Global technology deals - down but not out with the UK showing great resilience

London, 19 JAN 2009 - Overall value of domestic technology transactions increased nearly ten per cent in 2008 despite the desolate economic backdrop that has rendered other industries destitute, a PricewaterhouseCoopers LLP report reveals today.

In fact, in a year where global volumes declined by a fifth to 570 completions, from a post bubble peak of 713 in 2007, UK-inspired deals formed a third of all worldwide transactions.

However, despite the value increase, deal activity still fell during 2008 with 162 deals (with a UK bidder or target) worth a combined €17.7bn completed, compared with 184 totalling €15.7bn in 2007 - a drop of around 13%.

Values dropped off more steeply globally as the challenging financing environment and the resultant collapse in the €1 billion-plus “mega-deal” market saw the aggregate value of technology deals down by 27 per cent to €92.7 billion in 2008.

Andy Morgan, technology sector leader, corporate finance, PricewaterhouseCoopers LLP, said:

“The technology sector has held up better than many other industries. The harsh lessons learned from the bursting of the technology bubble in 2001/02 have left the industry better placed to deal with today’s challenges.”

Increasingly flexible business models have enabled technology businesses to move more swiftly in response to changing markets across the globe and, with less exposure to high levels of leverage, the impact of the credit crunch on the sector overall has to date been less pronounced than in many other areas of the economy.

“But the big question is - has the technology deal environment developed some truly defensive attributes, or will the inevitable impact of the downturn on corporate IT budgets hit home in 2009?” Andy added.

The flagging market was beginning to pant by Q4 2008. A third of global deals in terms of both volume and value were completed between January and March. In fact, the final quarter saw the lowest level of deal completions in the sector since the depths of the post bubble market in 2002.

The same applied to the UK. Deal flow steamed ahead in Q1 but tailed-off as the year progressed and was reduced to a trickle in the final quarter in parallel with the UK’s economic slowdown.

Mid-market replaces the mega deal

With mega deals in relatively short supply (10 completed transactions globally compared with 19 in 2007), the mid-market continued to fuel the global technology M&A market with activity similar to 2005 and 2006.

“Deals valued between €10m and €250m account for some 94 per cent of global volumes – a clear illustration that technology M&A remains driven by the midmarket heartbeat,” Andy commented.

There has been a shift away from the mega deal as 91% of transaction noise came from the €10m - €250m range in the UK, compared with 89% in 2008.

Private equity goes to ground

The lock down in the debt markets made the second half of 2008 uncharacteristically quiet for private equity investors. Last year 36 global buyouts worth a combined €5.2bn were recorded compared with 80 worth an aggregate €17.4bn in 2007.

Again, the UK proved to be more resilient than most and accounted for 19 deals totalling €1.7bn.

Andy explained:

“Whilst liquidity will be difficult, there will be deals to be done in 2009. Whilst follow on deals for existing portfolio companies are likely to be the order of the day, we expect to see more non-core disposals from larger multinationals and a selective return in public-to-private transactions once public market valuations find more of a level. PE houses will look for value while institutional investors continue to prefer the security of cash, and a flight to scale or blue chip assets. The UK’s AiM market may also continue to prove fertile feeding ground for transactions.”

He went on to say, cash buyers that are able to determine an angle on a deal and prepared to call the bottom of the market may look back on 2009 as a vintage year from a returns perspective, but undoubtedly there will be fewer PE-backed deals.

Interest from abroad

As in 2007, global technology deal volumes last year continued to be underpinned by a large number of domestic Asian transactions. These accounted for 36 per cent of global domestic deal volumes in 2008 with Europe responsible for 25% and North America 38%.

Asian and particularly Indian acquirers are increasingly focussing their M&A energies on Europe with growth in off-shoring opportunities in the UK set to outpace the US. Cross-border parties generally are likely to find the UK a more attractive destination with the weakness of sterling producing some keenly-priced assets.

Managing through the downturn

Andy said:

“Although global economic conditions are considered to be the worst for decades, technology companies which survived the turmoil of the dot.com crisis of 2001/02 are far better equipped now to weather the toughest of storms.”

“Deal conditions and liquidity are unlikely to improve materially over the next six to nine months although we do anticipate an upturn in M&A activity towards the end of 2009.”

Meanwhile, there are still interesting deals to be done but structures will need to be more equity-led with the focus swinging away from private equity to trade-orientated strategic acquisitions. Deals will also take longer to conclude with due diligence requirements becoming ever more onerous, he concluded.


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