The pace of mergers and acquisitions among UK computer-related companies has not let up since Meltdown Monday – but valuations have fallen 30% since the bull was slaughtered. That is the conclusion of a study by Regent Associates Ltd, Richmond, Surrey company broker and specialist in information technology acquisitions. Regent finds that there were 119 acquisitions worth UKP500,000 or more involving UK computer-related companies in 1987, a 68% increase on the 1986 figure: the combined valuation was over UKP1,000m. In the final quarter there were 39 transactions, a 70% increase on the fourth quarter 1986 figure but the bear took his toll on valuations and the acquired companies went out on an average exit price-earnings ratio of 19, compared with an average 27 during the first nine months. Flotation less attractive Commenting on the trend – which actually shows the pace of combination increasing – Regent managing director Peter Rowell explains Flotation on the stock market is clearly a less attractive option at the present time, and many companies that had been anticipating a listing in early 1988 to help finance their growth plans now see acquisition as an attractive alternative. Additionally some venture capital investors are now urging acquisition as a means to realise the return on their earlier investments. In an industry used to 20% per annum growth, anything below that can be seen as a sign of problems ahead. But it is very difficult to maintain growth organically if a company is under-financed. ‘Acquire or be acquired’ is a comment I am increasingly hearing, and Regent Associates even has mandates from some partners to satisfy either of these objectives. Breaking down the figures, Regent says that the software and computer services sector was the most active, accounting for 48 of the 119 acquisitions tracked, an increase of almost 80% over 1986 – and it was a good business to be selling, companies going out on an average price-earnings ratio of 26 for the year. But these are people businesses and good people are hard to recruit. And the average was pulled up by some apparently very high exit multiples, but these were mostly on the basis of contingency payments tied to very demanding future performance. Who’s buying? Well Alphameric Plc, Altantic Computers Plc, CAP Group Plc, Monotype Corp Plc and Thorn EMI Plc each made three acquisitions. The lists include UK companies buying overseas as well as foreign companies buying in the UK, and in all, there were 19 overseas acquisitions by UK firms, but needless to say 14 of them were in the US: the continent remains a closed book to too many UK computer firms. On the other hand, the continentals see the UK as an attractive base for expansion of the 20 acquisitions made by foreigners in the UK, half were by European companies. With big restructuring exercises at Thorn EMI, Extel Group Plc – now part of United Newspapers – Plessey and Ferranti, there were 29 divestitures of divisions or subsidiaries during the year. Does all this activity mean a consolidation in the industry? Far from it, Rowell believes. He reckons that for every company that loses its independence, two new ones are born. And with the first generation of Business Expansion Scheme companies ending year five this year, the pace of acquisitions is unlikely to abate in 1988.
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