Technology insights Q2 2022

Deal volume in the second quarter of 2022 was strong across our four tech subsectors of software, IT services, fintech, and advertising. There were a record 309 deals, 21% up on the same quarter last year, and 4.1% up on Q1 2022.

In Q2 2022 disclosed deal value was £14.4 billion, up 35% on Q2 2021 (£10.7 billion) and 29% when compared to the previous quarter (£11.1 billion).

_{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.}

The figure was bolstered significantly by The Access Group securing further investment from existing investors Hg and TA Associates, and incoming institutional investor GIC, which was done at a mid-20x EBITDA multiple, valuing the company at £9.2 billion.This highlights the continued strong appetite and valuation environment for private equity-backed, profitable and cash generating software businesses, notwithstanding tightening debt markets.

Why is tech M&A robust?

Strong fundamentals

As we've seen before, valuations have held strong for assets which are cash-generative and demonstrate consistent growth over three years, have visible recurring revenues, opportunities for cross-selling, and provide a strong buy and build platform.

Resilience in the face of inflation

Though tech is not immune to the inflationary pressure of rising energy, wage costs and increasing interest rates - driving continued talent shortages, overhead pressure and supply chain challenges in certain parts of the market - in many cases it's more resilient to inflation than most other sectors.

High-margin models can absorb rising costs, while the customer base of the increasingly prevalent subscription-revenue models is becoming conditioned to annual price increases. The business critical nature of most B2B SaaS models will likely remain robust and attract capital compared to consumer-facing tech models, which are more exposed to inflationary pressures and customer demand softness.

Ironically, an inflationary environment can strengthen the investment case for technology which increases clients’ productivity and reduces costs.

Protection against rising interest rates

Compared to its peers, tech is not a highly-leveraged sector. The cash-generative nature of many businesses within the sector makes them an attractive M&A target amid rising interest rates.

However, this is less true of early-stage companies and emerging SaaS models, which typically require growth capital. This is where the pressure on funding cycles is being felt with many management teams reassessing their cost base to extend their funding runway and shorten their path to profitability and cash generation. These are more likely to feel the macro-economic heat in the coming months, though we can expect the winners to come out stronger.

Capital markets

The MSCI and NASDAQ are down 20% and 15% respectively for the year ending 30 June 2022, with continued volatility and weakness over Q2. Capital-market sentiment has continued to move away from growth stocks, driven by global macroeconomic factors and more aggressive interest rate policy as central banks try to get high inflation under control.

In terms of sub-sectors, fintech suffered a sharp decline and is down 26%. Advertising, IT services, and software fared slightly better, dropping by 10%, 14%, and 21%, respectively.

M&A versus capital markets – why the disparity?  

Tech stocks’ recent underwhelming performance has not dampened appetite for technology M&A. It must also be set against the context of a remarkably strong bull-run over a sustained period in recent years.

Buyers are seeking deals based on strong fundamentals and strategy, which can help offset (or at least withstand) the macro-challenges that have pushed capital market investors towards more defensive stocks.

The weakening of capital market valuations creates buying opportunities for some. Optum UK’s £1.24 billion acquisition of UK healthcare technology provider EMIS is a good example of strategic trade with strong balance sheets and liquidity seeing buying opportunities. The deal represented a 49% premium to EMIS’s share price but adds scale, a strong market position in the UK healthcare eco-system and a highly profitable and cash generative asset to Optum UK.

We've also seen the return of the public to private transaction with PE-investors seeing value in listed technology stocks. The £1.1 billion recommended offer by Hg for regulatory and compliance software consolidator Ideagen plc being the stand-out deal. We may well see more over the remainder of 2022 if valuation softness in capital markets continues into Q3 and Q4.

Private equity vs trade

We saw several dual-track processes in Q2 amid strong competition between trade and private equity. Trade was responsible for 164 deals (54%), PE-backed trade for 105 deals (34%), and PE stand alone accounting for 38 deals (12%).

Four trends to watch 

UK buy-and-build goes overseas  

We’ve seen a growing trend of maturing UK buy and build platforms expanding their horizons outside of the domestic market.  

In April, UK business messaging platform Commify entered the US market through its acquisition of CDYNE Corporation. Commify already has a proven acquisition model in Europe, and it's now looking to copy this over to the fragmented and high-growth US market. We provided due diligence services.

Other overseas moves include business management software firm The Access Group acquiring Australian volunteer management software firm DutySheet, while Iris Software has continued its push into the US with multiple acquisitions over the last 12 months.

Sustainability-linked loan providers embrace tech 

In April, HSBC issued its first sustainability-linked loan (SLL) to a tech company, Maintel Holdings (on its website Maintel states that it is committed to science-based targets aligned with 1.5 °C). We're seeing more tech players benefit from this type of loan which offers favourable interest rates in exchange for good ESG practice.  

Demand for compliance-and-regulation software 

We're seeing increasing interest in TMT companies that help their clients achieve governance targets related to compliance. 

In April, professional services and technology group Davies acquired Worksmart, which helps organisations to track and manage regulatory processes. We provided buy-side advisory services.  

Likewise in June, Ideagen’s shareholders accepted a 350p-per-share offer from private equity group Hg valuing the company at £1.1 billion.  

The monetisation of data 

The adage that the smartest person in the room is the one with the data, could as easily read, the richest person in the room…We're seeing an increasing number of deals focusing on sector-specific data specialists. 

In April, Allfunds Group swiftly followed up its euro 145 million acquisition of WebFG from Bridgepoint by acquiring InstiHub, which provides market insights and pricing data to the delegated fund industry. We provided sell-side advisory services.  

The truth behind the headlines 

Finally, when shares in big consumer-facing names, such as Netflix or Meta, are falling, it's easy to forget the workhorses of the tech sector. These are the software, services, and IT companies that satisfy the continuing demand for digital transformation and compliance. It's these that will continue to underpin M&A activity if economic and market conditions face a tougher outlook over the next 6-18 months.

For more insight and guidance, get in touch with Andy Morgan.