M&A in the UK IT services sector: Q1 2025
Activity slows but private equity interest remains high
153
deals completed
-4%
Moore Kingston Smith
IT Services Index
70%
deals backed by PE
Our view of the market
As noted in our annual review, 2024 was a very strong year for M&A in the UK IT services sector. Q4 2024 was particularly robust, possibly boosted by increased activity ahead of the Chancellor’s Budget in late October, amid concerns over potential changes to capital gains tax rates and reliefs.
It is not surprising that we observed a dip in activity in Q1 2025, especially given the recent economic challenges faced by companies in the sector. We counted 153 completed deals – an 11% decrease on the 172 deals we recorded in Q4 2024.
While this level of activity is consistent with quieter periods in recent years, it may reflect a more difficult environment for M&A, mirroring the broader challenges IT services companies are experiencing.
These are interesting times for UK IT services businesses. While services offered to global customers may not be subject to tariffs in the same way as exported goods, nevertheless the economic headwinds of a global trade war are widely felt. Margins may be under pressure as companies struggle to raise their fees to keep pace with inflation and increasing staff costs.
Recent share price volatility has made it more difficult for quoted groups to transact. The good news is that private equity (PE) interest in the sector has continued unabated and, if interest rates continue to fall, PE houses should be more willing to do deals.
Quarterly deal volume
Q1 deals by sector
“2025 has delivered some surprises and it may take the market a while to understand the consequences of these and adjust to new economic realities. Nevertheless, financial buyers remain drawn to the UK’s IT services sector, recognising it as a unique ecosystem within which quality and innovative businesses are launched and can grow to become global leaders.”
Nick Thompson, Corporate Finance Partner
Spotlight on: Software value-added resellers
Together, software distribution and software value-added resellers (VAR) accounted for half of all the Q1 transactions we recorded in the outsourcing and distribution space, which represents a huge increase on the 30% we recorded in Q4 2024. Software VARs take third-party software and insert modifications, adaptations or services into the package to tailor it to their clients. According to a recent Business Research Insights Report, the global IT VAR market was worth c. $11.83 billion in 2024 and is forecast to grow at a CAGR of 7.5% over the next decade.
The biggest deal in the software VAR space in Q1 was the purchase of Canadian VAR Softchoice by privately held US technology services company World Wide Technology, in an all-cash deal worth c. $1.25 billion. Softchoice provides software, cloud, cyber security and AI solutions, and World Wide Technology aims to integrate Softchoice’s products with its own services to provide customers with a comprehensive solutions portfolio.
Source: businessresearchinsights.com
Trending: Managed security service providers
Managed security service providers (MSSPs) are companies that offer outsourced monitoring and management of security devices and systems, providing businesses with a way to enhance their security capabilities.MSSPs provide a range of security services, including real-time monitoring, threat detection, incident response and compliance. According to a Fortune Business Insights report, the global MSSP market was worth c. $17.3 billion in 2024, and is projected to grow at a CAGR of 11.8% over the next decade.
In January, Edinburgh-headquartered Quorum Cyber continued its expansion in North America with the acquisition of US-based Kivu Consulting, a cyber security firm specialising in incident response. The strategic move bolsters Quorum Cyber’s global presence and follows its acquisition of Difenda, a Canadian company specialising in Microsoft Security Managed Services, in September last year.
In 2024, Quorum Cyber announced it had secured new investment from US PE house Charlesbank to supplement the support it received from existing PE investor Livingbridge.
Source: fortunebusinessinsights.com
Matt McRae, Corporate Finance Director
Private equity
Of the 172 transactions we recorded in Q4, 70% involved PE investment, either directly or via an existing portfolio company. This was an increase on Q3 and closer to the first half of 2024.Looking at the year as a whole, PE-backed investments accounted for 70% of the 641 deals we recorded. This is higher than the 64% in 2023 and the 67% in 2022. PE remains the fundamental driver of M&A activity in the IT services sector. Of the 153 transactions we recorded in Q1, 70% involved PE investment, either directly or via an existing portfolio company.
This is the same level as last quarter and consistent with the numbers we saw throughout last year. PE remains the fundamental driver of M&A activity in the IT services market. If interest rates continue to fall steadily, this could boost PE houses’ activity still further.
