The IT sector has entered 2014 in robust health, both globally and in the UK.
There was a return of landmark transactions within IT (including Silver Lake's $24.9bn MBO of Dell) and in the wider technology sector (including the sale of Vodafone's stake in Verizon Wireless for $130bn).
These contributed towards a 31% increase in global technology merger and acquisition value in 2013 versus 2012. Economic growth rates in key economies are increasing and equity market volatility is decreasing, resulting in a marked improvement in corporate confidence.
The IT sector is highly attractive to both corporate and institutional investors from a M&A perspective. Whilst corporate acquisitions are based on product/geographic extension, cross-sell and consolidation opportunities, financial buyers and banks are attracted to the availability of long-term contracts, recurring revenues, business critical nature of products and services and cash generation of mid-market and larger companies in the sector.
These factors underpin high, and sometimes eye-watering, sectoral valuations.
This is reflected in Gambit Corporate Finance's analysis of UK transactions in 2013, which highlighted median enterprise value: Ebitda multiples in Q4 2013 of 13.6 and 11.5 for software and managed services transactions respectively.
Successful IT companies need to maintain a clear focus on innovation and delivery, which provides an opportunity for SMEs to gain a competitive advantage over larger corporates in niche markets and new technology segments.
Many lucrative sub-sectors within software and managed services remain highly fragmented, offering a signifi-cant opportunity for companies to raise growth capital and implement a buyand-build strategy to consolidate these sub-sectors and develop a market- leading position.
There are a number of M&A hot spots within the IT sector. Within software, cloud computing, software-as-a-service (SaaS) and big data analytics are anticipated to remain key areas of focus, and therefore drive premium valuations, for the foreseeable future.
The managed IT services sub-sector has undergone large scale consolidation in recent years from both corporates and private equity-backed buyand-build platforms.
This trend is anticipated to continue, as extension to both service offering and geographic footprint are sought, whilst the incremental adoption of cloud services by larger corporates will increase demand for managed services capacity.
The ICT sector contributed Pounds 2bn of gross value added (GVA) to the Welsh economy in 2012, reflecting a relatively small but growing number of indigenous and multinational IT growth companies which operate on a pan-UK or global basis.
The sector has the second highest level of GVA per hour worked of any sector in Wales, and the Welsh Government is rightly focused on the development of the ICT sector.
This is reflected by the preliminary discussions under way to create a Pounds 100m ICT private sector fund on a similar basis to the Wales Life Sciences Investment Fund.
There are a number of unheralded IT sector success stories in Wales. eLINIA, a Cardiff-based managed services company acquired by Adapt Group in 2012, has significantly increased its headcount in Wales since being acquired, as specialist technical roles have been transferred from London to Cardiff.
QPC, a Finance Wales-backed provider of data analytics and customer experience optimisation software to global call centres has offices on four continents with a head office in North Wales.
Also, the area covering South Wales, Cheltenham and Gloucester has the highest concentration of cyber security experts in the UK, which is likely to increase further as additional related companies are drawn to the area based on the skills and expertise available, thereby creating a sectoral cluster.
Gambit Corporate Finance has extensive experience of advising companies in the IT sector, with a specialist IT sector advisory team.
We forecast that the improvement in corporate confidence, coupled with unprecedented levels of cash held on the balance sheets of technology corporates and uninvested funds held by private equity firms, will underpin a continued improvement in M&A activity within the IT sector in 2014.