Merger and acquisition (M&A) activity in the UK technology sector continues to boom.
Brexit and other factors may have caused certain investors to take stock, particularly regarding IPO activity, but others are viewing recent events as an opportunity.
In the UK’s current low interest rate environment, businesses (including those outside the technology sector) are looking to invest in technology, change their business models and/or buy growth.
Cheap debt remains available to many financial buyers that still have plenty of “dry powder”.
There is significant and growing interest in UK technology assets from in particular China, Japan and the US (people are now referring to “Bre-entry”), in part following sterling’s devaluation relative to other currencies.
This is helping to fuel competitive auctions, particularly for quality assets that can scale, especially in the mid-market.
Where companies are less mature, and investment decisions are more binary and discerning regarding what is viewed as a quality asset, this amplifies the attention on the few stand out assets.
Consequently, there is strong interest for fast growth businesses in a low growth world.
International venture capital, growth equity and minority private equity are viable alternative routes to straight exit of technology businesses in the current climate.
Valuations are generally holding up as are the typical lead times to sell technology assets with pre-emptive deals outside of formal processes becoming more common.
Recurring trends of transformation, consolidation, and investments in emerging technologies (particularly cloud, mobile, social, location-based services, big data analytics and security) continue to demonstrate the rapid evolution within the technology industry, which is also seeing increasing interest in digital assets from non-digital buyers.
A number of technologies are notable for their rate of growth, including Internet of Things (IoT), drones, big data analytics and a recent uptick in UK cyber deals, such as the acquisition by SecureLink (an Investcorp company) of Nebulas (announced 15 August 2016), and GB Group plc’s acquisition of IDscan Biometrics Ltd (announced 29 June 2016).
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Key areas of focus for successful technology M&A deals remain familiar themes, and perhaps easier to explain than achieve.
Financial & market positioning
This requires robust budgeting accuracy, key performance indicators (KPIs) on budgeting and the speed of conversion; and a delivery on numbers during the transaction process.
Setting out a clear pathway to cash generation – pointing to operating leverage – not just focussing on growth (although key) is a useful strategy to adopt.
Similarly, clarity on accounting treatment, particularly any capitalisation of research & development (R&D) and any deferred income. An effective R&D strategy, including explaining the location, cost and effectiveness of teams onshore or offshore is vital.
Commercial & due diligence
It is necessary to obtain strong recurring, or subscription revenue and multi-year contracts. This can be acheived by understanding customers – expiry, renewals, concentration, change of control and onerous contractual provisions, stickiness and churn.
There must be a clear protection and exploitation of Intellectual Property (IP) and confidential information, particularly as regards open source as well as documenting know how.
Especially relevant is understanding the use of personal data and complying with current legal and regulatory challenges in all relevant jurisdictions;
It is crucial to be prepared and starting deal preparation early, and considering vendor due diligence, will maximise price at a critical time.
Client management is essential, and handling client and other references sensitively at the right time is crucial.
Negotiating as much as possible through term sheets rather than long form (without weighing too much on the momentum, is key in identifying complex deal terms that you should steer clear of.
Finally, communicating with key stakeholders, including employees, option holders and any long tail of shareholders as well as getting shareholder approval early generally will ease transaction management.
Trying to keep all these balls in the air whilst growing in an innovative way, in challenging area, at a fast pace, particularly in a young company without all the required infrastructure or personnel is not easy but the rewards for those who manage to exit during this continued bull run remain.
The valuations achieved for those who do this in the first few years of being founded are often even more impressive.
The risks of a failed process are significant, particularly if in a public arena, but so are those of being left behind whether in product niche, more competitive environment or if technology itself outpaces a business or business model.
Standing still is rarely an option.
Sourced by Thomas Colmer, partner in the corporate team at PwC Legal