Technology Barometer

The Taylor Wessing
Technology Barometer
Tracking the temperature of the
UK technology sector
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Taylor Wessing View......................................................3
Share prices and valuation.........................................4
Trading & Confidence..............................................7
Sub-sector trends................................................... 8
M&A and fundraising.............................................10
About Taylor Wessing............................................... 12
All share prices quoted in this document are as at the close of business on 31 December 2014
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Taylor Wessing view
Your # guide to the top takeaways from
this quarter’s Technology Barometer:
The Megabuyte Taylor Wessing All-Share saw an increase in
Corporate activity and an overall increase in performance at
the end of 2014.
Outlook overall positive outlook, with 89% of respondents
feeling confident about the sector.
Equity markets were impacted upon by the reduction of oil
Increase in Private Equity activity in Q4 2014, especially in
public to private transactions.
7 Private Equity deals, valued at £3.2bn.
Decrease in activity in Capital Markets space.
8 institutional placings in Q4 2014. IPO of Gamma
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Corporate activity lifts
MBTW All-Share
Following two periods in decline, the Megabuyte Taylor
Wessing (MBTW) All-Share enjoyed a strong end to 2014, albeit
strengthened by corporate activity. As a result, the MBTW AllShare ended 2014 8% higher than where it started, significantly
outperforming the FTSE All-Share, which has declined 2% over
the last 12 months.
In a period where equity markets were, in general, impacted
by the slump in the oil price, the MBTW All-Share managed to
return 9% in the final quarter of 2014. The strong end to the
year more than offset a 3% decline in the previous quarter and
outperformed the FTSE All-Share, which increased by just
1% over the same period. The outperformance was, however,
augmented by a number of take-private bids announced over
the last three months, including those for Allocate Software,
Advanced Computer Software and Incadea in the Software
sector and Daisy Group in ICT Services.
The Software-related deals helped drive the sector’s index up by
13% in the fourth quarter, which compares to a 6% return for the
ICT Services sector. Meanwhile, on an annual basis, the sectors
have returned 14% and 3% respectively.
Looking in greater detail at the Software sector, Accounting &
Enterprise Software was by far the best performing peer group
in fourth quarter, returning 25%, driven by the take-private
bids for Allocate Software, Advanced Computer Software and
Incadea, at respective 35%, 17% and 60% premiums to the
prior day closing prices. Specialist Applications was the only
group to finish the quarter lower, down 1%, as AVEVA continued
to struggle to rekindle investor affection after its surprise
September profit warning.
The ICT Services sector was driven by an 11% increase for the
Mobile Wireless & Satellite peer group, as a result of strong
performances by Avanti (+45%), eServGlobal (+22%) and
Bango (+21%). Meanwhile, Data Centre & Hosting Services
increased roughly in line with the sector, up 5%. Other peer
group performances were more muted, but it is worth noting a
handful of Telecoms & Networks businesses, which all returned
in excess of 20%, including Redcentric (+20%), Adept Telecom
(+21%) and Maintel (+30%).
3 months
MBTW All-Share
ICT Services
Chart 1:
Index Series –
Q4 2014
Source: Megabuyte, Capital IQ
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MBTW All-Share
ICT Services
Chart 2:
Index Series –
since inception
Dec-09 Jun-10
Source: Megabuyte, Capital IQ
Valuations rebound from lows
After falling to a 12 month low of 17.2x in October, the MBTW
All-Share’s PE multiple started to pick up in the fourth quarter,
to finish 2014 at 19.4x, albeit still 8% lower than where it started
the year. On an EV/EBITDA basis, having eased back from the
January high of 12.6x throughout the first, second and third
quarters, the MBTW All-Share EV/EBITDA multiple ticked up
3% in the final three months of the year to 10.6x.
The Software and ICT Services sectors’ PE multiples followed
a similar path through the fourth quarter, ending the period
up 6% to 18.8x and 7% to 20.0x respectively, with the ICT
Services premium relative to Software edging up to 6%.
By contrast, on an EV/EBITDA basis, the Software sector’s
multiple improved by 5% to 11.5x, whilst ICT Services remained
relatively unchanged from the previous quarter at 9.9x. As a
result, on this metric, the Software sector is now priced at a
17% premium to ICT Services.
