TMT M&A review: Summer 2024

2024 started positively for TMT M&A, as quarterly transaction volumes rose for the first time since 2022. Though this uptick flattened in Q2, recent headline deals demonstrate growing confidence in the sector.

In June, BlackRock acquired UK alternative investment data specialist Preqin for £2.5 billion. The sale netted its founder's family investment vehicle approximately £2.04 billion, with the remainder shared among management and 1,500 employees.

In July, we supported 2024's first tech listing on the London Stock Exchange (LSE) as the reporting accountant for long-standing client Raspberry Pi, the leading designer and developer of low-cost, single board computers and compute modules for industrial IOT customers and educators. Minutes after trading began, the shares rocketed from 280p to a high of 392p each, valuing the company at £541.6 million.

The overall picture shows a modest increase in deal volumes of 4% H1 2024 compared to H2 2023, though still some 16% below completion levels in H1 2023, reflecting the challenges that are still evident in getting deals across the line. The above examples suggest the dam is beginning to burst. The certainty of a new government, coupled with anticipated interest rate cuts, is expected to support growth in activity later this year and into 2025 – whether this becomes a tsunami rather than a surge of deals remains very much in the balance.

Deal volumes

There were 227 deals in the second quarter of 2024, a small (-2.2%) decline on Q1 2024 and a solid enough performance in the context of a surprise general election and the Bank of England holding interest rates for longer than expected.

Q2 deal volumes

_{Source: CapitalIQ (CIQ) and Megabuyte} 

Quarterly deal volumes and disclosed deal value

  _{Source: CapitalIQ (CIQ) and Megabuyte} 

How we helped in Q2

• Our M&A team helped construction SaaS specialist Clixifix on its May 2024 sale to Nordic listed group SmartCraft. Clixifix is SmartCraft's twelfth acquisition in the past seven years and its first entry into the UK market. 
• In June 2024, Software distributor QBS Technology Group completed the acquisition of Hungarian software distributor KSKFT. We provided due diligence and tax advice to QBS's backer, MML Capital.
• We advised managed-service provider Air IT on its May 2024 acquisition of Edinburgh-based SoConnect. The move takes Air IT's staff to 570 and increases its presence in Scotland.

Private equity activity  

Private equity made 33 stand-alone investments in the sector in Q2 2024, accounting for 15% of all deals. This share is in line with the previous quarter (14%) and Q2 2023 (16%). Meanwhile, there was a notable step up in bolt on activity for PE platform assets, with PE-backed TMT companies accounting for 37% of all Q2 2024 deals versus 21% in the prior quarter and 26% in Q2 2023. Confidence appears to have returned among the active PE-backed consolidators.

Q2 deals by acquiror type

_{Source: CapitalIQ (CIQ) and Megabuyte} 

Quarterly volume of private equity deals    

  _{Source: CapitalIQ (CIQ) and Megabuyte} 

Quarterly volume of deals involving private equity backed platforms

  _{Source: CapitalIQ (CIQ) and Megabuyte} 

Software valuations continued to recover in private and public markets during Q2   

 Valuation of private TMT companies 

 _{Source: CapitalIQ (CIQ) and Megabuyte}

Valuation of public TMT companies

 _{Source: CapitalIQ (CIQ) and Megabuyte} 

Software begins to outperform SaaS Cloud

The convergence of general software and SaaS Cloud valuation metrics on the public markets, which has been a notable trend over the last 18 months, hit an inflection point in Q2. The re-calibration of software valuation metrics towards scale and profitability ahead of pure growth saw the valuation multiples of our basket of listed software stocks push ahead of the SaaS Cloud index for the first time. Overall public market sentiment for software remains strong and the recovery that started in Q1, and has strengthened in Q2, provides an underpin for future deal activity in the sector.

EV/Revenue multiples: Software versus SaaS Cloud   

 _{Source: CapitalIQ (CIQ) and Megabuyte}  

Five TMT Trends 

1 Tech IPOs provide a boost for London

The struggles of UK exchanges to attract new listings across the market, and in the tech sector in particular, are well documented. Q2 delivered a real shot in the arm for public market sentiment with TMT one of the few sectors to get IPOs across the line. In addition to Raspberry Pi’s landmark LSE IPO, MedTech company AOTI launched on AIM in June. While providing a much needed boost for UK public markets, there's much to do in terms of coverage; liquidity depth; and valuation perception relative to other international exchanges before we can be credibly signposting a 'new dawn' for listed UK technology stocks.

Q2 also saw two TMT companies leave the LSE. In April 2024, Thoma Bravo announced a cash offer to acquire Darktrace, valuing the cybersecurity specialist at almost USD 5 billion. In May 2024, KKR took IQGeo private for £316 million.

The secondary issues market has been active in H1. Notable examples include a £57.4 million fundraising by Invinity Energy Systems. Of this, £25 million came from the UK Infrastructure Bank (the UK government-owned policy bank).

