Covid-19 sped up the digital transformation of the economy and is helping to drive interest in M&A opportunities in the tech sector.
Since the pandemic, businesses have accelerated their digital strategies and shifted to remote working, online sales and electronic payments, which has driven buyers’ interest in the long-term growth IT story. Lockdowns, social distancing and travel restrictions may have ended in most countries, but the digital revolution is here to stay.
It is also increasingly accessible. The development of software-as-a-service and platform-as-a-service is democratising digital strategies, allowing even smaller businesses to take advantage of sophisticated analytics and machine learning solutions.
With businesses handling increasing amounts of data and learning to do more with it, the demand for IT solutions and services is expected to grow strongly.
Indeed, businesses are already earning a digital dividend from such investments. McKinsey estimates that digitisation can raise revenues and margins by as much as 7% in the broader industrial segment, which can increase EBITDA by up to 9%.
All of these themes are fuelling M&A activity in the mid-market IT sector as strategic buyers look to acquire specific technologies, patents and market position.
Across Europe, there are more than 10 interested parties per company in the IT sector, according to Dealsuite’s September 2022 M&A Monitor. In the UK & Ireland, this figure is 15.7.
In every major European market [except France], there is more interest in the IT sector than any other segment.
This level of demand for IT-sector acquisitions reflects significant cross-border action, as we previously discussed with Christophe Del Toso, Partner and Head of IT, Digital and Tech at In Extenso Finance & Transmissions.
Unsurprisingly, valuations in the mid-market IT sector remain high across Europe given the levels of interest. In the UK & Ireland, IT companies have the second-highest valuation across all sectors, with an average EBITDA multiple of 8.2 in the first half of 2022. This compares to an overall mid-market average of 5.4.
These valuations have held up despite the backdrop of war in Ukraine, rising inflation, higher interest rates and recessionary fears. M&A buyers are clearly looking beyond the current disruption and are pricing in the long-term strategic opportunity for the IT sector.
High valuations aren’t the only factor drawing sellers into the market. There is a large contingent of small engineer-led start-ups in Europe that need access to capital, scale and talent to grow to the next level, which is favouring consolidation.
As the digital revolution continues to change the face of business in the wake of the pandemic, M&A will be an important tool for capturing the growth opportunity.
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The recovery of the UK&I M&A market has continued over the
Tight macroeconomic conditions, the rising cost of financing, and continued geopolitical uncertainties
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