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Forward looking PE ratio
Chart 3:
MBTW All-Share
ICT Services
Dec-09 Jun-10 Dec-10 Jun-11
Dec-12 Jun-13
Dec-13 Jun-14
Source: Megabuyte, Capital IQ
Whilst changes to PE valuations may have been similar for
the sectors in the fourth quarter, there were some significant
differences at the peer group level. Within Software, the PE
multiple attached to the Accounting & Enterprise Software
peer group widened by 17% to 19.3x, driven by the take-private
bids for Allocate Software, Advanced Computer Software and
Incadea. Meanwhile, Media & Telecoms Software also enjoyed
a significant uplift from 16.6x to 20.7x. Banking & Insurance
Software remained the most highly valued software group, up
5% to 22.6x, whilst Security & Infrastructure Software and
Specialist Applications are now the most lowly valued, down
16% to 14.0x and up just 2% to 18.4x respectively.
Aside from a 13% jump in the PE multiple for the Mobile,
Wireless & Satellite peer group to 26.7x, changes in valuation in
the ICT Services sector were much more subtle. Data Centre
& Hosting Services enjoyed a 7% uplift to 19.0x, but Consulting
& Systems Integration and Telecoms & Networks were up
by just 3% and 2% to 19.5x and 17.8x respectively, whilst the
Infrastructure Services PE multiple contracted by 3% to 11.8x.
Table 1: Peer Group valuations
Peer Group
Weighted average current year valuation
PE ratio
Accounting & Enterprise Software 3.5x
Banking & Insurance software
Media & Telecoms software
Security & Infrastructure Software3.9x
Specialist Applications
All Software
Consulting & Systems Integration 2.7x
Datacentre Hosting Services
Infrastructure Services
Mobile, Wireless & Satellite
Telecoms & Networks
All ICT Services
Megabuyte All Share
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Trading and confidence
A slightly more cautious outlook
Chart 4: CXO change in confidence in Q4 2014
Boardrooms on the whole remained confident in the final
quarter of 2014 although there were some signs of caution from
a handful of the survey’s respondents, with 7% of CXO feeling
less confident about their company’s prospects than three
months ago. However, for the majority – 53% of respondents
– confidence levels remained unchanged over the last three
months, whilst 40% highlighted an improved sentiment.
No change
Less confident
Source: Megabuyte
Chart 5: CXO level of confidence over next 12 months
Very positive
Very Cautious
Source: Megabuyte
With the marginal increase in cautious responses, the total
proportion of CXOs feeling either ‘very positive’ or ‘positive’ for
their company’s prospects over the next 12 months reduced
by 4.6 percentage points, albeit still representing a significant
majority at 89%. Moreover, the proportion feeling ‘very
positive’ actually increased from 23% to 30%. At the other end
of the spectrum, while the number of ‘very cautious’ responses
remained at zero, ‘cautious’ responses increased slightly to 3%
of the total. Meanwhile, the proportion of CXO’s that view their
prospects as ‘neutral’ over the next 12 months increased from
7% to 10%.
In addition to the figures showing a slightly more mixed
sentiment, some of this quarter’s qualitative responses
were certainly more cautious than others. Those of more
positive sentiments highlighted an overall improving business
environment, with companies committing more to software
projects. Meanwhile, others noted that an increased level of
consolidation in certain sectors is creating greater opportunities
for the smaller players. In contrast to the optimism expressed
by some CXO’s, others indicated that the trading environment
in certain areas of Europe remained weak.
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Accounting & Enterprise Software
During the fourth quarter we saw another European
enterprise software vendor move into private hands,
as US private equity outfit Vista Equity Partners
acquired Advanced Computer Software, valuing
the equity at £725m. The transaction follows similar
deals for Dutch businesses UNIT4 and Exact, leaving
just Sage and SAP as the two significant European
enterprise software businesses that remain publicly
listed. While each private equity-backed business is
tackling the SaaS transition in a different way, all have
been clear that the reason for their respective takeprivate deals has been to provide more flexibility in
how they make the transition. And with the US SaaS
vendors such as NetSuite and Workday now making
a concerted push into Europe, the pressure is on for
the European incumbents to take that step.
