Cloud means tech leaders optimistic on 2011 merger outlook

A report by Deloitte has found that technology leaders are increasingly optimistic about the outlook for mergers and acquisitions over the next 12 months, with cloud technologies at the forefront of the market.

The survey showed an increase in optimism from 53 percent to 60 percent as compared with six months ago. 

It is expected that the auction market will become more competitive with increased private equity activity, particularly focused on firms serving SMEs.  It is also reported by Deloitte that only 26 percent of respondents thought distress driven deals were the reason for increased activity, down from 40 percent six months ago, suggesting that the time for firms to opportunistically pick up a target on the cheap may have passed.

“It is encouraging that M&A optimism has increased, even if some of the significant premiums paid on a number of well-publicised deals may lead to some prospective acquirers deciding to sit things out,” commented Conor Cahill, technology corporate finance partner at Deloitte. “Cash rich corporate acquirers continue to consolidate the market with an accelerated migration towards cloud related technologies.”

There were four specific areas which UK technology leaders highlighted for premium valuations, these being virtualisation technologies, mobile applications, analytical/diagnostic software and security software.

“Valuations are expected to increase in the next 12 months as auctions become more competitive,” said Cahill. “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.”

The survey also highlights the role that overseas acquirers will play in the UK technology merger and acquisition market. 90 percent of UK leaders believe that US companies will remain at the forefront of this market, with an increase in interest from Indian and Chinese companies also expected in the next year.

Half of all respondents in the survey believe that the government’s current ICT strategy will have a good effect on the UK tech industry.  While it is not thought that major providers to the government will have welcomed the recent round of contract negotiations, the survey shows that the refocus by the coalition may create opportunities.

It is noted however that that the outlook for UK technology IPOs remains difficult, with few leaders believing that the next year will be a good time to float a company.  While the mergers and acquisitions outlook appears positive it is thought that investor confidence for new listings remain fragile, particularly around pricing. 

“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. Nevertheless, a compelling growth strategy and good timing may allow some companies to buck this trend,” said John Hammond, capital markets partner at Deloitte.