Technology insights Q1 2022

A perfect storm of supply chain disruption, high inflation, rising interest rates and the ongoing conflict in Ukraine is driving much press commentary around an expected decline in M&A deal activity in 2022. However, our Q1 analysis shows that the UK tech sector has proved resilient to that trend with no slowdown in dealmaking across the industry.

Below we explore:

• Q1 2022 deal volumes and values
• The most active sectors in TMT
• 2022 investment hotspots
• Deal valuation expectations for 2022

Deal value and volume per technology sub-sector

_{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.}

Q1 2022 deal volume and values

The year got off to a strong start with a total of 296 deals in UK TMT, the second-highest quarter since the beginning of the pandemic. This marked an increase of 11% compared to Q4 2021, although a modest decrease (-2%) on Q1 2021.

Disclosed deal value reached £11.1 billion, a 30% decline on Q4 2021 as mega-deal activity took a pause for breath. Only two transactions reached over £1 billion in deal value closing in the quarter, and none reaching the heights of Permira’s £4.4 billion acquisition of Mimecast which led the way in Q4 2021. UK TMT remains a predominantly mid-market play from a deals perspective, and this provides a strong degree of insulation for deal activity against the background of broader macroeconomic uncertainty. 

Private equity (PE) continues to drive activity through a heavy focus on buy-and-build platforms across the sector, most notably in software, IT services and unified communications. Strategic trade buyers continue to pursue tuck-in deals that can accelerate penetration of new markets. Appetite for businesses across the sector with robust revenue models and strong growth prospects remains strong.

Notable Q1 deals

Spanish IT services firm Telefónica Tech acquired Incremental Group for £175 million at an EBITDA multiple of 13.7x. The deal significantly increases its scale in the UK and its Microsoft solutions offering.

B2B telecoms specialist Daisy Group acquired business broadband, phone and card payment provider XLN for a reported £210 million. The acquisition boosts Daisy’s small business division.

Capital markets

Equity market indices

Stock markets worldwide continue to be shaken by macroeconomic pressures, including geopolitics, slow post-COVID-19 GDP growth, and the materialising threat of higher interest rates to combat accelerating inflation.

While tech stocks have not been immune, and there has been a recalibration of public market appetite for growth stocks more broadly, it is notable that they have since recovered 50%+ of the drop that occurred from January to mid-March across all sub sectors. With the exception of fintech, which remains the laggard in terms of public market performance, all sub-sectors remain firmly in positive market performance territory over the last 12 months.

While public market performance may remain volatile, it is interesting that we have not seen any reset in valuation metrics flowing through to the M&A market at this stage. Valuations remain very strong for quality assets, with perhaps only the slightest easing back from the peak multiple levels of Q3 2021.

Private equity continues to be engine room of M&A 

Q1 saw strong competitive interest from both PE and trade, resulting in more dual-track-focused processes. PE and PE-backed trade won out in 55% of the UK deals closed in the period, maintaining the high levels we have seen over the last three quarters. 

Secondary PE transactions continue to act as the bedrock for deal activity, particularly in the software market, as established platforms trade up the PE fund size pyramid. PE houses are increasingly looking to keep a stake in existing platforms rather than exiting in full.

Notable Q1 private equity deals

Nordic Capital joined existing backers Five Arrows and TA Associates in healthcare governance, risk, and compliance specialist RLDatix. The investment will “accelerate RLDatix’s journey as the leading provider of SaaS solutions that make healthcare safer for patients and organisations”.

Apax acquired Alcumus, a global leader in technology-led risk management and compliance solutions, from Inflexion in a reported £600 million deal.

Switzerland’s Partners Group acquired ERP company Forterro from Battery Ventures for €1 billion. It will use the investment to expand its capabilities to serve more deeply the industrial mid-market across Europe.  

Q1 saw strong international demand for UK assets, particularly from the US, attracted by resilient growth stories and increased confidence in the UK’s post-pandemic and post-Brexit economy.

Sector spotlight

Software continued to be the most active TMT sector, accounting for 53% of deals, its strongest quarter since the pandemic began. Numbers were bolstered by a high volume of smaller deals as buyers seek targets at an early point in their growth cycle, and the established PE-backed buy-and-build platforms continue to bolt on assets at an impressive rate.

There was a notable step up in advertising and marketing services deal activity (35 deals v 21 in Q4 2021). This reflects increased confidence in the end market as economies emerge from pandemic restrictions and the bounce back in events starts to happen, supporting the industry’s ongoing migration to digital.

In March, WestBridge Capital sold bChannels to US-based The Channel Company for a 4.2x return on investment. The deal expands The Channel Company’s digital marketing services reach and enables it to take advantage of bChannels’ AI-driven marketing platform.

2022 investment hot spots

We expect to see particularly strong appetite in the following three sectors throughout 2022:

What will happen to valuations in 2022?

Private market valuations appear to have held their ground in Q1, even as public markets reset.  Some of the frothier transaction multiples may become thinner on the ground but we don't expect a market-wide readjustment of valuation multiples as private markets get spooked by the same macroeconomic pressures that have hit capital markets. There may however be a flight to quality, with the casualties being marginal deals, which simply don’t get done as the bar is raised on what an acquisition needs to deliver.

Valuations will hold for assets that have:

• a consistent three-year growth record
• proved resilient during the pandemic
• have strong levels of recurring and visible revenues, with good cash conversion
• a long-term tier 1 customer base
• potential for up and cross-selling and international expansion

Diligence requirements are also likely to tighten. It has never been more important to ensure target businesses are set up to cope with rising input costs, ever-increasing pressure on talent acquisition and retention, and supply chain risk.

Our TMT deals team remains incredibly active. To talk to us about any of the topics raised here, contact Andy Morgan.