IT M&A deals weather storm

Recent figures from investment bank Regent Associates reveal technology sector merger and acquisition (M&A) activity shows no sign of abating.
Despite fears that the credit crunch would dampen the hunger for deals, the total number of transactions involving European technology firms rebounded in the fourth quarter. Some 799 deals were chalked up, compared with 772 in Q3, 802 in Q2 and 842 in Q1.
After falling from $114bn (£58.5bn) to $79bn between Q2 and Q3, the value of tech M&A deals also shot back up to $86bn in the final quarter of the year.
Unwavering interest from private equity backers ­ who bankrolled 15 per cent of the transactions ­ ensured the value of M&A technology deals for the whole year leapt four per cent to $349bn. The number of deals dropped by two per cent to 3,215.
Consolidation among UK channel players also got off to a flying start in 2008, with several big names already snapped up and a handful more rumoured to be up for sale.
Microsoft large account reseller Teksys was one of the first to announce a sale to two private equity investors, including former Cisco UK managing director Alan Watkins. Elsewhere, VAR Dynax has sold up to Impera and Cisco Gold partner s2s was acquired by Bailey Teswaine.
According to Peter Rowell, executive director at Regent, the UK remained the region’s M&A hotspot, although he noted that the number of deals is beginning to slow.
“The UK is the busiest in terms of companies selling, accounting for 25 per cent of the European total,” he said. “Some 789 UK firms were sold in 2007, down 11 per cent on 2006. What we are seeing is a slight tailing off in the UK.
“The US leads the world in economic cycles and the UK follows. France lags behind, which is why
the number of deals happening there is going up while the rest is going down.”
Some 187 UK technology firms sold up in the fourth quarter, compared with about 200 in each of the three preceding quarters.
John Lindley, director of IBM reseller Portal Partnership, predicted an intense year of consolidation ahead for the software channel.
“It is my strong feeling that the IBM partner community is ripe for further consolidation,” he said.
“There are more firms in that space than in hardware and it is smaller than the hardware market. If the market hits a further slowdown, the way to succeed is through careful M&A or by properly managing alliances.”
Lindley added: “I am aware there are some Dutch and German firms looking to expand into the managed services space in the UK and I would not be surprised if US companies are thinking the same way.
“Managed services is an attractive market at the moment because of long-term revenue contracts in that space, which makes margins easier to forecast,” he said.
Onlookers have cited a number of factors behind the unexpectedly active market.
Firstly, business owners that sell before the Chancellor’s planned capital gains tax shake-up in April will avoid paying an extra 80 per cent charge when they sell their business. Arguably a bigger factor is the recent drop in valuations that business owners are placing on their heads.
Martin Balaam, chief executive of VAR Redstone, now says the company is ready to embark on the next stage of acquisitive growth as prices begin to fall.
“M&A was not up in the fourth quarter in my experience,” he said. “If you look at all the usual suspects, such as us, 2e2, Calyx and Azzurri, none of us have done anything for months. In my UK small cap technology environment, the credit crunch has had an impact on M&A.
“Over the next three to six months we will start to see some activity coming back as vendors’ price expectations are realigned. I believe the finance sector will work itself out ­ their bonuses are based on deals, they have to make it work.”
Balaam added: “We are certainly coming up to a buyers’ market. If you have the funds and are inclined to consolidate, now is a good time. The only note of caution is to select businesses with good recurring revenues and customer bases. If the downturn in economic activity that people are talking about comes about, you will want to be looking at firms that are defensive in nature.”
The caution the private equity industry was expected to show to tech M&A has also failed to materialise.
Jason Rabbetts, managing director at storage VAR Storpoint, said venture capitalists’ appetite for big IT deals remains as large as ever.
“There is still plenty of cash there,” he said. “The credit crunch has not hit investors in real terms. If you look at European M&A it is generally the people with good track records that are doing them as they are VC-backed. We are talking about long-in-the-tooth entrepreneurs that the City knows will be able to buy a few firms, squeeze them and make them more profitable.”
Rabbetts added that the expected cut in interest rates also has the potential to fuel activity.
Credit crunch fails to slow IT consolidation