M&A in the UK IT services sector: Q1 2024

28 May 2024 / Insight posted in Report

Steady start to the new year

 

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156
deals completed

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+11%
Moore Kingston Smith
IT services index

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71%
deals backed by PE

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Our view of the market

As we reported in our annual review, 2023 was a good year for M&A within the UK IT services sector. After a slight Q2 blip, Q3 and Q4 2023 delivered strong figures for deal volume, and we said we expected this to continue into 2024. Q1 2024 does indeed show a continuation of that trend, with a total of 156 deals completed – exactly the same number we recorded in Q4 2023. Total deal volume is supported by a strong quarter for software development companies, offset by a 12% decrease in transactions in the outsourcing and distribution space.

The percentage of transactions involving private equity has increased significantly this quarter and is now running at the highest level we have seen in the past two years. In addition, most quoted holding companies saw their share prices increase in Q1, enabling them to do deals with more highly valued paper. If we add interest rate cuts later in the year into the mix, that will allow for more leveraged PE transactions, and for highly-rated publicly quoted companies to compete with PE, increasing deal activity.

Nick Thompson, Partner, comments: “We are delighted to see a robust level of M&A activity, and particularly to see a resurgence of PE interest in the UK IT services sector, ahead of anticipated reductions in interest rates later this year. We expect the coming months to offer an increasingly favourable landscape for companies and investors.”

Quarterly deal volume

Quarterly deal volume

“BGF’s investment in 2021 allowed us to continue to deliver our ambitious growth strategy. This will now continue with LDC, and we are excited about the opportunities ahead.”
Tom O’Hara, CEO, Kick ICT

Spotlight on: cloud-focused it managed services

IT managed services deals made up 37% of all the Q1 transactions we recorded in the outsourcing and distribution space, up from the 30% that we recorded in Q4 2023. A high proportion of the managed services targets specialised in cloud-based services, with legacy IT infrastructure firms increasingly looking to expand their offering into cloud-based technology.

Cloud-focused managed services deals in Q1 included Bowmark Capital-backed digital solutions specialist Xperience Group’s acquisition of GCC, and ECI Partners portfolio company BCN’s purchase of Prestige Logic.

Q4 deals by sector

Deals by sector

Private equity dominance

PE-backed investments accounted for 71% of all IT services deals completing in Q1 2024, which is 5% more than the level we recorded in Q4 2023, and the highest level we have recorded in the last two years. If interest rates drop later this year, as anticipated, this dominance could be expected to increase further as PE may once again have access to cheaper capital to finance transactions.

One particularly active UK PE house in Q1 was Bowmark Capital. Its portfolio company, business-critical technology solutions provider Focus Group, made no fewer than three acquisitions in Q1, snapping up RPM Communications, a provider of cloud-based telephony solutions to the healthcare sector; Bristol-based cloud and mobile communications company Pinnacle; and telecoms and IT specialist Datasharp. Bowmark first invested in Focus Group in 2020 and has since supported it in making 18 acquisitions. It has been reported that Bowmark is now in the advanced stages of selling Focus Group in a secondary buy-out to Hg Capital, in a deal worth c. £800 million.

Percentage of PE-backed deals

Percentage of PE backed deals

Notable UK mid-market deals

Synectics solutions logo   Synova Capital logo

 

 

Flooid logo Glory logo

 

 

 

Sopheon logo wellspring logo

UK fraud data firm Synectics Solutions was sold to Synova Capital at a valuation reported to be in the region of £180 million, after a feverish bidding process involving at least a dozen private equity companies.

Japanese listed company Japanese listed company GLORY acquired Coventry-based Flooid, a provider of cloud-based commerce software solutions to the retail industry, for £169 million from Inflexion.AIM-listed software business,

AIM-listed software business Sopheon was acquired for £115 million and taken private by Resurgens Technology Partners portfolio company, software and solutions provider Wellspring.

 

Stock market performance

In Q1 2024, global stock markets continued the bull run that began in the final quarter of 2023. The S&P 500 was up by 11% in Q1. The Moore Kingston Smith IT Services Index was also up by 11%, ahead of one of the technology-specific indices, the FTSE techMark Focus Index, which managed a creditable 6% increase, but somewhat behind the MSCI World Information Technology index, which ended Q1 up 15%.

Of the 21 companies in the Moore Kingston Smith IT Services Index, 13 ended the quarter in positive territory. The star performer was NVIDIA, which saw its share price increase by 88% during the period. NVIDIA’s share price more than tripled during 2023 but this AI-specialist stock market darling shows no signs of running out of steam in 2024. UK telecoms firm Spirent posted a 60% gain in a single day, following a £1 billion takeover offer from US rival Viavi in early March. At the end of March, another US firm, Keysight, gatecrashed the party, with a competing £1.2 billion offer for Spirent, sending its shares still higher. Spirent closed 63% up across the period.

Our worst performer in Q1 was Atos, which saw its share price decline by 73% across the period. The French tech group has struggled for the past three years; it is deeply indebted and its restructuring plans have not made enough progress to reassure the markets.

Moore Kingston Smith IT services index

IT Services Report Q1 2024 MKS IT index

 

Top 3 performersBottom 3 performers

Q1 2024 sector subcategories

Moore Kingston Smith IT Services Report Q1 2024 Graph

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