During the third quarter of 2022, the UK stuttered through several dramatic changes: a new monarch, a new prime minister, and a surprising new fiscal policy. A series of U-turns and another new prime minister have restored some market confidence and, hopefully, a welcome period of stability as we move into Q4. Inflation, a continued upward trajectory in interest rates, and a combination of sterling weakness and US dollar strength remain key factors causing volatility in UK markets. The M&A market is still adjusting, working out what is the new normal in terms of both activity levels and valuation metrics.

Against this backdrop, tech M&A deal volume in the third quarter of 2022 remained remarkably robust. There were 248 deals across our four tech subsectors of software, IT services, fintech, and advertising. However, there are signs of slowing down from the peak post-COVID-19 activity, with the number of deals 12% down on the same quarter last year, and 19% down on Q2 2022.

Deal volumes and value Q1 2019 - Q3 2022


Deal values are sourced from corporate websites, deal databases (including Capital IQ, Megabuyte and Mergermarket), or from press commentary released at the time of the deal. Deal values may be amended as further detail is released by the acquirer.

The rise of public to private deals

Share price performance


Share price performances have continued to struggle across the board, so it's no surprise that there haven't been any meaningful IPOs in the UK public markets since December 2021.

  FTSE 250 Nasdaq SaaS Cloud Index Software IT services Fintech Advertising
Three-month change -6% -5% -11% -9% -6% -6% -3%
Annual change -24% -24% -55% -27% -26% -32% -31%

Share price data is sourced from deal databases (including Capital IQ, Megabuyte, and Mergermarket).

The softening of public market valuations, combined with the weakness of sterling, has seen a notable pick up in public-to-private transactions. The nervousness of UK public markets is creating opportunities to invest in strong UK tech businesses. This trend is only likely to be exacerbated by the volatility in the pound, creating opportunities for US buyers in particular to seek out opportunities. The most notable deals in the quarter included:

  • HG Capital took compliance software specialist Ideagen off the AIM market for £1.1 billion

Proposed deals:

  • B2B information services provider Euromoney has received an offer from Astorg and Epiris for £1.7 billion
  • French industrial group Schneider Electric confirmed a £10.2 billion takeover of the remaining 41% of listed UK industrial software company Aveva PLC it doesn't already own

Other deals were publicly trailed but failed to come to fruition after initial exploratory discussions:

  • US-private equity group GTCR stepped away from talks with AIM listed UK data intelligence specialist GB Group
  • Thoma Bravo approached LSE listed enterprise security software vendor Darktrace, but discussions did not lead to a formal offer

There's a clear opportunity to take advantage of volatile markets, particularly if you're a US dollar- denominated fund for whom strong UK tech assets haven't represented such good value for some time.

Valuations come under pressure

Public market EV/Sales


M&A EV/Sales multiples


Valuation data is sourced from deal databases (including Capital IQ, Megabuyte and Mergermarket).

It's well-noted that public market valuations have fallen off significantly since January 2021, particularly high-growth technology assets. We can see that these effects have been amplified for smaller high-growth technology stocks, represented by the BVP emerging cloud index, which contains high growth, emerging SaaS technology stocks. Lower growth projections and higher discount rates applied to future earnings, as a result of higher interest rates and the perceived higher risk profile of future growth, have seen the present value of these stocks fall more than the rest of the market.

Private-market valuations by comparison have remained more resilient, but we can see they have started to show the first signs of slightly easing back. Average software multiples peaked at 6.4x EV/sales but have dropped by a couple of turns to 4.3x, while average services multiples peaked at 2.7x EV/sales but have now fallen back to 1.4x. While averages can be misleading, impacted by the mix of businesses transacting in any given quarter, the trend is very much reflective of the risk-off environment, with businesses more selective in acquiring.

Private equity remains the bedrock of deal activity


As seen in previous quarters, private equity (PE) and private equity-backed businesses continue to account for the majority of deals taking place. One notable transaction in Q3 was the secondary buy out of ERP consolidator Forterro by Partners Group from Battery Ventures. This was done at a 19x trailing EBITDA valuation, which valued the business at EUR 1 billion. It highlights the continued strong appetite and valuation environment for private equity-backed, profitable, and cash-generating software businesses. Battery Ventures reinvested in the deal, evidencing a growing trend for PE funds to stick with assets and management teams they know and trust, recognising the competitive challenges of deploying capital into new platform assets, particularly in the software sector.

Four interesting trends

1 Available debt (for strong players)

TMT(and technology in particular) remains one of the sectors for which lenders continue to have the most appetite. Conditions are toughening as higher cash interest rates mean lenders are re-assessing borrower debt service capacity, which may impact leverage. Despite this, lenders (both bank and fund) are still looking to deploy, albeit against a higher bar than this time last year. There remains more liquidity, across a greater range of lenders – both bank and funds – in the private debt markets than there's ever been.

2 Increased opportunities for bolt-ons

We've seen continued pain in the lower end of the market as growth financing has proved harder to come by and investors opt for less risky assets. This, alongside softening valuations, could create opportunities for bolt-ons for larger companies as many players yet to achieve cash break-even weigh up the merits of value today against the execution delivery risk and dilution impact of further funding rounds.

3 Interest from international buyers

Some softening in valuations across UK private assets, weak public markets and the depreciation of the pound may create further opportunities for international buyers to acquire strong UK assets at discounted US-dollar prices.

4 There will be more boomerang buyers

As the cost of debt rises and economic volatility continues, it's increasingly arduous for buyers to risk-assess new acquisitions, making it more appealing to retain a minority stake in an existing investment rather than exiting outright. Another example of this trend was the July sale by Tenzing of CitNow to Livingbridge, while stating that it has “materially reinvested” in the business.

A positive outlook for resilient businesses

The TMT sector remains better placed than most to overcome challenging market conditions. To fight rising inflation and cost pressures, businesses will favour investing in technology and automation, which means recurring based B2B technology businesses continue to prosper. These types of B2B recurring businesses are also insulated to inflation thanks to high margins and low overheads.

The economy may well be facing an uncertain year ahead, which may put further pressure on deal volumes in a risk-off environment, but there's no doubt that high-quality assets with a strong growth story will always attract strong interest and continue to remain resilient.

Q3 TMT deal highlights

In July 2022 we advisedSupermassive Games Limitedon its sale to Nordisk Games. Supermassive Games is a BAFTA-winning, independent game developer with a reputation for innovation in storytelling.

In September 2022 we advised Computer Service Centre, which provides IT solutions to SMEs, on its sale to managed IT service provider Acora, ahead of them swapping private equity backers Palatine in favour of LDC.

Announced in October 2022 (Q4) we advised Springboard Research Holdings, a provider of footfall and AI-powered analytics to retailers, on its sale to US real-estate software specialist MRI Software.

For more insight and guidance, get in touch withAndy Morgan.

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