M&A in 2008

Predicting ‘consolidation’ in the UK SITS sector has always been a pretty safe bet. Just like rain, you know it will always occur. The only variables are how much and when?

The FT on Friday 28th Dec 07 – Technology predators on the prowl - did a pretty good job at listing the possible targets (Detica, Civica, Coda, Axon, Innovation, Anite, Dicom) . This basically included ALL the UK mid cap SITS companies. So I’m positive the FT will claim success in a year’s time!

Let me answer the most popular questions I have been asked in the last month or so.

Q - Will the ‘credit crunch’ affect M&A activity in 2008?
A- None of the UK SITS mid-caps is big enough for the ‘credit crunch’ to have any effect on Private Equity interest. Valuation expectations will undoubtedly ease as, for example, SITS IPOs are suspended for at least a year. This might well attract PE back into this part of the market and will certainly provide opportunities for cash rich trade buyers. So, my prediction would be that UK SITS M&A activity will remain strong in 2008.

Q – Will the proposed changes in CGT affect the market?
A – Firstly, we should know what U-turn Darling proposes early in the New year. If he’s got any sense (now that’s a real question!) he will postpone it for a year and instigate a ‘review’.
Personally I don’t see any evidence of business owners deciding to expedite selling just for tax reasons. Additionally, entrepreneurs don’t start companies for tax reasons either. However, ‘arms length’ investors are affected by such issues. That’s why the AIM market will become a lot more unattractive in the year to come – expect a lot of investors to sell AIM shares ahead of the Apr 08 deadline (if the CGT tax changes go ahead). That will move to depress both prices and eradicate only life in the IPO market.

Q- Will the “Big Eat Big”?
A- I’ve been forecasting the “Big Eat Big” in the Global IT Services sector for ten years now. It hasn’t happened. NO Top Ten Global IT Services player has been acquired in the last decade. It’s a quite different story in the Global Software sector where the Tier Two players are a dying breed.

Sticking my neck out, I believe that 2008 will see my prediction come about – at long last. I see EDS, CSC, and Capgemini and, in Europe, Atos Origin, Steria and Logica as the most likely targets. The predators will come from outside the IT services sector. Quite possibly from the Telcoms and Business/Support sectors.