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Mid-market ICT M&A proves highly robust

Gareth Davies Gareth Davies

With robust mid-market M&A activity taking place within the Information Communications Technology (ICT) arena during 2020, will this year be similar? Gareth Davies and Will Rose review an interesting year and provide an outlook for 2021.

Last year was a significant one for a number of business sectors, with many companies wrestling with the fallout from COVID-19. The ICT market has proved resilient, however, with many platforms benefiting from a high presence of annuity revenue streams while also offering mission-critical services to long-term clients. In a year when online communication and services came to the fore, managed IT, unified communications, cloud and security services became more essential than ever.

Remote working has expedited many digital transformation programmes and public-sector-focused ICT providers, able to capitalise on increased government digital spend, have been among some of the strongest performers. We expect this theme to continue in 2021.

Surge in ICT UK deal volumes during Q4 2020

Figure 1: Quarterly deal volumes

Source: Capital IQ, Megabuyte, Mergermarket and Grant Thornton UK LLP analysis

As you may expect, overall deal volumes during the pandemic decreased year on year, however, there was a large surge in Q4. This was driven by pent-up demand and increasing confidence that transactions could be undertaken in a predominantly virtual environment. Overall deal volumes were approximately 16% down year on year, with the disclosed deal value 27% down over the same period. Despite this, when looking at Q4 in isolation, it was the highest quarter for deal value in the last two years, with over £5 billion of deals completed in this period, and with a greater portion of £100 million-plus deals versus 2019.

Figure 2: Disclosed deal values by size

Source: Capital IQ, Megabuyte, Mergermarket and Grant Thornton UK LLP analysis

Private equity (PE) and those businesses with private equity ownership executing on a buy-and-build strategy continue to be highly active in the sector.

During 2020, PE was involved in approximately 37% of deals by volume, up from 22% in 2019. Interestingly, the overall volume of transactions involving PE has risen from 68 in 2019 to 91 in 2020, up 33% year on year. Private Equity has been able to react rapidly on transaction processes, while their trade counterparts have perhaps tended to take a more risk-averse approach to M&A, while consolidating organic activities.

Indeed, trade (including public companies) undertook 161 deals in 2020 compared to 233 in 2019, with less cross-border consolidation. This was a consequence of both the pandemic and possibly some pre-Brexit nerves from international would-be buyers.

Valuations driven by robust business models

ICT M&A valuations have actually increased over pre-COVID-19 levels, driven by the robustness of the sector, relatively secure recurring revenue models, with vendors unwilling to accept a lower price. However, in some cases, there may have been changes in deal structures to reflect more-challenging pipeline visibility and a slow-down in prospect conversion. A lower volume of deals, with only strongly performing quality assets coming to the market over this period, may also be a factor.

Figure 3: Quarterly valuation metrics (average)

Source: Capital IQ, Megabuyte, Mergermarket and Grant Thornton UK LLP analysis

ict-sector-valuation-by-sector-graph-4.png

Figure 4: Valuations by sub-sector, excluding outliers 

Source: Capital IQ, Megabuyte, Mergermarket and Grant Thornton UK LLP analysis

Notable ICT transactions

Pre-lockdown, in early March 2020, Exponential-e announced a significant acquisition of Vysiion, a Business Growth Fund-backed infrastructure services provider, for an undisclosed amount. Most notably, this is the first acquisition Exponential-e has made and will look to enhance its already impressive financial performance of around £38 million EBITDA from £142 million revenue. The combined group will be a substantial provider of cloud and connectivity services, including unified communications, cybersecurity and wider managed services – an extensive service offering leveraging partners such as UKCloud and Ark Data Centres.

In December 2020, Wireless Logic completed on a transformational deal to acquire Arkessa for £90 million. Wireless Logic has been through a number of private equity rounds, the most recent of which was Montagu Private Equity in June 2018. Arkessa will provide Wireless Logic with an estimated additional £15 million revenue and £5 million EBITDA. Arkessa itself was backed by ECI Partners, who invested in the business in 2018 at an estimated £45 million Enterprise Value.

2021 outlook for ICT M&A

ICT continues to remain a fragmented marketplace, with a number of owner-managed businesses that are highly attractive to trade acquirers, private equity and private equity-backed trade undertaking a buy-and-build strategy.

The first quarter of 2021 is likely to see a flurry of deal completions. This is due to a combination of further pent-up demand and those businesses coming to the market in Q4 2020, as well as the expected changes as a result of the Budget in the latter part of the quarter.

The post-COVID-19 world might even see further accelerated PE spend in some areas of infrastructure services which have proved very resilient.

Trade activity will pick up again, with acquirers looking at synergistic acquisition plays to augment the organic growth story. They may seek to add on specific tech capabilities backed by own IP, or increased scale in geographically strategic hotspots, which certainly includes the UK.

Some of our ICT transactions in last two years

  • Ultima Business Solutions Limited: vendor due diligence on sale to Apse Capital (July 2019, IT fulfilment, managed and professional services provider)
  • Complete IT Limited: sale to Sharp Business Systems UK plc (July 2019, managed IT services)
  • NETconnection Systems Limited: sale to Charterhouse Voice & Data Limited (December 2019, technology – managed network service provider)
  • Exponential-e Limited: acquisition of Vysiion Limited (February 2020, IT and telecoms)
  • Aker Systems Ltd: sale to Lloyds Development Capital and Management (July 2020, data migration and cloud transformation)
  • Focus Group: acquisition of Resource Telecom Group (October 2020, telecoms, IT and utilities service provider)

If you want to discuss the ICT sector please contact Gareth Davies or Will Rose.

All deal activity is based on the announced date of the deal and includes deals with a UK target or deals with a UK-domiciled acquirer. Deal activity excludes growth capital transactions.

Deal values are mainly sourced from corporate websites, however if no press release is available they are sourced from deal databases, including CapitalIQ, Megabuyte and Mergermarket, or from press commentary released at the time of the deal. Deal values may subsequently be amended as further detail is released by the acquirer.

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