M&A in the UK IT services sector:
Q2 2024
Steady start to the new year
151
deals completed
17
data & security
transactions
74%
deals backed by PE
Our view of the market
After two quarters of flat M&A activity in the UK IT services sector, Q2 2024 has shown a small decrease in the number of deals completing – 151 deals compared with the 156 transactions we logged in both Q1 2024 and Q4 2023. The UK market is essentially stable for the time being, and it seems that the drivers of increased activity – an improving economy, expect lower interest rates, business owners worried about possible changes in the UK tax regime’s treatment of capital gains – are taking longer to translate into higher numbers of transactions than we might have expected.
It is now running at levels that we haven’t seen since the beginning of 2021. We believe that private equity is running ahead of the curve, and that trade buyers are now re-entering the fray, bolstered by increased valuations on the public markets and expectations of a more benign lending environment.
Nick Thompson, Partner, comments: “Despite ongoing macro-economic headwinds due to political change in the UK and delays to anticipated interest-rate cuts, deal volumes have remained robust in the UK IT Services sector. Whilst this is largely due to Private Equity’s willingness to transact, we expect trade buyers to come back to the market once new political policy is enacted and interest-rate cuts arrive. This, combined with continuing Private Equity demand paints a promising picture for robust deal activity over the next 12 months.”
Quarterly deal volume
“The deal markets for private equity transactions continue to gradually improve, aided by improving investor confidence and more accommodative conditions in credit markets. The kinds of high-quality software assets that make up the majority of our portfolio continue to be viewed as some of the most attractive areas to invest across private markets and to transact at significant multiples.”
Jim Strang, Chairman of Hg Capital Trust
Spotlight on: data storage
Data storage deals made up 39% of all the Q2 transactions we recorded in the data and security space. According to a recent MarketsandMarkets report, the global data storage market is expected to grow from an estimated $65.1 billion in 2024 to $90 billion by 2029. The growth of the data storage market is driven by an expanding need for real-time data, and by the increasing adoption of connected devices and Internet of Things technologies.
Data storage deals in Q2 included sustainable data centre solutions provider Keysource’s acquisition of 2bm, a specialist data centre and critical environment company headquartered in Nottingham.
Q2 deals by sector
Trending: software development
Software development deals made up 88% of all the Q2 transactions we recorded in the IT consulting space. A rising demand for custom software solutions and a focus on improving productivity underpins the growth in the software consulting market.
Moore Kingston Smith’s corporate finance and tax teams advised software developer and digital transformation specialist, 2i Testing, on its sale of a majority stake to Rockpool Investments in May. 2i plays a key role in the long-term development of mission-critical IT systems. It has highly skilled software engineers and automation products serving its public sector and blue-chip client base. Rockpool’s investment will support 2i’s organic growth plan and enable the company to embark on a buy and build strategy.
“We’ve been impressed by 2i’s proactive investment in talented people and automation products. The business is highly innovative and takes a strategic partner approach to working with its customers. Increased digital change poses a huge risk to organisations, as system failures can lead to significant financial and reputational issues for companies and their senior executives. 2i is well-placed to support through its focus on high-quality delivery and customer service.”
Private equity continues to dominate
Private equity-backed investments accounted for 74% of all IT services deals completing in Q2 2024, which is 3% more than the level we recorded in Q1, and the highest level we have recorded in over three years.
One particularly active UK PE house in Q2 was Hg Capital. In April, it concluded its backing of the secondary buy-out of acquisitive business-critical technology solutions provider Focus Group, replacing Bowmark Capital as lead investor. Focus Group continued its expansion with three acquisitions in Q2 – Brighton-based communications specialist Cellular Solutions; Milton Keynes-based provider of voice and data solutions Entropie; and managed communications services specialist Midland Telecom. Another of Hg’s portfolio companies, Ideagen, a provider of software solutions to regulated and high-compliance industries, acquired UK cloud applications company InPhase, and snapped up Australian workforce solution Damstra. Hg also backed its existing portfolio company Bright, a provider of tax, accounting, finance and payroll software, in its acquisition of MyWorkpapers, a digital working papers solution for accountants and auditors.
Percentage of PE-backed deals
Notable UK mid-market deals
German live entertainment group CTS Eventim acquired UK-headquartered ticketing technology business See Tickets, in a deal rumoured to be worth c. £300 million.
LSE-listed digital transformation consultancy Kin + Carta was acquired for £239 million and taken private by BC Partners portfolio company Valtech.
French travel software business Travelsoft acquired Slough-based ATCORE Technologies, a travel technology company, for c. £100 million from Inflexion.
Stock market performance
In Q2 2024, the bull run in global stock markets that had been a feature of the previous two quarters began to slow. The S&P 500 was up by 4% in Q2. The Moore Kingston Smith IT Services Index was marginally down by 1%, keeping pace with one of the technology-specific indices, the FTSE techMark Focus index, which was also down 1%. However, the MSCI World Information Technology Index ended Q2 up 11%.
Of the 21 companies in the Moore Kingston Smith IT Services Index, 11 ended the quarter in positive territory in Q2. The star performer was yet again NVIDIA, which saw its share price increase by 37% during the period. In mid-June, NVIDIA briefly overtook Microsoft to become the world’s most valuable company before its shares slipped back slightly as investors took profits. NVIDIA’s share price has increased more than ninefold since the end of 2022, as its chips continue to play a central role in the race to dominate the market for artificial intelligence.
Our worst performer in Q2 was again Atos, which saw its share price decline by 48% across the period. The French tech group’s shares have collapsed in value over the past three years, as existing shareholders expect to be massively diluted under a restructuring plan which will swap debt for equity.
Moore Kingston Smith IT services index
Q2 2024 sector subcategories
Contact us
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.
