Digital disruption to fuel 2018 tech M&A, by Clearwater International

Last year the number of TMT transactions rose globally, up by 3% compared to the same period in 2016. With many firms waking up to the threats of digital disruption and with new technologies such as Artificial Intelligence (AI) and the Internet of Things (IoT) still in their relative infancy, there are still plenty of compelling reasons for firms to turn to M&A.

North American and European targets increased their stranglehold over TMT M&A in 2017, representing almost 70% of the market between them. The number of transactions featuring an Asia Pacific-based target dipped by 1.5%. Given the maturity of Western economies and the fact that the vast majority of the global middle class now sit in the emerging markets, it is perhaps surprising that we have not seen more TMT acquisitions within regions such as Africa and South America.

Yet with many emerging economies in 2018 still languishing at the bottom of the World Bank’s ease of doing business rankings, it seems international investors could still be dissuaded by political and economic risks, along with challenging regulatory environments and operating conditions.

Private equity and TMT are still a perfect match

As in previous years it looks like there will continue to be a frenetic level of private equity investment in TMT in 2018.  China became a particular hotspot in 2017 with the value and volume of private equity investment reaching a new high. Larger deals were also up 50% in 2017, as funds looked to find the new breed of unicorns. However, the level of first round investments was still at a historical low, this is continuing into 2018. This suggests that investors may continue to become more cautious towards start-ups and adopt a wait-and-see attitude, rather than the more gung-ho approach of previous years.

Elsewhere, despite some of the political uncertainties around Brexit, the UK looks set to remain a hotspot for private equity transactions, from both domestic and international investors. 2017 was a record year for UK Fintech investments and it seems likely that in 2018, the UK will retain its position as a leader in innovation in the sector. For instance, in March this year online only bank Atom raised £149m in a new funding round led by Spanish financial institution BBVA, along with asset manager Tosca Fund.

B2B IT services and hosting continue to be hot property throughout Europe. Clearwater International advised Converge, a specialist provider of hosting to the legal sector, on its investment by Tenzing Private Equity at the end of 2017. Earlier this year private equity fund Bowmark acquired Ask4, a UK student broadband provider; AAC Capital Partners invested in Belgian IT provider Savaco; and Alcuin Capital invested in UK Apple reseller and managed services provider Jigsaw24, also advised by Clearwater International. With so many private equity investors committing to IT services as buy and build models, we expect that to drive significant M&A activity in this fragmented market, as it becomes the most obvious way to gain scale.

Software assets across Europe still look set to command double digit multiples from private equity houses with SaaS models, characterised by high recurring revenue levels, still the most sought after businesses. Firms that serve industries which have traditionally been late adopters of technology, such as transportation, remain very attractive. In March 2018, Clearwater International advised Mandata, a provider of transportation software solutions to the haulage industry, on an investment by LDC. In April, Insight Venture Partners invested in Irish software firm AMCS Group, a provider of smart resource software and vehicle technology solutions for the waste, recycling and resource industry. 

Conversely, strategic buyers still remain the most likely source of exit for businesses in the media and marketing services environment, as purchasers are able to structure their deals with an attractive level of earn-out.  However, it seems that there is an increasing appetite for businesses with a strong level of B2B digital content and analytics driven data. Clearwater International advised private equity firm FPE, on its investment in IWSR, leading global alcoholic drinks information provider; whilst Synova also invested in Mintec, a provider of pricing data to the food industry.

Key Trends

During 2017 companies largely shunned all stock mergers. Yet with one major technology merger already announced this year between Sprint and T-Mobile, it seems that the lull has lifted. Many companies have significant cash levels on the balance sheet and are coming under pressure to make investments or return it to shareholders. Equally greater clarity around US taxation schemes should also help to incentivise activity.

Media acquisitions dominated the top ten largest transactions in 2017 with a significant focus on television. As traditional television and movie distribution models are increasingly disrupted by digital services, 2018 could be the year of M&A involving video streaming platforms. Apple recently announced that it will invest $1bn (c.£740m) in its Music Division, as part of its strategy to build out video content. There was also speculation that it could make an offer for Netflix.  Meanwhile the fate of Netflix’s competitor Hulu also hangs in the balance. 60% of Hulu is owned by Disney, with the remaining percentage owned by Comcast and Time Warner. With both Comcast and Time Warner lacking their own video streaming platform, they could team up to buy out Disney and create a genuine competitor to Netflix and Amazon.

In 2017 Intel made the largest investment in a self-driving car firm to date, when it acquired Mobileye for €14bn (c.£12.3bn). As cars increasingly transition towards becoming the new technology platforms, we can expect connected cars, autonomous driving, mobility as a service, and automotive data security and protection to feature heavily in M&A this year.

Last year the key software players largely focused on smaller tuck-in acquisitions. Yet two large SaaS providers - Workday and Servicenow, could change that trend in 2018. Both firms have numerous admirers but their valuations in 2017 soared, which perhaps led to overly high price expectations. As those valuations have weakened, now might be the perfect time to take them off the market. Their purchaser could be another SaaS player, such as a mega-merger with Salesforce but equally they could go to on premise vendors such as Microsoft and Oracle as they continue to transition their business models to cloud based offerings.

Looking ahead as new high profile data leaks continue to hit headlines, and amidst a political climate dominated by accusations of election hackings and cybercrime, internet security specialists will continue to be sought after assets. We’re certain to see more deals like Microsoft’s €84m (c.£74m) purchase of Hexadite.

Meanwhile 2017 saw €18bn (c.£16bn) invested in M&A in AI, 26 times more than in 2016. Whether the current tech giants remain supreme depends largely on the future of AI. If real world data remains essential then they are currently in pole position. Yet in another possibility, where simulation is key and machines teach themselves using synthetic data, their power is blunted. The race is now on and we will start to get a clearer picture of how the battle will unfold.

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