2 PE makes grand exits

 Macroeconomic challenges may have forced private equity investors to hold TMT assets for longer than initially planned. As valuations increase, they're increasingly bringing these assets to market, where they’ve been scooped up by a flux of private equity buyers. Ten secondary buyouts took place in Q2 2024, adding to 15 in Q1 2024. Examples in Q2 include Swedish investment firm EQT's sale of data management firm Rimes to Five Arrows.

3 Debt terms improve

 As we entered 2024, analysts predicted that the Bank of England would cut interest rates as early as summer. Despite a significant drop in inflation, this wasn't to be, with one or two 0.25% cuts to base rates now expected by the end of the year. A series of gradual cuts are now expected towards the end of the year. The delay hasn’t stopped lenders from returning to the table, both due to improved economic environment and the continued positive credit characteristics of many businesses in the sector, and increased competition is resulting in reduced margins and improved terms, albeit leverage will remain constrained while base rates remain high.

4 Media assets recover

_{Source: CapitalIQ (CIQ) and Megabuyte}

Media stocks continued their strong recovery in Q2, as events businesses embraced the return to face-to-face meetings and a more favourable economy bolstered consumer-facing firms. This confidence is beginning to filter into M&A activity, and we expect a strong pipeline of media deals to come through in the coming months. 

5 The altnet tightens

 The much-trailed consolidation of UK altnet companies is coming to fruition. In June 2024, Netomnia announced that it had merged with BRSK to become the second-largest altnet provider in the UK. The new group will have a combined network footprint of 1.5 million premises. With a multitude of players still left in a highly fragmented market, this is just one of many consolidation deals to come with those players with the liquidity and strong balance sheets clearly in the driving seat.

What does a new government mean for TMT M&A?

 An earlier than expected general election avoided what could have been several more months of political uncertainty for investors. Following the State Opening of Parliament on 17 July, investors now have a clearer picture of the opportunities that might come from the Government’s plans for digital transformation. While not every promise in the manifesto made it into the King’s Speech, those plans are still valid indicators of Labour’s priorities.

Labour’s digital transformation agenda

The Government campaigned for office with a manifesto promising change without public spending increases. It plans to do this by finding efficiencies in public institutions and services, particularly through digitisation and new technology. Initiatives include modernising the police force, digitising healthcare records, and investing in HMRC technology.

The manifesto was bolstered by several sectoral plans published in the run-up to the election. The health plan promised a ‘Fit for the Future’ fund to invest in new technology such as CT and MRI scanners and AI diagnostics. The plan for Britain’s railways was headlined by the intentions to bring them into public ownership, but the Government also intends to introduce  digital season tickets and automatic delay and cancellation refund systems.

To support such changes, Labour wants to create a National Data Library to bring together existing research programmes and deliver data-driven public services. The Digital Information and Smart Data Bill – announced in the King’s Speech – aims to enable better digital public services and ensure safe data protection practices.

The Department for Science, Innovation and Technology (DSIT) will have an expanded remit, working across departments to support digital transformation – similar to how the Treasury functions. It will unite the work of the Government Digital Service, Central Digital and Data Office, and the Incubator for AI to house digital transformation in one department. DSIT will be charged with upskilling civil servants in AI and digital skills and accelerating investment in innovation and technology.

What has it said on tax? 

Labour’s overarching pledge for business tax is to provide certainty and stability rather than sweeping reform. Its manifesto included pledges not to increase the 25% headline rate of corporation tax for the duration of the next Parliament (and to act if this becomes internationally uncompetitive); to maintain full expensing for capital expenditure; and to preserve the Annual Investment Allowance for small businesses. It has also committed to publishing a roadmap for business taxation for the duration of the next Parliament.

 The future of R&D tax incentives didn't feature in Labour’s manifesto, but earlier in 2024 they published a Business Partnership for Growth paper indicating support for the incentives and their intention to maintain the current structure of research and development tax credits over the next Parliament. However, it also expressed a willingness to evaluate the impact of the scheme on a sector-by-sector basis, starting with life sciences. This suggests that they could look to make further changes to the regime in the medium to long term.

Labour has pledged to replace the existing business rates system. While there’s little detail, we understand this will be revenue neutral, with the aim of levelling the playing field between the high street and online companies. This policy will be one to watch for online businesses, which are often less impacted by business rates.

Labour’s manifesto was silent on capital gains tax (CGT), an important area for business owners and investors, particularly where a sale is on the horizon and for those considering succession planning. On the campaign trail, senior Labour figures sought to reassure that it has “no plans” to increase CGT. However, unlike for some other taxes, Labour didn’t rule out a future rise in its manifesto.

Outlook

 It’s too early to tell whether the Government’s plans will be successful. However, its reliance on digitisation to do ‘more with less’ will only increase the appeal of TMT assets. Combined with a more favourable economic environment for dealmaking, our M&A team expects a very busy year to come.