There is no doubt that the UK has embraced the technology sector and acknowledged the positive impact it can have on both the M&A market and the wider economy.

The digital economy in Britain is now booming, with more money spent online per head of the population than any other country, according to management consultancy firm Boston Consulting Group.

In what was perennially the stomping ground for the US and its beloved Silicon Valley, the technology sector has bucked the trend of falling deal values and volumes that have stymied growth in other sectors since the financial crisis, and posted year-on-year increases.

Between 2008 and 2010, research from Zephyr and Bureau van Dijk shows that the number of technology deals rose from 295 to 483, with annualised 2011 figures set to show a rise of 21 per cent on 2010 results (see Table 1).

In the same period, deal values have followed suit, with a 65 per cent rise in deals with known values (see Table 2) demonstrating the extent to which tech M&A has grown while other sectors have struggled to get through the big-ticket deals that bolster figures.

The recent acquisitions of Motorola Mobility by Google and online video call software Skype by Microsoft bring into focus the mega-deals that are driving the tech sector. Worldwide technology M&A stands at $125.7 billion at time of print, the strongest year for M&A in the sector since 2007.

Simon Pearson, partner of technology M&A at Ernst & Young, says that the technology sector tends to be an area that is constantly changing: ‘There are always new innovations, new business models and new software being brought to the market, so it is never static.’

Examining the rise in technology M&A, Pearson says that some of this can be attributed to the research and development that was reined in following uncertainty in the markets, with many top tech companies now flush with cash and looking to acquire again.

Missed Trick

With technology moving at such a fast pace, Pearson says that missing a new development greatly hinders a business’s ability to catch up. ‘These waves of change mean that people have to react. If they don’t have the product they just go and buy it,’ he adds.

]Business software company K3 is using technology acquisitions to achieve a rapid rate of growth that has seen the Manchester-based business post revenues of £44 million, a 20 per cent rise on 2009.

Chief executive officer Andy Makeham comments, ‘We’ve just done a small placing that has been matched pound for pound by the bank, so that gives us another acquisition war chest to go out and press on with.’

The AIM-listed software business has had a busy 2011, with the recent acquisition of e-commerce company FD Systems following on from three other deals for Azzuri Retail, Clarita Solutions and Sense Enterprise Solutions.

Makeham comments, ‘I think prices are more affordable right now. We are finding that there is plenty to buy at sensible prices. Owners are generally thinking there is a tough ten-year period ahead and that now is probably the right time to get out.’

For the technology sector, Makeham explains that people need to buy in order to grow. If they can find an area that they want to expand into, it is far quicker to buy the growth than find it organically, he adds.

Looking at what is driving deals for K3, Makeham explains that, while the rationale behind its acquisition criteria in previous years was about bolstering K3’s infrastructure, it is now about expanding its customer base.

‘Up until 2009 we were building our infrastructure so, to an extent, the acquisitions were harder as we were buying management,’ he adds.

As K3 has achieved what Makeham describes as the ‘magical £50 million market cap’, during the past six months the business has been offered an acquisition on an almost daily basis, a position that he believes should lead to attractive future buys.

>Cross-border Surge

Figures for the technology sector also show that cross-border M&A, involving a UK acquirer, has seen a rapid increase in both deal values and volume. The number of deals in 2011 is on course to reach 62, with total known values increasing from £648 million to £1.42 billion, if trends continue (see Table 3).

One such company riding on the wave of cross-border activity is Kent-headquartered Synchronica, an AIM-listed mobile messaging and social networking company.

Carsten Brinkshulte, CEO of Synchronica, says that the £15.5 million deal he has struck to buy Finland-based mobile phone giant Nokia’s Operator Branded Messaging business in a reverse takeover will not only pay for itself in the short term, but also transform the company’s business model and profit prospects.

He comments, ‘Across the market we are seeing the move from sending messages via SMS to using email and social media sites such as Facebook.’

Brinkshulte explains that with any purchase made by Synchronica, two criteria must always be met: the technology aspect and an expansion of market share. He adds, ‘It is clear that building a product in any sector, particularly technology, is very complex.

‘It requires time, money and effort to build and roll out an application, so it’s more valuable to buy something that has already gone though that process than get it done yourself – that is the way to achieve rapid growth.’

The deal for Nokia’s Operator Branded Messaging business is part of a move to embrace the emerging economies, with users moving from basic products to new technologies and missing out the intermediate stages.

The transaction works as a buy-and-build deal for Synchronica. ‘It accelerates the market entry while driving product development and competitive positioning,’ Brinkshulte adds.

Synchronica’s deal with Nokia came after a successful fundraising of £9.4 million, giving the business the ammunition it needed to grow in a sector that has shown yearly growth on a consistent basis against a backdrop of underperforming ones (see Table 4).

IPO Underperformance

For tech companies looking to raise funds to accelerate growth, the IPO route is one that has continued to underperform in the UK, even for the buoyant tech market. While the US has seen an upturn in technology businesses listing – with 18 in the first two quarters of 2011 – the AIM market, once the playground of choice for global tech companies, has seen just two.

However, the re-emergence of private equity investment in the market has not been missed by the technology sector.

Tinglobal was recently the subject of a £6 million MBO backed by NVM Private Equity, with Andy Vickers, ex-managing director of Canon UK and Ireland, moving to Tinglobal to become business development director.

The MBO of the refurbished IT hardware business demonstrates the extent to which the green initiative has been adopted in the corporate space. Chairman David Gutteridge explains, ‘As we deal in refurbishments we have caught a bit of the green agenda wave, because the bigger corporates need to have their corporate responsibility and environmental agenda, and phrases to put in reports and marketing material.’

For technology businesses looking to grow, Gutteridge feels that private equity is a sensible option, with the benefits being more than just an injection of finance: ‘The benefit that we get from private equity that we would never get with a bank (which would only really give you a quarterly meeting with your account director) is a genuine interest in the business strategy and how it is developing.’

Tinglobal, which primarily sells refurbished mid to high-end servers, is now aiming to expand upon its existing retail operations to incorporate a service element, a move that Gutteridge believes will be possible with the addition of Vickers.

Looking at prospects for the coming year, Ernst & Young’s Pearson says he believes there is enough pent-up demand to see technology M&A continue on its upward track: ‘I think there is enough dynamic pressure in the way consumers are changing behaviour, and the way that the software industry is being changed.

‘The fundamental shift is not suddenly going to stop, even if the economic outlook takes a turn for the worse.’