business Darktrace private in a transaction valuing the business at £4.3 billion. While this is another quality software business gone from the UK public markets, we consider this to be a good deal for Darktrace’s shareholders given the 44% premium to its average price over the three months prior to the offer.

SME Focus

The charts below continue to show the impact of challenging M&A conditions on the lower-mid market, with buyers and investors having focused on larger, less risky acquisitions. The move towards Secondary buy outs (SBOs), likely due to longer holds and the relative safety of a tried and tested management team, has continued with 12 completing in the quarter, up from two in the same quarter last year.

Key trends in the lower mid-market.

• Cautious outlook: with political and economic uncertainty over the past quarter, SMEs with weaker balance sheets and less firepower have been more cautious with M&A as they have focused on their own financial stability.
• Longer deal processes: deals gestation remains longer as caution is exercised throughout the execution phase and budgets have been harder to hit. This should stabilise as confidence returns and valuations adjust.
• AI is here to stay: AI, and particularly generative AI, has the potential to disrupt entire industries and we have seen the billions of dollars of investment already made by large technology companies in the US. We are seeing versions of AI being adopted by UK SMEs in data analytics and software development, but it is critical that UK technology businesses continue to invest in their own IP to avoid being left behind.