Private equity continues to lead revival in UK technology M&A

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Private equity continued to lead the revival in UK technology M&A in the first half of 2011, contributing to an overall increase in deal volumes involving domestic targets or acquirers of 25 per cent when compared with the same period last year. That is according to data from The Wire– the half-yearly report on trends in technology M&A from Clearwater Corporate Finance.

The sector also saw a strong increase in the number of transactions at the larger end of the market, recording 14 deals worth £100m+ during H1 2011, compared with the same number throughout the whole of 2010.

Private equity was responsible for half of the £100m+ transactions in the first half of this year, with Vitruvian’s investments in Openbet and Universal Utilities (Unicom) making it the most active player in the space. Key deals in the sub-£100m market included the continuation of Daisy’s acquisition spree, which saw the unified communications provider snapping up Outsourcery for around £12m, and the trading assets of Telinet and Ipotimi for £15.4m.

In terms of the geography of acquirers of UK assets; domestic deals made up the lion’s share of transactions in H1 2011, with US buyers in the period accounting for just 10 per cent of all acquisitions and making them slightly more active than their European counterparts. The headline sales of UK assets to overseas buyers were the acquisitions of Bristol’s Icera by the US-based NIVIDIA Corp for £224m and of course the very recent bid for Autonomy by HP.

Carl Houghton, partner and head of the technology sector team at Clearwater, said: “Private equity activity in the technology sector maintained a steady state in the first half of this year, healthy in both deal size and volume. Furthermore, private equity continued to make net gains in the space, with investment outstripping exits by more than 2:1.

“Even so, exits have continued at reasonable levels this year, as private equity sellers take advantage of attractive valuations that continue to be available for good assets. Solid businesses that have performed well through the recession and are now demonstrating growth, recurring revenues and good IP can often realise values north of 8x EBITDA and, for the very best, north of 10x EBITDA is not out of reach.

“At a current average of 20x, it is also encouraging to note that price earnings ratios have gradually worked their way back up to the heady heights of early 2007, when the average value across the sector stood at 22x.

“Whether this progress continues in light of current market fears over sovereign debt remains to be seen, but the outlook remains broadly positive. In particular, the strong activity by private equity at the top end of the market should begin to drift down into more activity in the mid-market, and corporates should also look to maintain share price through acquired growth where organic growth is tougher to deliver.”

Clearwater is the leading independent corporate finance house in the UK, and closed 25 deals in the first half of 2011. These included ECI’s investment in Fourth Hospitality – the UK’s second largest SaaS deal to date.