When the chips are down

It may not have California’s silicon sunshine, but the Thames Valley remains the UK’s hub for technology companies.  

It may not have California’s silicon sunshine, but the Thames Valley remains the UK’s hub for technology companies.  

It may not have California’s silicon sunshine, but the Thames Valley remains the UK’s hub for technology companies. 

For Nick Kingsbury, non-executive director of Australian software company Objective Corporation, Maidenhead made sense as a base for European operations: ‘There are a lot of IT players in the Thames Valley, such as Microsoft and Oracle. It’s good for working with partners and for hiring staff.’

The company, which set up its UK office in 2002, specialises in software services for the public sector, and acquired London-based Limehouse last year for £3.2 million.

According to Kingsbury, the transaction was completed within four months: ‘Any type of acquisition is a bit of a rollercoaster. The seller, Charles Welsh, had built up the business and it’s always emotional, but in the end, we managed to get the deal done.’

As a foreign-owned business buying a UK IT company, Objective’s acquisition of Limehouse can be regarded as a typical Thames Valley deal. Geert Struyven, partner at accountancy firm Horwath Clark Whitehill, says there has traditionally been a high level of foreign investment in the area because of the concentration of technology companies.

However, foreign investment in the area is under threat: ‘I haven’t seen as many overseas buyers as anticipated. I expected there to be more companies looking for bargains because of the [low] value of the pound. Instead, I’ve seen a lot more divestments,’ says Struyven.

Deal blow

In the grip of a global recession, multi-national businesses have felt the strain. Kingsbury says: ‘Many US players have cut back. When there’s trouble, it’s always easier to cut jobs in other countries rather than back home.’

As you might expect, the software and IT sector proved to be one of the most resilient areas for M&A in the Thames Valley region, accounting for 14 per cent of deals (seven) in 2009, according to research by Zephyr. The total number of deals across all sectors in the region fell by 42 per cent to 49 from the previous year.
Unsurprisingly, finance for deals remains a sticking point.

Nick Rogers, partner at professional services firm James Cowper, says: ‘We need banks to stop obsessing about profits and to start taking risks by lending again. They are very inconsistent in their approach. There are some capable businesses that would not have had a problem finding finance 18 months ago, and they are now being left to fend for themselves.’

Struyven adds: ‘I haven’t been involved in a bank-led transaction for a long time. There is still some appetite for asset-based lending (ABL) facilities, but banks have abandoned unsecured lending for companies with EBIT [earnings before interest and tax] below £2 million.’

As a hub for technology companies, Struyven says that the Thames Valley has long attracted interest from venture capital (VC) investors. But as the credit crunch has taken hold, there have been some changes. ‘It’s a bit more difficult for the VC market now. There’s less appetite for early-stage investments; they are now backing proven technologies in proven markets.’

If an appetite for deals does exist, it’s in environmental businesses. ‘There are strong legislative drivers which force people to change behaviour. Houses need to be much more energy efficient than in the past, so there are opportunities for new players in the market.’

First timers

IT infrastructure business Teneo was founded just before the ‘tech wreck’ of the dotcom crash in 2001. The company attracted early-stage investment from VC firm Contech Consultants, which realised its investment in a management buy-out led by CEO Piers Carey in 2004.
Last year the Reading-based company made its first acquisition, IT security company iSimile. Carey says: ‘The company offers products that are fundamental to businesses. We wanted to increase our product range and we didn’t have the skill set in-house.’

Teneo used the recession to its advantage. Carey says: ‘We had our first meeting in November 2008 and the preliminary discussions went nowhere. We weren’t close on valuations.’

After a difficult trading period between late 2008 and mid-2009, iSimile had a change of heart. ‘The recession was really underway and they found it difficult. They realised they needed to accept a lower price,’ says Carey.

Cool head

As a first acquisition, Teneo had plenty to learn: ‘It’s important not to get sucked into the pressure of events. We could have done a deal six months earlier, but it wasn’t right for the business. We were prepared to walk away, although whether that was luck or judgement, I’m not sure.’

With the country coming out of recession, fingers are being crossed that deal flow will pick up in the region.
 Emma Gibson, a partner at law firm Shoosmiths, observes: ‘Corporates were holding on to cash because they weren’t sure if they would need it.

‘As conditions improve, a lot of companies are looking to make acquisitions and private equity firms are beginning to come back to the market.’


Signs of change

Charles Whelan, managing partner at HW Corporate Finance, discusses deal flow in the Valley

M&A activity has reduced significantly across the country and the Thames Valley is no exception. As a result of the lack of deals, the corporate advisory community in the region has shrunk by at least 20 per cent.

The current funding environment is what it was like in the 1990s. There’s far less leverage and much more reliance on vendor support. Private equity is at an all-time low and many of the larger houses didn’t  complete a single deal last year.

In addition, few if any of the banks are interested in lending to smaller businesses on a cash flow basis. Asset-based lending (ABL) facilities are still available, but more often than not it’s not possible to fund a deal with just ABL – a company’s debtor book and assets simply won’t stretch that far. ABL is useful as part of a mix, but it’s been a long time since I’ve seen ABL used on its own to finance a deal.

Although the number of M&A deals is still low, there has been a pick-up in activity since mid-2009. There’s more confidence and vendors are realistic about prices. Businesses have saved money and are increasingly ready to start spending again. People realise it’s not going to be Armageddon anymore.

 Charles Whelan
 Managing Partner
 HW Corporate
 Finance LLP
 13-21 High Street
 Guildford GU1 3DG

To email Charles, click here

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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