The first quarter of 2018 has seen M&A activity hit dizzying heights, with a total of 681 global M&A deals worth $120bn between January and April – over double the overall value of transactions in Q4 of 2017. Although increases were seen in both domestic and outbound M&A transactions, inbound M&A activity, where foreign companies buy into the UK market, has sky-rocketed in the first four months of the year, with 133 global deals valued at $11bn. Whilst a booming M&A market may appear to be a positive on the surface, there are a number of considerations that tech firms will do well to keep in mind when looking to the M&A market over the next six months.
We are currently experiencing a sellers’ market, with both small and large UK tech companies keen to expand, acquire new capabilities and talent as well as branch into new sectors. This means that those looking to buy have to be agile and prepared to bid against any competitors, whilst ensuring their offerings are above and beyond the competition.
With the growth in technological innovation set to continue throughout the rest of this year, we can also expect to see larger tech corporations, both those in the UK and abroad, continue to acquire smaller UK tech innovators. By absorbing smaller businesses, larger players are able to gain digital capabilities and innovations, widen their service offerings, whilst reducing the volume of market competition. In acquiring smaller firms, the big tech buyers also acquire the talent responsible for the development of tech innovation within these smaller firms. If a seller has a new and unique tool or software system, it is in the buyer’s best interest to retain those who not only best understand the tech, but also created it.
Buyers will also look to firms with experience in markets they are not currently operating in. UK firms have experience of both UK and European markets, which is particularly attractive to foreign firms who may need a helping hand in navigating a new market.
Acquiring or merging with a competitor allows companies to leverage their strategic position. By obtaining another firm’s capabilities, these tech giants are able to expand their own user databases, as well as acquire tools that they want access to, without having to invest in developing their own capabilities internally.
The absorption of smaller innovators in turn creates huge, global, ‘one-stop-shop’ tech monopolies, that pose a major threat to diversity and competition in the sector. Today’s market is dominated by only a handful of larger firms, who will continue to look to widen their services in an effort to appeal to a wider market and increase their profit capabilities. The most obvious example, Facebook, has acquired over 50 tech companies. Whilst some of these 50 firms are larger social media companies, such as WhatsApp, the majority are smaller innovators. This poses a real concern for regulatory bodies, as the likes of Facebook will no doubt continue to have a firm grip over the tech sector. Whilst there are always start-up companies innovating and developing new ideas who are entering the market, there needs to be a more concerted effort by regulatory bodies to nurture these smaller companies’ growth and innovation in the sector to avoid a downturn in competition.
With Brexit on the horizon, companies will do well to prepare themselves for potential mergers. To mitigate any potential risks posed by Brexit many UK tech firms are exploring their options overseas, mainly across the USA, Germany and China. The UK tech market has seen an increase in interest from American buyers, arguably following the changes to corporation tax in the USA. As the tech unicorn capital of Europe, the UK has a global reputation for tech innovation and with experience in European markets, UK tech firms are particularly appealing to US buyers. However, as Brexit negotiations fail to provide clarity on future trade relations, the possibility of restricted economic movement across borders may impact on future M&A deals.
As a result of current uncertainty, it is important for UK tech firms to ensure that they take advantage of this foreign appetite. Sellers will do well to ensure that they can secure the best possible deal. Appealing to foreign buyers in the first instance is important, as is consideration for how they want to develop their business.
With larger foreign buyers interested in UK tech firms, an influx of capital from private equity and venture capital firms is also responsible for the upturn in M&A activity this year. The UK tech industry has received over three times as much investment than any other European country, raising over £874m in venture capital funding so far this year. This is arguably spurred on by London’s status as the tech capital of Europe, with thriving innovation that provides a good source of capital for investors. What’s more, investing in UK tech companies provides buyers with the expertise into the European tech market that they may not already have access to.
Despite the lack of clarity over the UK’s future of economic and trade relations, M&A activity in the tech sector is booming, with growth forecasted to continue for the rest of 2018. Whilst Brexit is still an uncertainty, the outlook is positive for UK-based innovators, thanks to the UK’s unicorn environment. With sellers at an advantage in today’s market and for UK companies with much to offer buyers, the increase in foreign interest from both investors and tech giants alike, provides an opportunity for UK tech firms who may be considering the next step in their company’s lifecycle.
Laura Mott, Partner at haysmacintyre
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