Banking & Insurance Software
We continue to see a mix of trading conditions in the
Banking & Insurance Software peer group. IT spend
within retail banks continues to be under pressure,
as evidenced by a serious profit warning from
Temenos in early January. Conversely, technology
spend within the investment banking segment has
been robust, although it remains to be seen if weaker
capital markets will impact investment levels in 2015.
The most active area of this peer group, both from
a trading and corporate perspective remains the
insurance software sector. Although there were
fewer insurance software deals in the fourth quarter
following a very active third quarter, we expect at least
one major deal to complete before Easter. Meanwhile,
the trading environment continues to be buoyed by
aggregator-led disruption in the insurance supply chain,
overlaid with ongoing regulatory change.
Specialist Applications
In this group of vertical software solutions, we are
starting to see the impact of the falling oil price on
vendors that are exposed to the oil & gas industry. First
and perhaps most significant was AVEVA’s first half
profit warning, which was related to weaker demand
in the Oil & Gas industry, amongst other factors.
Since then, Swedish provider of ERP software to a
number of verticals, including oil & gas, IFS has warned
that licence revenues for the fourth quarter will be
below expectations, whilst full year results for Idox’s
Engineering Information Management division were
also held back by a fall in activity in the oil & gas sector.
Interestingly, against this challenging backdrop, AVEVA
recently completed the acquisition of 8over8, a provider
of contract management software to the oil & gas,
mining and other infrastructure industries, for £26.9m.
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Security & infrastructure Software
The Security & Infrastructure Software peer
group on the whole performed well in the quarter,
with vendors continuing to take advantage of
increasing adoption of newer IT infrastructures and
the security implications of doing so. Of particular
note was the news that Symantec is to split its
Security and Information Management businesses
into two separate publicly traded entities, as well
as press reports that AVG Technologies may be
in line for a take-private. In contrast, there has
been IPO activity in the Infrastructure Software
market as New Relic and Hortonworks both
successfully debuted during the quarter, while UKheadquartered Sophos was recently reported to
be eyeing a LSE IPO. Also in the UK, both Corero
Network Security and Digital Barriers had to seek
additional funding from the capital markets to
finance short-term cash requirements.
Telecoms & Networks
Events in recent months in UK telecoms are likely
to kickstart significant M&A in both consumer
and business markets. BT’s planned move into
mobile services has been the trigger for consumerfocused M&A as all players in the market consider
their own options for a converged fixed/mobile/
video future. With BT now pursuing the acquisition
of EE, having also been offered Telefonica O2, it
seems likely that there will be at least one other
major deal involving two or more of Vodafone,
Telefonica O2, Virgin Media, Sky, 3UK and Talk Talk.
Meanwhile, the take-private of Daisy and a change
of backer for XLN are two events suggesting at
least a continuation and perhaps an acceleration of
already high levels of M&A among business comms
providers, driven by the search for scale and
product diversification into new growth areas.
Media & Telecoms Software
After a period of consolidation in the end market,
momentum looks to be once again improving for
software vendors exposed to developments in
mobile technology, namely 4G. At the forefront of
this trend are Anite and Spirent. In October, the
latter warned that trading conditions had softened
in the third quarter, particularly in the US and
China, due to merger activity and delays in capital
expenditure in the end market. However, just three
months later, Spirent indicated that order intake
in the fourth quarter had exceeded the Board’s
expectations. In a similar fashion, after a slow start
to the year, interim results from Anite indicated
improving momentum in group’s Handset Testing
and Network Testing businesses.
Consulting & Systems Integration
The overarching competitive dynamics in the
European IT services market remain unchanged
with the US and Indian players taking share from
the European incumbents. We continue to believe
that merging with each other is not the solution
to the problem but, strategic moves in the US by
the European players may help to level the playing
field over time. Consequently, we were particularly
interested to note the acquisition by Atos of Xerox’s
US-based IT outsourcing operations in the fourth
quarter. Meanwhile, the trading performance of many
of the European mid-sized players, which are often
national champions and/or have strong vertic5al
market positioning, is generally much stronger. And
this dynamic has not clearly not been lost on the
private equity community as Apax acquired Nordic
champion EVRY in a public-to-private transaction in
the fourth quarter.
