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Technology will be a shining light in M&A post-lockdown

Andy Morgan Andy Morgan

Welcome to the launch of Technology Insights, our quarterly analysis of UK M&A trends in software, IT services (including digital transformation), fintech, advertising and marketing services. Our first edition sees Andrew Morgan summarise the second quarter of 2020.

There were 144 announced 1 technology transactions across our key focus sub-sectors in Q2. This was down 42% from Q1 2020 and 54% from the same period last year.

This is no surprise, given the economic uncertainty and the practical challenges of completing deals without face-to-face interaction. Despite the drop, the sector remains resilient. Tech has undergone two major shocks in the last 20 years – the 2001 dotcom bubble and the 2008 financial crisis - and has emerged stronger both times.

I'm cautiously optimistic about Q3 M&A, as social-distancing measures will likely ease and business adapts to the 'new normal'. While deal activity is likely to remain subdued for a time, and there will be challenges in dissecting underlying performance for valuation purposes, technology will continue to be a shining light in M&A.

Technology deals market boosted by Just Eat acquisition

The announced deal value 2 of the 144 transactions during Q2 was £8.7 billion. Just Eat Takeaway’s £5.74-billion acquisition of US-based food service platform Grubhub accounted for a large portion of this. When the takeover completes, it will create the world's biggest food delivery firm outside China.

There were several significant transactions in the technology mid-market, all of which involved international companies accessing key capabilities and customers through UK acquisitions:

  • Keysight Technologies bought software test automation platform Eggplant, delivering a strong exit for The Carlyle Group (£266 million)
  • Microsoft enhanced its 5G capabilities with the acquisition of Metaswitch Networks (£655 million)
  • Fleet telematics specialist Connexas was sold to AddSecure Group, providing a seven-year exit for Horizon Capital (undisclosed deal value)


UK TMT quarterly deal activity by sub-sector 

UK TMT quarterly deal activity by sub-sector

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


M&A valuations held up well, with little evidence that deals were agreed at lower multiples than before lockdown. However, there may have been some flex in deal structures to reflect the more-challenging visibility on short-term growth and pipeline conversion. As the technology sector remains robust, there is little appetite from vendors to accept a lower price. 

Equity markets, as always, provide the best real-time view of investor sentiment. Technology stocks performed much better than the general market in Q2, continuing to trade in the region of 10% higher than the levels at which they entered 2020.

These premiums were driven by classic attributes, such as high recurring revenue, but also the new pandemic-driven phenomenon of increased remote working. This creates a need for all things cloud, digital and collaboration-related. I expect to see this theme carry over to the M&A market.


Tech heavy indices have strongly outperformed broad-based ones since COVID-19

Tech heavy indices have strongly outperformed broad-based ones since COVID-19

Source: Capital IQ*


Technology sector spotlight

Of the announced technology transactions, software was the most active sub-sector with 66 deals, followed by IT services (41 deals), advertising and marketing services (25 deals) and fintech (12 deals).

The most active sub-sectors also performed well in capital markets. Although all sub-sectors saw a sharp de-rating in Q1 2020, fintech and software remain the highest-rated segments on a trailing EV/EBITDA basis.

Fintech remains the most highly valued, with an average EV/EBITDA of 29.3x, slightly up from the beginning of the year. The peak to trough for 2020 saw software deliver the most-resilient performance with a relative decline in valuation terms of 19%, compared with a 40% drop for advertising and marketing services.

Valuation – a robust recovery for technology stocks

Valuation – a robust recovery for technology stocks

Source: Capital IQ*


Private equity appetite remained strong in the technology sector, for both software and IT services, with 12 announced investments in Q2 2020. Deals include Alinda’s acquisition of business park ISP specialist Glide (£200 million).

The recovery in transaction activity from private equity is likely to be focused on growth capital and equity release transactions. Flexibility in structuring will be key, with a greater reliance on equity than highly leveraged debt as markets adjust to the new normal.


