Buy or be bought: the message is clear for technology companies

Private equity is likely to have another big year backing technology buyouts in the UK, according to PricewaterhouseCoopers, as trade buyers return elsewhere.

Global mergers and acquisitions levels in the technology sector broke through the €100bn barrier in 2006 for the first time since the height of the 2000 M&A boom, driven by resurgent corporate acquisition activity and renewed private equity interest in the sector, according to new analysis by PricewaterhouseCoopers.

Andy Morgan, technology sector leader at PricewaterhouseCoopers’ corporate finance unit, said there were challenges ahead for mid-market companies:

“When companies reach a valuation of €100 million they become much more strategically attractive, and need to decide whether they want to really invest to drive growth – probably through acquisition – or focus on an exit strategy.

He said activity in the heartland of the mid-market between €100 million- €250 million had been the one area of consistent growth in the technology sector over the past four years.

The return of strategic trade acquirers to the market over the last 18 months has made the temptation of a healthy exit valuation almost irresistible for many shareholders.

Despite a marked decline in the last quarter of 2006, the strategic drivers of deal activity still remain.

Mega deals continue to be a feature within the technology sector with 18 €1 billion-plus deals in 2006 compared with 14 in 2005. Alcatel’s €11.1bn acquisition of Lucent Technologies topped 2005’s largest deal, the private equity-led acquisition of Sungard Data Systems by €2.4bn.

PricewaterhouseCoopers expects strong M&A performance to continue at least through the first half of 2007, driven by the weight of available private equity funds, and a continued strong corporate appetite for both infill and transformational deals.

While private equity played another strong hand globally in the technology sector in 2006, the increasingly aggressive approach of strategic trade acquirers is providing competition for the private equity houses.

The experience in the UK was different with the private equity market rediscovering its appetite for software and IT services – attracted by the cash generation potential of emerging business models and the buy and build opportunities. Four of the top six acquisitions of UK technology companies were leveraged deals in 2006, a stark contrast to 2005 when the UK private equity industry failed to score a single top ten deal.

The industry has now firmly moved through phase two consolidation as the leading players tackle a rapidly evolving landscape, fuelled by convergence, new delivery platforms and the challenges of building and delivering new services and accessing less familiar markets.

This structural re-alignment has been characterised by the significant increase in valuations and the step change in total deal values experienced in 2005 and 2006 against a background of flat deal volumes.

Asia, specifically India, will continue to rise in importance on the global technology M&A stage particularly in Europe. China will slowly continue to exert more influence on transactions, both as a buyer and seller, but it is unlikely there will be a material shift in 2007.

The level of investment to date in environmentally and energy efficient technologies, such as fuel cells, energy efficient displays, biometric recognition and alternative lighting, is increasingly being rewarded by the evolution of these technologies into practical, cost effective and reliable solutions for consumers.