A new report by technology-focused investment bank ICON Corporate Finance, has revealed that despite Covid-19 causing a 50% year-on-year collapse in Tech M&A activity in the second quarter, a remarkable bounce-back led to a spate of M&A activity in businesses focussed on ‘Digital Transformation’, resulting in a near-record final quarter, boding well for 2021.
The report, which analyses some of the largest and most interesting FinTech deals in 2020, and which looks at trends in the tech sector, saw M&A activity rally, up 6% in Q4 compared 2019, which had itself been a record year for Tech M&A activity.
In the FinTech sector consolidation in financial information led to ever larger deal sizes. This included the announcement that S&P Global was to acquire IHS Markit for £34bn or 9x revenues. This beat the £24bn acquisition of Refinitiv by London Stock Exchange in 2019.
Overseas appetite to grow
ICON believes that Digital Transformation across all industry sectors, including FinTech, will continue to accelerate, driving further M&A activity in 2021, boosted in no small part by appetite from overseas investors – a major force in the 2020 bounce-back.
Cross-border deals rose to a record high in 2020, accounting for 48% of all UK deals.
“Normally in economic downturns overseas buyers tend to pull up the draw-bridge and re-focus. However, that was far from the case in 2020,” says Brian Parker, Co-Founder, Head of M&A at ICON Corporate Finance and author of the report.
Alongside the mainstay of buyers from the US, 2020 saw a significant widening of interest in UK tech companies from Australia, Scandinavia and Europe as buyers like Byggfakta (Scandinavia) ELMO (Australia) and MessageBird (Holland) boosted activity. It will be interesting to see if this is a trend that continues in 2021.
“There is simply a tsunami of cheap funding looking for a home, says Parker. “Many used these funds to plug the hole created by COVID, while others used the funds for M&A. As a result, there were 4,700 global tech M&A deals in 2H20, up 4% YoY. That has also pushed up valuations to frothy levels with two of the largest US deals achieving more than 30x revenues.”
Private equity funded acquisitions on the rise
The report identifies that private equity acquisitions were one of the key factors behind buoyant tech M&A activity in 2020. This is likely to continue in the year ahead.
“Total VC/PE backed acquisitions accounted for 23% of all deals in 2020 – similar to 2018 and 2019,” says Parker. “However, with interest rates remaining low and significant funds raised yet to be spent, further M&A activity can be expected. We have seen a wave of PE backed buy-and-build deals in the past few years and that is unlikely to change in 2021.”
Notably, all the most acquisitive UK buyers in 2020 were PE owned. The report looks at ClearCourse Partnership, Juniper Education, Advanced, Access Group, Iris and Civica, among others, who are all looking for new technology in their respective sectors.
The report also identifies growing appetite, particularly for Cloud-based software businesses, which led to a significant rise in UK tech valuations which in total have climbed towards 20x EBIT. Keysight, Byggfakta, RELX, Elmo, Tracsis and Broadridge, Ideagen and Aptean all paid over 5x revenues for UK targets.
The wave of cheap money is evident in the UK too where £11bn was invested in Technology companies last year, slightly higher than 2019, and a new record. Despite the pandemic this reflects investors’ ongoing appetite for risk driven by low interest rates.
There were large fund raisings from Resolut, Ki, Octopus Energy, Oxford Nanopore and Bristol-based AI chip maker Graphcore, plus seven new UK Unicorns were added taking the UK total to 80. Gymshark, Gousto and Arrival joined TransferWise, etc.
Good Energy Group, the 100% renewable electricity supplier and energy services provider has taken control of Zap-Map’s parent company, Next Green Car.
Zap-Map is an app for the UK’s fast-growing 300,000 electric vehicle (EV) drivers – planning routes, identifying charge points, checking their availability, and sharing power. With more than 250,000 app downloads, and 100,000 registered users, Zap-Map (based in Bristol) is used by a significant amount of the fully electric EV market.
In August BAE Systems strengthened its technology and data portfolio, buying Techmodal, a Bristol-based data consultancy and digital services company. With 120 employees and 30 associates, it has contracts with the MOD in support of the UK’s armed forces, particularly the Army, Strategic Command and Royal Navy. Its services include the Data Integration Platform to view, manage and exploit data provided by multiple systems on aircraft carriers.