UK TECH COMPANIES PREPARE FOR WAVE OF TAKEOVER ACTIVITY

01 January 2015

– Tech firms set for a boost in M&A activity in 2015
– Regulatory environment considered a major barrier to deal completion
– Cloud and mobile are expected to be the most active segments of tech M&A sector in 2015/16

London- UK technology companies are expected to be at the centre of a wave of takeover activity over the next two years, according to a major survey published today by international law firm Pinsent Masons in conjunction with Mergermarket, identifying UK & Ireland as the most active target region and London as the technology start-up hub of Europe.

The research, which canvassed the views of 150 of the most senior corporate executives and private equity professionals across Europe specialising in the tech arena, found that around 80% of those questioned anticipate an increase in both the volume and value of deals in Europe over the next 12 months, building on the record year for deals in the sector in 2014.

A third of those surveyed said they expected the value of deals to increase ‘significantly’, with a continued rise of cash-rich bidders and the influence of big recent IPO valuations such as Alibaba, expected to be significant pricing drivers.

Cloud and mobile have emerged as the segments expected to experience the most M&A growth over the next two years. Wearable technology and the ‘internet of things’ were ranked as those segments most likely to develop through organic growth.

Survey participants, all of whom have completed significant deals over the past year, indicated that a desire to expand geographical reach remains the most common strategic driver for technology M&A.
The research also found that market players expect Germany to be the most active market on the buy side. However, corporate bidders that are likely to pay premium prices are expected to originate from Asia and North America.

Pinsent Masons highlights that the regulatory environment remains the biggest legal challenge for technology M&A, with 45% citing it as their toughest hurdle during their last transaction. Regulatory scrutiny places greater emphasis on the need for effective due diligence, particularly in cross-border transactions for which the fundamental differences in law must be fully recognised.

Andrew Hornigold, a Partner and technology M&A specialist at Pinsent Masons, says: “There are two factors specific to the technology sector that will drive growth. Large corporates have accumulated principal cash piles and are chasing transactions using that cash, and private equity houses are still sitting on funds that they need to deploy. The general health of the European economy is the joker in the pack, but barring any significant shocks to the Eurozone, continuing buoyant deal values and volumes seems on the cards.”

In relation to the difference between sectors for organic and M&A growth, Hornigold adds: “The maturity of the specific industry is likely to impact whether businesses opt to acquire or grow the technology organically. Cutting edge technology such as wearables isn’t necessarily an established market yet, whilst sectors such as cloud and mobile have established customers and recurring revenues.”

Thilo Schneider, Senior Associate at Pinsent Masons, highlights the potential drivers for cross-border activity in Europe, commenting: “It is particularly striking that corporate buyers see Germany emerging as the most likely home to bidders. Germany has a strong background and history in technology, is very focused on growth in international markets, and firms will be looking to bolster their IP and geographical reach through cross-border acquisitions.”

On the subject of London being the start-up capital of Europe, he added: “The UK has a very favourable tax environment when it comes to tech investment and London has a mature venture capital and angel investment scene, inevitably helping to attract tech entrepreneurs.”

Beranger Guille, editor at Mergermarket, concludes:” The ongoing emergence of disruptive digital and mobile economies will continue to drive Tech M&A in 2015. As the mid-market heats up, we expect deal activity to increase, particularly in volume, fuelled by growth in mobile payment, FinTech, analytics and security.”

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