Data Centre & Hosting services
Fundamentals remain strong across the Data Centre
& Hosting Services peer group, driven by the move
to Cloud computing and companies outsourcing
their IT requirements. However, the sector is also
very dynamic, with service providers occasionally
being blindsided by changing corporate demands,
particularly the move to a hybrid Cloud model
combining private and public Cloud computing;
Iomart is a good recent example. M&A continues
unabated, with Host Europe (which attempted to buy
Iomart in the summer of 2014) recently snapping up
Intergenia in Germany and Onyx buying Knowledge
IT. Meanwhile, we expect more private equity exits
from the class of 2010/11 (after Pulsant last year),
potentially including Six Degrees and Adapt in 2015
and Onyx, Attenda and UK2 in 2016.
Mobile Services
Whilst mobile network operators and handset
manufacturers tend to be large, generally profitable
and cash generative beasts, the multitude of smaller
companies selling either to MNOs or to mobile users
face on-going challenges, navigating slow moving
MNOs, rapid changes in technology and market
demands, and so on. Just in the last quarter or so,
there have been revenue downgrades or misses for
public companies as diverse as eServGlobal (mobile
money), Telit (m2m) and Mobile Tornado (push to talk)
and disappointing private company accounts from, for
example, Truphone (low cost calling) and ip.access
(small cells). In corporate activity, Monitise (mobile
money), eServGlobal and Truphone raised funding,
whilst M&A activity included recently IPOd IMImobile
and Esendex.
Infrastructure Services
Following on from the negative news of Trustmarque’s
problems in the third quarter, the corporate news in
the Infrastructure Services peer group was altogether
more encouraging in the fourth quarter as Core Capital
sold its 35% stake in Kelway to CDW for a double digit
multiple. From a trading perspective, we continue to
see a wide range of growth performances in this sector
as strong sales execution and a service-led approach
differentiate the winners from the losers. Meanwhile, a
rapid increase in demand for Cloud solutions, especially
those that utilise multiple layers of Cloud infrastructure
(hybrid Cloud) is benefitting those vendors with a
strong service offering in this area.
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M&A and fundraising
Last minute deals
The fourth quarter marked a standout period for private equity
activity, with the seven deals registered under our coverage
collectively valued at £3.2bn. Significantly, a resurgence of
public-to-private transactions was a key feature of the period.
By contrast, the capital markets were in a quieter mood
leading up to the New Year, whilst M&A activity was helped by
a busy December.
The largest M&A deal was completed by Host Europe, through
its acquisition of Intergenia from Oakley for €210m (£165m), at
a valuation of just over 10x run rate EBITDA. Meanwhile, there
were other Data Centre & Hosting related deals for Iomart,
Onyx and SCC, with the acquisitions of ServerSpace for up to
£4.25m, Knowledge IT for £6.7m and SSE Enterprise Telecoms’
Fareham data centre for £12m respectively.
From a pan-European perspective, Idox completed its first
acquisition for 18 months in the form of German compliance
software player Digital Spirit. Alongside this, Datatec’s ICT
Services subsidiary Logicalis completed the significant strategic
acquisition of Inforsacom, to build a critical mass in the German
region, and, in the opposite direction, privately owned panEuropean network operator Interoute acquired Vtesse.
The Asia Pacific market also attracted corporate interest,
with COLT spending €130m on sister company KVH, or 5.7x
‘underlying’ EBITDA. In addition, low-cost broadband provider
New Call Telecom spent a rumoured $175m for a 70% stake
in emerging markets-focused messaging provider Nimbuzz,
following up this deal with the purchase of UK-based wholesale
voice carrier Wavecrest.
The largest deal in the Software sector saw US-listed Dealertrack
Technologies make a formal offer for Incadea at 190p per share,
valuing the equity at £122m, equivalent to a very healthy 20x
current year EV/EBITDA. Meanwhile, the UK design/engineering
software space continued to attract interest from international
buyers with NASDAQ-listed Trimble acquiring UK-based Amtech.
