Brexit has provoked a cacophony of disparate, predominantly negative reactions from the UK technology and M&A communities over the last 60 days.
Factors ranging from the possibility of detrimental labour, mobility and tariff barriers to the uncertainties of future regulatory passporting and the arcana of data protection regulations have spooked businesspeople and the M&A markets.
UK M&A volumes fell 69 per cent year-on-year in the first half of 2016, compared to a decline of just 27 per cent globally. If extremes of this spectrum of opinion were taken literally it would be hard to imagine how technology businesses could ever grow, attract good people, and realise premium valuations in M&A outside a large free trade area like the EU.
The decisions that would flow from this changed vision of the future – where to live, build a business, pursue a career, which languages to teach one’s children – are big, life-changing calls. To understand whether this depressing scenario is an outcome about which one should be seriously concerned I have looked to the longer term history of technology M&A.
The emergence of modern M&A
Deal activity as we recognise it today has two fundamental prerequisites: creation of capital value in businesses and embodiment of those businesses in a form that can be traded. In agrarian subsistence economies, each year looks much like the last plus or minus the effect of seasonal variation, plague, war etc.
Whilst there undoubtedly is value in capital assets such as land and buildings within such an economy, entrepreneurial value creation is rare. Particularly, little of the value created is embodied in anything other than physical assets, and purchased goodwill is almost unheard of. Prior to the 16th century the UK was just such an agrarian subsistence economy. From 1270 to 1700 UK GDP growth is estimated at 0.2 per cent per annum, reflecting only a little more than the effect of population growth.
The first tentative steps towards industrialisation in the 16th century brought the fulfilment of the first of these pre-conditions – significant creation of capital value in businesses – and the beginning of the history of recognisable M&A in the UK. Driven by a range of enabling technologies, the average rate of GDP growth quintupled to reach a heady 1.1 per cent from 1701 to 1831.
This first blush of industrialisation also brought the first technology mega-deal. In 1775 Matthew Boulton, then co-owner of a successful metal-working business, bought out the two-thirds interest John Roebuck held in James Watt’s condensing steam engine for £1,200. Amounting to just over £100,000 at current prices this would prove to be the bargain of not one century but two, as their combined enterprise became the ubiquitous provider of motive power for the industrial revolution of the 17th and 18th centuries.
Whilst landmark deals such as Boulton & Watt are easily identifiable even at a distance of three centuries, the legal form of this transaction itself – sale of an interest in an English law partnership – as well as the ultimate fate of the firm, which ceased independent operation with the death of James Watt’s son, indicates that recognisable M&A and reliable data on it was not widespread whilst businesses remained primarily personal endeavours.
The fulfilment of the second of our two preconditions in the UK would wait almost another hundred years for the Joint Stock Companies Act of 1862 which marked the birth of shareholder capitalism and the separation of the creation of value in businesses from the entrepreneurs behind them. The rise of incorporation also created shareholder reporting and regulatory filing obligations that began to provide reliable M&A data.
The rise of technology M&A
The richest part of the recorded history of M&A therefore begins in the late nineteenth century, as technologies continued to advance and create value, and widespread shareholder capitalism enabled businesses to be traded and combined freely. Data prepared by Golbe & White of the University of Chicago indicates that in terms of deal volume relative to GDP, this was amongst the richest periods of M&A activity ever, far surpassing the conglomerate ‘wave’ of the 1960s and the first flush of the leveraged-buyout boom of the 1980s.
Looking back over this period, the abiding theme is the role of technological change in driving both continuing value-creation and transaction volumes. If one were to pick the standout deals from every decade of this data set the breakthrough technologies of each period would figure largely amongst them. From the creation of probably the most valuable company ever – Standard Oil – in 1882, to the first billion-dollar public company – U.S. Steel – in 1901, and the biggest deal (in nominal terms) of all time – AOL/ Time Warner – in the year 2000, emerging technologies have set records in M&A. As the technology frontier has moved forwards, so deal activity has followed from industry to industry.
Notable by their absence from this narrative are permanent effects from a range of major economic shocks, some of much greater magnitude than Brexit. Between 1880 and the present day the Western world has experienced two world wars, a number of minor wars, several pandemic diseases, and political leadership ranging from trade-protectionists, to radical free-marketeers and moderate socialists (as distinct from immoderate Soviet-style socialists). The only events amongst these to register noticeably on the long-term progression of either real GDP or M&A volumes were the first and second world wars, and in each case the effect was temporary.
My own experience at the intersection of capital and opportunity in the UK validates this lesson from history – business models that create value by doing something better through technology are relatively insensitive to economic and political ‘weather’.
Whether driving penetration of the internet of things (CSL Dualcom, acquired by Iconiq Capital and others) or maximising the reach of successful multi-channel retailers with technology (Long Tall Sally, acquired by TriStyle Group) we have seen in recent weeks that the uncertainty of Brexit is no barrier to successful outcomes in M&A for good technology-enabled business models.
Nick Field, Associate Director, Livingstone
Image source: Shutterstock/Kritchanut