M&A activity in the UK tech sector continues to boom. Andy Morgan looks at the deals and TMT sector trends you need to know about.

In Q2 2021 we saw a continuation of the very high levels of technology M&A activity from Q1. The number of transactions was slightly down: 254 deals across the fintech, advertising, IT services, and software sub-sectors, compared to 304 in Q1, but activity in that quarter was boosted by shareholder concerns over potential changes in Capital Gains Tax. There is still an elevated level of M&A across the sector in comparison to the quarterly average for the last two years.

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.

TMT sector trends

Balanced transaction types

One notable trend from Q2 was a nice balance of transaction types. The variation included significant secondary activity (such as Montagu’s investment in Wireless Logic), a take private (Sirius’ proposed acquisition of Equiniti), as well as considerable PE-backed trade activity (such as Francisco Partners backed E2open’s acquisition of BluJay). Trade acquirers also made some notable strategic deals: AlertLogic acquired Dexda (adding valuable AIOps capabilities); Craneware acquired Sentry (adding pharmacy capabilities and bolstering its US presence), and Jamf acquired Wandera (adding cybersecurity capabilities to its wider portfolio).

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Private equity dominates UK tech sector

Private equity (PE) continued to play an outsized role in the UK tech market. A record 58% of deals by volume in the UK in Q2 were standalone PE investments or conducted by PE-backed trade. Access (TA/Hg backed - 4 deals) and Agilio (August backed - 3 deals) were the most prolific acquirers in the quarter: a nice illustration of the continued attractiveness of the software sector for PE.

Q3 activity should remain elevated

Looking ahead, M&A activity is likely to remain elevated in Q3. Vendors are keen to take advantage of robust pricing for technology assets, and potential acquirers, whether trade or private equity, have significant liquidity to deploy on TMT sector companies in the UK.

What is actually happening in the market?

Now, I've covered the principal TMT sector trends, it's useful to look at the detail of some of these deals, especially the 'mega deals'.

The key figures are 254 announced transactions in Q2 2021, a decrease of 16% from Q1, but an astonishing increase of 80% on the coronavirus impacted Q2 2020. Software has been the key battleground for deals, accounting for the majority of transactions (113 deals), but there was strong activity in the other fastest-growing tech sectors: IT services (93 deals), fintech, and advertising and marketing (24 deals each).

Disclosed deal value reached £11.5 billion –higher than the previous quarterly figure of £6.8 billion, driven by the acceleration of ‘mega deals’. There were 22 deals in Q2 with an enterprise value larger than £100 million.

Number of deals per sub-sector (Q1 2019-Q2 2021)

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Source: Mergermarket, Megabuyte, Grant Thornton Research, Capital IQ

Notable ‘mega deals’ in Q2

Montagu invests in Wireless Logic

Montagu invested in M2M provider Wireless Logic, at an enterprise value rumoured to be in excess of £1 billion. Wireless Logic is a provider of connectivity and data for IoT applications that want to utilise cellular connections (common in industrial and related sectors). We have seen significant interest in the Internet of Things (IoT) space – a trend I expect to continue, given the strong growth dynamics and recurring revenue business models that characterise the sector.

ES2Open acquires BluJay Solutions

E2Open acquired peer BluJay Solutions for an enterprise value of £1.2 billion or about 9x forward revenue. BluJay’s products are widely used by logistics professionals for supply chain planning. As a result of the deal, E2Open is expected to add complementary geographic and vertical market coverage.

Sirius Capital agrees take private for Equiniti

Siris Capital agreed a take private for Equiniti at an enterprise value of £985 million or about 10x EBITDA. Equiniti is a provider of administration services and payment services to large corporates based in the UK and worldwide. Equiniti is expected to focus on both organic opportunities as well as strategic infill opportunities under Siris’ ownership.

Looking at deals with an EV larger than £100 million (with disclosed deal information) in Q2, 15 were standalone PE investments or platform PE deals. The influence of PE can be seen across the mid-market. In Q2, there were 35 direct PE transactions but 111 transactions involving PE-backed ‘platform’ businesses, which typically (but not always) focus on a higher volume of smaller transactions to consolidate a marketplace.

Q1 2021 deals by acquirer type

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Source: Mergermarket, Megabuyte, Grant Thornton Research, Capital IQ

Looking towards valuation, the mean EV/revenue for our four key sectors in aggregate was 3.4x revenue in Q2, representing a slight increase from the Q1 figure (3.3x). The rolling average software valuation reached 4.5x revenue for software and 2.3x for IT services.

TMT 90 day rolling average EV/revenue since Q1 2020

tmt-insights-q2-rolling-average.svg

Source: Mergermarket, Megabuyte, Grant Thornton Research, Capital IQ

This figure shows the preceding 90 day rolling average EV/revenue for transactions with deal information in the public domain; individual time series for fintech/AMS is not shown due to lower volume of transactions.

These deal values are sourced from corporate websites, deal databases: Capital IQ, Megabuyte and Mergermarket, or press commentary. If more detail is released by the acquirer, we will update these figures.

A look at capital markets

For the best real-time insight into both valuation and sentiment, we need to look at listed businesses. Taking the macro view, the tech-heavy Nasdaq and the broadly focused MSCI Global Index have tracked each other quite closely since the beginning of the year, with the index values up 13.8% and 13.3% respectively, as varying moves towards 'reopening' around the world increase sales opportunities for different markets, including technology and technology-enabled businesses. Even the most resilient tech sectors like enterprise SaaS (which is relatively well insulated from the impact of coronavirus) benefit from salespeople meeting decision-makers and technologists visiting client sites to implement products.

Equity market indices (12/2020-06/2021)

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Source: Capital IQ

In terms of valuation, listed fintech and software both saw a slight increase in average valuation, with the fintech peer-group reaching an average of 12.2x (up from 11.7x at the end of Q1) and the software peer group increasing by a turn to reach an average of 10.0x (up from 9.0x in Q1). Investors continue to pay up for growth and high-value recurring revenue business models.

The markets opened up for new issues in Q2, with a variety of technology listings in the UK taking advantage of the robust pricing for TMT related equities. Notable transactions in Q2 include Wise (currency transfers), ITIM (retail software), Dianomi (advertising technology) and Darktrace (cybersecurity software). We provided reporting accounting services for the Darktrace transaction. Although there has been elevated take-private activity in the last year or so, there is still a steady flow of businesses listing for the first time, and the pipeline for the remainder of 2021 looks strong, so there are good reasons to be optimistic about the appetite for technology stocks across capital markets in the UK.

Peer group valuation (12/2020-06/2021)

tmt-insights-q2-peer-group-valuation.svg

Source: Capital IQ

For more insight on TMT sector trends in M&A, get in touch with Andy Morgan.