Elsewhere, investment banking software provider First Derivatives
acquired a further 46% stake in US-based Kx Systems, whilst
information management software provider Ideagen doubled-up
with the purchase of Gael and Anite acquired US-based Xceed
Technologies. Last, but certainly not least, Servelec acquired
Corelogic for £23.5m, in order to expand into the complementary
social care market.
A busy end to 2014 for private equity
A total of seven private equity deals were completed in the fourth
quarter, valued at an aggregate £3.2bn; the highest level since at
least the end of 2009. We believe that the primary forces behind
the increased level of activity include buoyant debt markets and
the easing of quoted company valuations.
Table 2: Selected UK M&A deals
Vtesse Networks
Xceed Technologies
First Derivatives
Kx Systems
£36m (47%)
New Call Telecom
£108.5m (70%)
£84m (35%)
COLT Group
Innovation Group
Servelec Group
Dealertrack Technologies
Host Europe
Source: Megabuyte, Company announcements NB: *Megabuyte Estimate
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Within the fourth quarter there were three public to private
transactions, with Allocate Software, Daisy and Advanced
Computer Software agreeing offers from HgCapital, the Riley/
Penta/Toscafund consortium and Vista Equity Partners
respectively. These deals were valued at a total of £1.5bn, with
Vista’s buyout of Advanced Computer Software, struck at an
enterprise value of £761m (15x current year EV/EBITDA), the
largest take-private under our coverage since Vista took Misys off
the public markets in June 2012 for £1.3bn.
Aside from the public-to-private transactions, The Carlyle Group,
Euromoney and private investors funded the estimated $700m
buyout of Dealogic Holdings, little more than three years after
it was taken off AIM for just under $250m. Meanwhile, in the
telecoms space, there was a change in owners for provider of
telecoms services to small businesses XLN, where Blackstone’s
GSO Capital Partners backed a secondary buyout from ECI for a
reported £140-150m, or about 8x trailing EBITDA.
Cinven also had a busy end to 2014, buying Northgate’s Public
Services unit from KKR for an estimated £380m, or 9x trailing
EV/EBITDA. The deal represents the second exit for KKR of the
Northgate group of companies following the sale of Northgate
Managed Services to Capita in early 2013, and leaves KKR with
only the underperforming HR software and services division
Northgate Arinso. Rounding off the quarter’s activity, CVC Capital
Partners purchased an 80% stake in Sky Bet from Sky (formerly
BSkyB), for £600m in cash upon completion with a further
deferred and contingent consideration up to £120m.
Limited capital market activity
There were a total of eight institutional placings completed
in the fourth quarter, including the IPO of Gamma
Communications, which successfully placed 50% of its shares
to institutions, at a market capitalisation of £162m. However, the
company did not raise any new money, given a healthy balance
sheet and good cash generation. The main aim of the IPO was
to raise its profile.
Of the follow-on placings completed, Ideagen’s £17.5m
fundraise was of particular note. The funds raised were used to
finance the majority of the £18m acquisition of one its closest
peers, Gael. The deal, completed at 7.8x EV/EBITDA, represents
one of the group’s most significant acquisitions to date and
will approximately double Ideagen’s revenue base to just under
£20m. Elsewhere, security-related vendors Corero Network
Security and Digital Barriers had to seek additional funding from
the capital markets to finance short-term cash requirements.
Table 3: Recent Private Equity deals
XLN Telecom
Deal type
Allocate Software
Daisy Group
Chain Bidco
Dealogic Holdings
Advanced Computer
Sky Bet
Northgate Public
Vista Equity
CVC Capital
Source: Megabuyte, Company announcements NB: *Megabuyte Estimate
Table 4: Recent Capital Markets Transactions
Mkt cap
@ issue price
Deal type
Follow-on public
Follow-on public
Digital Barriers £31.3m
eg solutions
Source: Megabuyte, company announcements
Follow-on public
Follow-on public
Follow-on public
Follow-on public
Follow-on public
Follow-on public
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About Taylor Wessing
Key Contacts
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Partner, Head of Corporate Finance
+44 (0)20 7300 4678
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Technology Group
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Technology Group
+44 (0)20 7300 4839
[email protected]
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+44 (0)20 7300 4986
[email protected]
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Partner, Venture Capital
+44 (0)1223 446425
[email protected]
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