Thursday, 22 January 2009

Tech M&A in 2008 and 2009

(By Richard Holway) I have written often about bellwethers. I don’t think that M&A activity, or even valuations, is a bellwether – it is more of a tracker. As such the Analysis of European Technology Acquisitions in 2008 from Regent comes as little surprise. An overlay of either the changes in any Technology share Index or, indeed, the actual growth rates of the tech sector, would pretty closely track one or other (or both) of the lines in the Regent charts below.

Acquisition numbers and valuations
In 2008 the number of deals has declined by 9% to 2,941 but the value of those deals is down a pretty staggering 55% to $158b. One reason was a sharp decline in the number of medium and large sized deals announced, particularly in Q4.

The number of deals involving UK companies (whether as buyer and seller) was pretty much the same in 2008 as in 2009. The US trended down (minus 7%) as a buyer but there was an increase in the final quarter of the year when the rapidly declining £/strengthening $ created buying opportunities.

Industry sector activity
Only Internet Services (up 29%, a growth story), Embedded Technology (up 9%, a diversification trend) and IT Distribution (up 25%, a consolidating market) saw any increase in number of transactions. Two of the largest sectors– Media and Content (down 15%) and IT Services (down 14% with the biggest falls in resourcing, desktop services and consulting) - saw the biggest falls. But the steepest decline in deal flow was in the Communications Equipment sector which fell by 36% as companies in that sector saw much of their business dry up particularly in the final quarter – as evidenced so dramatically this week by Nortel. The Software Product sector, which is the focus of much consolidation, saw a decline of 7% in acquisition activity during the year.

Public to Private
To me, the most startling thing about 2008 was the number of UK quoted SITS companies that delisted in one way or another. Here let me quote (with permission) from Ian Spence of IS Research (

”On 1st January 2008, the market capitalisation of the software & IT services sector was £18.8bn. By 31st December, it had shrunk to just over £11.0bn - a decline of over 40%. Whilst around two thirds of this decline can be explained by falling share prices, the other third is down to companies being taken over or delisting for one reason or another. The number of companies listed under software & IT services declined from 184 at the start of the year to 149 by the end of the year. Of these, 6 were public to private transactions, 18 were trade sales and the remaining 13 were delisted because they changed sector, returned to a single overseas listing or went bust.”

(You can read Ian’s full quote Click here)

PE ratios finally responded to the effect of the economic pressures in the final months of 2008.. The headline PE across all sectors ended the year at a still respectable 13.29. The price to sales (PS) ratio ended 2008 on 0.97. It has been in steady decline since the middle of 2007 reflecting pressure on the profitability of the industry.

But this covers up significant differences between sectors experienced in the second half of 2008. Professional services firms suffered the worst decline in valuations – falling around 40% to PEs of 12 and PSs of 0.76 in H2 2008. Clearly the risk of more ‘players on the bench’ in a downturn worried buyers. Software products companies also fell with PEs down c40% to 16 and PSs down 24% to 1.6 in H2 2008. As we have reported many times, new product sales to new customers have been badly hit in the downturn. Conversely Systems Integrators (horizontal and vertical) were more highly valued as they tend to have long established client bases – such an asset in the current circumstances.

Rather than witnessing major change, we see 2009 as being a continuation – maybe an acceleration – of existing trends. There will be more consolidation – both by the big players and the smaller ‘consolidators’. Big companies with IT assets might well consider these ‘non core’ – so we will see more divestments. Some Private Equity firms might be under great pressure to return cash to their hard strapped investors. They will clearly resist in their own interests. No company willing votes for its demise. But others are still flush with cash and looking to 2009 as a year of great opportunity when valuations finally get realistic.

Regent predicts that deal flow in 2009 will ”remain respectable”. However, that certainly doesn’t extend to IPOs (which will probably be non existent) and we can expect more ‘public to private’ deals – only limited by the reducing pool of publically quoted companies left to delist!

Regent expects valuations in 2009 to stabilise as buyers become active once there is more certainty in the economic trends.

More information
If you would like a more detailed M&A Report from regent please visit or email Peter Rowell on

Footnote - Richard Holway is a non-executive director of Regent.

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