This brief blog post sets out my thoughts on what we are likely to see in the Technology Sector for 2011. This is a culmination of my digesting a wide range of sources and considering the impact of the political and economic environment that we are challenged by today. I am broadly optimistic about 2011 but believe that more than ever quality is the key and companies need to be very focused and strategic in their decisions and dealings.
Mobile
The recent fantastic results from Apple combined with the 100 plus tablet devices on show at CES in Las Vegas are confirmation that this year is all about Mobile. It is estimated that more than two thirds of phones in the UK are now smart phones and although the networks sometimes struggle to keep up, demand for applications continues to build.
For Corporates operating in this space I expect to see a significant number of acquisitions in six core strategic areas
- Advertising
- Payments
- Messaging
- Gaming
- Content
- Application Delivery
The opportunity to reach customers (B2B or B2C) through their mobile device is becoming a key marketing and sales channel and technology companies who adopt the mobile technology, particularly when integrated with complex social media strategies will be able to create market leading solutions for their customers.
The launch of the App Store as a separate entity is another key trend indicator.
US Cross Border Deals
Despite a relatively weak dollar (£1=£1.60 as I write), US companies are increasingly meeting the globalisation challenge by seeking overseas acquisitions. In the UK I see this more as a market entry and customer acquisition led strategy and therefore do not look for mega deals. This is particularly the case as there a relatively few $1 billion plus corporations left in the UK technology space. The common language and relatively benign culture in the UK makes this the first stop for US buyers looking to find deals in Europe. (See my previous blog about US acquirors coming into the UK).
The mega deal market has dynamics of its own – the consolidation players are now global and the private equity acquirors are often acting with industry players as a risk diversification strategy.
While the capital markets trade at reasonable valuations and corporates consolidate their strategies non-core assets are also a potential source of deals, not just for US buyers but a significant area for them to look nonetheless.
Sectors
As ever some are hot and some are not. To specifically look at three major sectors.
The squeeze on the UK public finances means that a different approach to public sector deals will be required. The selling point has now got to be around a fast ROI, cost savings and structuring deals as a service rather than a capital cost. Outsourcing deals have been doing this for sometime but have often involved a significant up front SI and infrastructure investment project to get them going. The absence of capital means that technology vendors will need to be more creative and imaginative in their proposals.
Healthcare is also facing a squeeze but like the public sector needs to save money in order to become more efficient and deliver more front line services. The complexity of the NHS and private healthcare when combined with the complex ecosystem of suppliers and support services means I belive this will continue to be an interesting market for technology vendors and M&A will continue.
Financial Services have bounced back from the troubled times of 2008 and 2009 but still face considerable regulatory and risk management pressures. The combination of complexity, regulation and a dependence on high tech means to my mind that solution sales will continue to be strong and software and service vendors will remain attractive M&A targets.
SAAS and Cloud Computing
Thin Client structures have been around a long time but the latest evolution of these to hosting “in the Cloud” and offered on a software as a service basis (also applicable to public sector vendors) is finally beginning to achieve traction.
Microsoft, Google and other major companies have been investing vast sums in server farms for several years making solutions offered in the public cloud increasingly attractive, certainly to the B2C market. For the B2B sector, where virtualisation is a virtue but security is a necessity, outsourced Cloud and SAAS solutions or private cloud solutions in owned data centres are now beginning to gain traction.
From an M&A perspective, service companies who can implement cloud solutions will be attractive, security and virtualisation skills will also be important. As there is currently a shortage of data centre resources, deals in this infrastructure area are likely to command significant scarcity premia.
Private Equity
2010 showed that the mega deals and global industry consolidation are back but mainly led by cash rich corporates and not the highly leveraged deals which were prevalent in 2007. I have seen small deals really struggle for the past two years due to the lack of acquisition and leveraged finance from the banks. Indeed, I believe that this risk adverse approach from the banks will continue in 2011 and that mid market private equity firms will have to accept lower leverage and lower return projections to get deals done. This means of course that there will be greater pressure on management teams to perform, to make their businesses more efficient and that bolt-on acquisitions and buy and build strategies will be important to earning acceptable deal returns.
Private Equity buyers have long stressed the importance of recurring revenues, the defensibility of IPR, the importance of quality management teams. I think this will continue to be the case in 2011 and therefore project depended SI and Consulting firms are more likely to appeal to trade buyers than Private Equity.
Small and Mid Cap Companies
Vendors expectations of price have been out of kilter for a couple of years making deal closure in the small and mid cap sector relatively difficult. In 2011 I think this gap will be seen to have closed and I think there will be more (predominantly trade) acquisitions in the mid market, including more public to private transactions.
This area is a fertile hunting ground as often the quality of the companies is good, earnings are solid but they lack the value premium on the scale axis and for a large trade buyer will look like good value. Expect to see more deals, particularly cross border deals as overseas (US and other) buyers take advantage of our benign business and legal environment.
I would be interested to hear your views. As ever, if you like this please RT