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December 6, 2010

UK tech firm leaders: do you prefer that safe trade sale to that risky IPO?

Gary Flood looks at the UK IPO market and ask what we have to do see the next Autonomy

By Cbr Rolling Blog

A new Deloitte survey into M&A (mergers and acquisition) activity reports increased activity and therefore cause for optimism about the UK high-tech scene on the one hand – but warns that we remain as far off as ever from any kind of healthy local IPO market.

UK tech IPOs

US companies, followed interestingly by Indian and Chinese bidders, are expected to be the dominant purchasers of UK tech firms, it seems, with any start ups being able to demonstrate they have convincing cloud-related technologies possibly being able to command a good price in a buyout.

This is all in a context, says the firm, of increased auction competition, more private equity activity and a supportive ICT strategy by the government as it moves away from the days of mega ICT contracts and an alleged opening up to SME vendors as "creating new opportunities for nimble and innovative companies".

All this data is from a biannual chat with UK technology companies, focused on technology M&A and capital market trends for 2010/11. The survey was of 35 of the top 150 UK tech private or listed firms with revenues in excess of £20m, and included comment from their CEOs, CFOs and M&A directors.

In summary, the report’s authors expect there will be a more competitive auction market – in other words, firms can go hawking themselves and getting a price for a purchase, rather than going bust and their assets being bought out much cheaper.

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"Cash rich corporate acquirers continue to consolidate the market with an accelerated migration towards cloud related technologies," commented the consultancy’s Conor Cahill, technology corporate finance partner.

So if you run any kind of decent British virtualisation, mobile applications, analytical/diagnostic software or security software outfit – that yacht could be at last within your grasp: "The favoured sectors that will attract a premium are those that support and embrace cloud-based solutions, while diagnostic software is particularly important to understand changes in customer behaviour. Organisations will look to address the increased interest in cloud related technologies through their M&A strategy in order to accelerate capability in this area."

Great for you – but this is the bit that depressed us: the outlook for UK technology IPOs continues to "look challenging". Following a difficult 2010, few technology leaders believe that the next 12 months will prove a good time to float a UK technology company. In contrast to the positive results on M&A outlook and valuations, investor confidence for new listings remain "fragile," with "particular sensitivity around pricing on new issues".

It’s been the case, it has to be admitted, that some fledglings have tried to fly on the public markets – but chickened out. "Well publicised details of eleventh hour valuation revisions and pulled flotations (across all sectors) have not been conducive to building management confidence in new listings," confirmed one of Cahill’s colleagues at Deloitte, John Hammond, capital markets partner.

But UK Plc will never have any kind of presence at the top table of global ICT suppliers beyond our sole ARMs or Autonomys unless that changes – and at least some UK firms choose to try and go for the big time, not settle for a trade sale.

Stock exchange image courtesy of jam_90s on Flickr.

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