The feeble pound has brought UK technology companies into the sights of overseas buyers with money to spend. Andrew MacLeod reports
In the UK, any mention of high-tech often comes in the same breath as the sector’s prime location – the Thames Valley, and it is here that the combination of a low pound and realistic valuations is proving attractive to some cash-rich firms from the US and Europe.
For these, and a number of mid-to-large UK corporates, opportunities now exist for bargain hunting, according to Philip Tranter, a Reading-based mergers and acquisitions lawyer with Boyes Turner.
He sees an immediate future that is simultaneously tough and ripe with possibilities for acquisitive firms with cash in hand, or ready access to it.
Last year was patchy, he says, with frantic activity in the first quarter driven by well-trailed changes to the capital gains tax regime.
“It didn’t particularly matter if the transaction involved a large corporate. If there was an owner-manager in there anywhere, the pressure was on to complete ahead of the deadline,” says Tranter.
Since then, despite a reasonably fruitful summer, activity has slowed.
“There are still deals being done, but at a lower level, and those there are tend to be smaller, or completed by larger corporates that don’t depend on external funding,” he says, predicting that the situation will remain much the same until the banking crisis blows over.
Cross-border work is also holding up, as foreign firms eye the options presented by the recession and sterling’s poor performance.
“In the past few months, we have been doing work for a number of overseas purchasers, with one significant transaction involving the acquisition of a UK-headquartered business operating subsidiaries in other jurisdictions,” Tranter says.
“The Thames Valley already has a number of US-parented companies based there, and the region continues to be attractive.”
David Fawcus, a corporate finance partner with accountancy firm James Cowper, with offices throughout the Thames Valley region, says he and his team were kept busy for most of 2008 on transactions in the £2 million to £10 million bracket, but new instructions slowed in the last quarter.
The collapse of Lehman Brothers in mid-September was the last straw. Confidence crumbled, and the pipeline of prospective work – which until then had seemed robust – was difficult to convert. Cowper’s corporate team saw the year out largely progressing and completing existing deals.
Fawcus predicts a sluggish start to 2009, despite government attempts to inject capital and confidence into the banking system.
“It’s going to be a slow, uphill struggle,” he says. “In the M&A business, confidence is an important ingredient, and no-one knows when it will return.”
Despite that, deals are still being done, thanks to some good opportunities, particularly in IT technology and niche engineering sectors, and the continuing but limited flow of cash to complete them.
Transactions will continue, he argues, because there is always a supply of owner-managers who, for whatever reason – health or personal considerations – cannot or will not delay their exit strategy.
On the acquisition trail
At the same time, many cash-rich firms prefer to put their money to work in an acquisition rather than have it lying idle in the bank.
Law firm Osborne Clarke lays claim to having one of the most active corporate and banking teams in the Thames Valley. Corporate head Greg Leyshon breaks activity down into the following six key areas:
Plain vanilla M&A work
At the lower value end, a healthy level of activity continues, as corporates with cash take advantage of the opportunities open to them. Where cash is hard to come by, share-only deals can be a viable option for privately held companies.
Public company activity
New issue work is non-existent, but Leyshon says take-over activity is “reasonable” and that there is evidence of foreign buyers re-entering the market. Alongside them are some domestic mid-sized and larger corporates looking for bargains.
Involvement in larger transactions requiring bank funding is virtually non-existent, although there is activity in the £5 million to £100 million bracket, often triggered by corporates selling subsidiaries to MBO teams. In addition, PE houses are taking a more active role in the management of their portfolio businesses.
VC and development capital
Investments also provide good opportunities at the small end of the market, particularly companies in life sciences and drug development in need of cash to help
Corporate advisory work
This is picking up, as businesses seek guidance and legal advice on what they should be doing to restructure for difficult trading conditions.
Cowpers act for the banks that fund M&A transactions, and Leyshon reports that new instructions show signs of an increase over the same period in 2008.
He adds: “It’s going to be a tough year for corporates and financial institutions, and not just in the Thames Valley.
“The UK generally is going to suffer.”
Thanks partly to the allure that technology-based companies still have for acquisitive corporates, the Thames Valley retains the ability to generate more than
its fair share of deals – and the region’s boast is that its professional community is up
to the challenge.
Among the most recent was January’s acquisition of motor trade insurer Antell Insurance Associates by BJP, the Thames Valley-based commercial broker. Financial details have not been released.
Another recent transaction was the acquisition, for an undisclosed sum, of UK-headquartered International Cooling Group (ICG), which now forms part of GEA’s Refrigeration Division. GEA Group AG was advised by law firm Boyes Turner.
ICG has operations in France and Germany as well as the UK, and Boyes Turner led the transaction, co-ordinating advice from lawyers in those countries.
Osborne Clarke has also seen recent activity, being involved
in December 2008 in the £440 million sale of Axon, a SAP provider, to the Indian company HCL.
Osborne Clarke also acted for ECI Partners in its £60 million take-private of the listed pharmaceutical company Premier Research Group.
Accountant and business adviser James Cowper also remains active despite the economic gloom, reporting that it is starting the year with an early-stage transaction in the £5 million to £10 million range. No details have been given, but the companies concerned are involved in the food sector.