Brexit is no barrier to UK TMT M&A

Whether the UK achieves the near-impossible task of agreeing on the terms of its European Union departure or implements Brexit without a deal at all, we can expect this to impact the UK TMT sector. However, amidst the political uncertainty, the winners will be those that act now, and Brexit is proving to be no barrier to corporate transactions. 

M&A activity in the UK TMT sector has continued to increase since the June 2016 referendum, with deal volumes growing by 10% from Q1-16 to Q1-19. Domestic transactions have been particularly prominent, with deal volumes increasing by 19% over the same period. 

Despite the political turmoil, this is a sector showing positive resilience in the face of uncertainty with a number of contributing factors:  

Europe’s tech hub 

Access to unprecedented talent, funding and a business-friendly corporate regulatory environment are just a few of the attributes making the UK Europe’s technology hub. The UK attracts many US tech companies looking for opportunities to expand out of Silicon Valley, with the number of inbound deals from the US in 2018 up 4% on 2016 levels.  

Applications for UK tech visas have also risen, and Tech Nation has announced a 45% increase in 2018/19. This includes a large number of applications from the US and India, with sectors such as software, fintech and artificial intelligence attracting the highest number of applicants. 

The UK’s TMT market remains highly attractive to buyers, with a significant increase in deals from both the US and the EU as well as domestically, reflecting the continued belief in these businesses and their strategic importance.  

Labour availability

There is a growing demand for highly skilled recruits within the UK tech industry, with 8% of its current workforce sourced from the EU. With the UK being the leading European country for candidates with IT skills, other regions outside of London have seen an increase in tech recruitment including Birmingham, Leeds and Manchester, though London’s pool of talent will continue to thrive and primarily attract investor interest. The UK tech sector unquestionably creates jobs for UK graduates, who are in high demand. 

The Government’s Immigration White Paper suggests reducing the UK workforce by between 200,000 and 400,000 EEA nationals over the first five years, which will hit GDP by between £2bn and £4bn, however the increasing dependence on Information Technology across all sectors should act as a mitigator to the effects on labour availability. 

Funding and Innovation

The UK TMT sector benefits from an active community of innovative, creative start-ups and a futuristic approach to business solutions, which is driving appetite from investors. The sector saw more venture capital funding and stock market flotations than any other European country in 2018. This included £2.5bn of venture capital funding (£1.1bn more than its closest rival, Germany).  Notable deals included Amazon's $575m investment in food delivery start-up Deliveroo and fintech banking provider Revolut’s $250m fundraise, valuing the company at a staggering $1.7bn.  

There continues to be a growing desire to support these innovative tech businesses and there is no sign of that letting up. 

Digital disruption

Given that we are building a ‘smart economy’ and all verticals are becoming ever-more reliant on tech-enabled services, we expect a surge in IoT solutions to deliver this. We are constantly seeing the emergence of flexible, dynamic and disruptive start-ups, which larger corporates look to acquire in an attempt to remain competitive. 

Digitalisation and the need for process automation are beneficial trends impacting the TMT sector, alongside the increasing spend on cyber security and data protection. This has been demonstrated by Blue Prism’s recent £80m acquisition of intelligent automation solutions provider Thoughtonomy and Livingbridge’s recent investment in enterprise-level managed security services provider Adarma. 

Although the TMT sector continues to be challenged as Brexit reaches a climax, the growing importance of technology is underpinning a robust demand for UK TMT businesses.  

 

David Bellis, Alantra 

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