Percentage of PE-backed deals
With a large pool of PE funds having invested in the UK’s IT services market for some years, we are seeing an increasing number of secondary transactions, whereby the original investor looks to realise its investment by selling its portfolio company to another PE house, to begin the investment cycle anew.
One such secondary transaction in Q1 was NorthEdge’s sale of specialist intelligence and investigation management software company Altia to Bowmark Capital. NorthEdge invested in Altia in 2020 and backed the company to undertake multiple acquisitions. This enabled it to grow to a size where it attracted Bowmark’s attention. The new investor expects to back Altia in its plans to expand its global footprint, enhance its technology platform and extend its product portfolio.
Notable UK mid-market deals
In January, 2i Testing acquired nFocus Testing in a move to strengthen its market presence in the UK. This marks 2i’s first acquisition after its recent investment from Rockpool Investments. Moore Kingston Smith’s Corporate Finance team advised 2i on the transaction.
In March, Nasdaq Stockholm-listed data and information management specialist Proact IT Group acquired London-based cloud transformation consulting company BlakYaks in a transaction worth up to £27 million.
Also in March, AIM-listed Restore announced it had acquired Synertec, a UK document management business for an initial cash consideration of £22 million, plus an earn-out.
Stock market performance
Global stock markets experienced significant volatility in Q1. After a positive performance in Q4 2024, following Donald Trump’s presidential election victory, the S&P 500 fell by 5% in the first quarter of this year. Investors were concerned about the potential effects of the new president’s fiscal and foreign policies on the US economy.
Economic uncertainty in the US and concerns that tariff policies could lead to higher consumer prices and a global economic slowdown do not play well for quoted IT services companies and tech stocks in general. Anticipating slower economic growth, investors are shifting out of high-momentum stocks into more defensive, lower-valuation segments of the market, such as defence and infrastructure.
Additionally, there was a sell-off in some of the most highly valued US tech stocks in Q1, triggered by the release of China’s DeepSeek AI model in January. This raised questions about the massive investments US companies have made in developing their own AI models and whether those investments will yield returns.
The Moore Kingston Smith IT services index ended Q1 down by 4%. This lagged the performance of one of our technology-specific indices, the FTSE TechMark Focus Index, which fell by just 1%, but was considerably better than the MSCI World Information Technology Index, which ended Q1 down by 12%.
Of the 21 companies in the Moore Kingston Smith IT Services Index, only seven ended the quarter in positive territory. Q1’s star performer was Atos, which saw its share price increase by 50% across the period.
However, given Atos’s share price essentially fell to zero in Q4 2024, what seem like large percentage gains in any quarter reflect just a very small increase – fractions of a cent – in actual nominal value. Atos has recently completed its financial restructuring plan and is launching a reverse stock split. One new Atos share will be issued for every 10,000 shares currently held by investors, in an effort to stabilise trading.
NEC performed particularly well in Q1, with its share price increasing by 17% across the period. The increase was fuelled by speculation that the Japanese giant was in talks regarding a potential offer for US telecoms software and services business CSG Systems. The potential acquisition by NEC could be seen as a strategic move to expand its presence in the digital enablement systems sector.
Our worst performer in Q1 was Xerox which started the year well, as investors responded positively to its January $1.5 billion acquisition of Lexmark in a move to strengthen its core print portfolio. However, it eventually saw its share price lose 43% of its value, after a disappointing earnings report alongside news that it is undergoing a major restructuring programme and planning a 15% reduction in headcount.
Moore Kingston Smith IT services index
Q1 2025 sector subcategories
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Methodology
In compiling our deal tracker we use Pitchbook, an international financial data provider that gives access to comprehensive data on the private and public markets. We analyse every deal with either a UK buyer or UK seller or both. Where the target company is classified as IT consulting, outsourcing and distribution, or data and security, the transaction is entered into the deal tracker. We classify IT consulting into four sub-categories, outsourcing and distribution into eight sub-categories,
and data and security into three sub-categories.
As well as the data extracted from Pitchbook we have used information from the following sources: idoxgroup.com, sage.com, insidermedia.com, osf.digital, intercede.com, cnbc.com, marketbeat.com, babble.cloud, pinnacle-online.com, pehubeurope.com, quoteddata.com.
