Deal activity rising
Corporates ready to swoop on tech firms as M&A surges
Technology firms are in the sights of big firms
Scotland’s thriving technology scene is likely to become a target for big cash-rich corporates on the prowl for acquisition candidates.
Large businesses are seeking operational bolt-ons and have built up mountains of cash during the three years of Brexit uncertainty.
PwC says it expects to see deal activity unleashed this year with an increase in sales of owner-managed businesses, while stand-out firms across all sectors are likely to be more attractive than a single dominant sector.
“While technology firms will continue to garner suitors from all asset classes, they could also attract the attention of corporations seeking operational bolt-ons,” it says in a new report.
PwC is boosting its own deals team in Scotland in anticipation of a surge in M&A activity.
Deal volumes fell as the UK wrestled with the political and economic uncertainty that followed the Brexit vote in June 2016, but the large Conservative majority returned in December’s General Election has boosted confidence in the market as it reduces uncertainty.
These findings were reflected in PwC’s recently published CEO Survey, which found that 90% of UK CEOs are confident to some degree about the prospect of their business growing revenue over the next three years.
The survey also revealed that the availability of key skills is the number two business concern for CEOs in the UK, behind only cyber threats, which aligns with the prospect of technology-enabled bolt-ons.
Among the deals PwC worked on in 2019 were the acquisition of SSE‘s household energy business by Ovo Energy, the acquisition of Alexander Dennis by NFI, the acquisition of Wireless Infrastructure Group by Brookfield Infrastructure and the LDC investment obtained by Commsworld.
The firm also worked on the disposal of Howden to KPS Capital, on the disposal by SSE of stakes in the Stronelairg and Dunmaglass wind farms to Greencoat UK Wind, on the sale of Terra Nova Technologies by Wood Group to Murray & Roberts, the sale of Dragon LNG to Ancala Infrastructure and the i newspaper by JPI Media to DMGT.
There is a huge amount of capital out there. The challenge is that there is enough money, but not enough strong opportunities– Jon Shelley, PwC
Deals of this nature are expected to increase in 2020, said Jon Shelley, head of corporate finance at PwC Scotland.
“There is a huge amount of capital out there. The challenge is that there is enough money, but not enough strong opportunities,” he said.
“Private Equity funds are having to be far more focused on how to create value, as they are having to pay top dollar for good businesses and are subsequently doing more to make the returns work – that means that international growth strategies, roll-outs, bolt-ons and transformational M&A, for example, are increasingly more important on top of a solid organic plan.”
One of the main trends expected in 2020 is how fast-paced changes in societal attitudes will impact the investment market.
Mr Shelley added: “Change is coming at us quicker than ever. Boards have got to be cognisant of new themes and trends and how they impact their business and then be very agile to adapt to them. Some people will be caught out, some will prosper – look now at the power of voice for energy transition and veganism, the social change regarding both are just massive.
“For buyers and investors, it is not just a case of thinking about what a business’ position is now, but also what it will look like four to five years from now.
I don’t think anyone can predict with robustness what any one business’ market is going to look like in three plus years– Jon Shelley, PwC
“In a world where trends are moving so quickly that is getting increasingly tricky to do. I don’t think anyone can predict with robustness what any one business’ market is going to look like in three plus years, so the game now is much more about how you develop a business and strategy that can adapt to whatever comes at you..
Mr Shelley said this includes backing management teams that have a proven ability to successfully adapt strategy while strategic plans need to be shorter term and need to be revisited more frequently.
He added: “Where once a five-year strategy was written and implemented and then the cycle repeated, now it’s more like a rolling three-year strategy that needs to be revisited every three months – this takes a new kind of discipline.”
In addition, activity will be buoyed by businesses who have been sitting on plans now more likely to move forward with them. This could lead to the possibility of an increase in the sale of owner-managed businesses, with sellers now able to make decisions from a position of greater clarity.
Another trend which could emerge in 2020 is corporates which are looking for a technology angle to prosper in their core business.
Jason Morris, head of deals at PwC Scotland commented: “The fear now is that if you don’t have a digital capability and don’t go out and get one soon you might find your core business is not the core business you thought it was. The best tech start-ups and operators are highly attractive to incoming corporates.”
Mr Morris predicted a continuing trend of “stars” in individual sectors rather than one whole sector being lauded. This has led to the best performers in individual sectors attracting high multiplies and valuations because they are so sought after.
He added: “The better performers in each sector are thriving. This is beneficial because you want to see success rewarded and innovation encouraged.
The best tech start-ups and operators are highly attractive to incoming corporates– Jason Morris, PwC
“These stars will prosper and that will encourage more entrepreneurs to do something innovative and take some risk. It’s probably the best time to now believe that you can take a little risk. Whatever your business it’s a good time to invest.”
Infrastructure, construction, energy and communications are sectors expected to see activity this year – as illustrated by the investment made by Lloyds Banking Group’s LDC private equity arm in telecoms firm Commsworld in December 2019.
The energy sector is also expected to see increased activity as the North Sea industry continues to work through energy transition.
Mr Shelley commented: “There has been a lot of activity in the upstream sector but not in services so that may well change. Sustainability is also manifesting itself in a few ways.
“There are an increasing number of pension funds and LP investors that will only invest in funds that will only invest in certain things, and environmental factors are becoming more prevalent here.”