Index performance by sub-sector

Index performance by sub-sector

Source: Capital IQ*


Looking forward

The fallout from COVID-19 will continue to have a material global impact on mergers and acquisitions activity.

I expect to see five themes driving technology, media, and telecom (TMT) deals in the remainder of 2020 and beyond:

1 International trade appetite for European technology bolt-ons

UK TMT businesses are widely recognised for their technical capabilities, international outlook and solid commercial foundations, and are much sought after by both international trade and PE buyers. A good example is the acquisition by Siemens of semiconductor IP firm UltraSoC 3 in June 2020.

2 Non-core disposals

Pre-pandemic, management teams faced pressure to simplify their operations and focus on their core competency and market. Current events will accelerate this.

3 Resilience of underlying technology business models

Over the past few years, technology businesses have both increased their proportion of contracted revenues and become responsible for the automation of ever more business-critical functions. I expect to see firms with a strong digital transformation footprint and visible ROI to hold up well as businesses need to bring in further automation to survive and adapt.

4 Selective opportunities for public-to-private transactions

Current events have shown being listed does have the benefit of allowing companies to more-easily raise equity capital. However, there are still several TMT companies that have an implied valuation lower than comparable recent M&A transactions, and management with little ‘skin in the game’.

While these conditions persist, both trade and PE will continue to find attractive assets in public markets, at potentially better valuations than they would have to pay in a private transaction. A good example of a recent quoted company acquisition is LDC-backed MSQ’s acquisition of Be Heard PLC.

5 Strong private equity appetite for software and IT services

I expect private equity to remain active in both markets as both sectors remain fragmented with a long-tail of owner-managed businesses that are highly amenable to private equity investment.

There will be pent-up demand, which will be gradually released in Q4 2020 and into 2021. We can expect adjustments to deal terms and metrics, and increased focus on the right underlying earnings for valuation purposes. Aligning acquirer and shareholder forward-growth expectations will be a key challenge for all and will undoubtedly impact and extend transaction timetables.

The shape of the recovery

Unlike in past crises, the pandemic has called for a change in how M&A transactions are negotiated. The effective use of remote collaboration tools, technologies and techniques has become more critical as buyers, sellers, providers of M&A financing, and all of their respective legal and financial advisers adjust to the new normal.

Whatever the shape of the recovery – 'V', 'U' or 'L' – I'm confident that technology will be in the vanguard. We'll need to see more creativity and pragmatism between buyers, sellers, financiers and advisers to get deals done. The crisis has shone a spotlight on the robustness and business-critical nature of much of the UK technology industry. This will provide insulation to M&A activity levels in a time when many other sectors are struggling.

To discuss deals within the technology sector further, contact Andrew Morgan.

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Selected notable UK mid-market technology deals in Q2 2020

Target Description Sector Acquirer

Enterprise Value (£m)

Likely drivers of deal value


Specialist ISP for students/business parks

IT services



  • Continuing UK fibre-optic rollout
  • Platform for further M&A
  • Strong managed services proposition


Testing software focused on user experience




  • Strong UX testing capability
  • 500 ‘blue chip’ clients
  • Alignment to strong demand for digital transformation


Digital marketing agency

Advertising and marketing services



  • Strong digital skills
  • Likely revenue and cost synergies
  • Client base including Adidas and GSK


Telematics provider for retail, logistics and pharmaceutical sectors




  • Geographic diversification into UK and Australia
  • Potential to drive further consolidation in industry


Healthcare communications

Advertising and marketing services



  • Highly qualified workforce
  • Global footprint with offices in the UK and US
  • Resilience of healthcare advertising spend

Next Generation Data


Data centre operator


IT services



  • Strong demand for wholesale co-location space
  • Scarcity of assets of a similar scale

1 All deal activity is based on 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.

2 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.

3 We advised UltraSoC as part of this transaction.

* Each composite represents an average of the largest global companies in each sub-sector.