Sam Bailey: Hello, I am joined by Principal Associate Rebecca Gordon and Partner Stuart Young both members of our tech team. Today we are going to be looking at M&A and ECM transactions. So Stuart what trends are you currently seeing in the UK M&A arena? Are there any subsectors within tech that are particularly active?
Stuart Young: What we are seeing as the dominant trend in UK M&A is scale and subsector if you like, the scale issue is that we are seeing big deals, the large deals are on the agenda at the moment and are being executed and in terms of area of tech where they are happening, it is pretty broad but we are definitely seeing that the large telecoms operators are looking for synergies and domestic markets across Europe including the UK. There's also a convergence between fixed line mobile and broadband and trying to bring those trends together. And if you had to take a deal which optimised those trends it would be BT's takeover of EE.
Sam: So, how is the UK environment looking for ECM deals?
Rebecca Gordon: So 2014 was a busy year for the London market, there were over 150 companies listing on the Main Market or AIM which is the busiest since 2007, AIM was the more dominant market with 118 companies listing on AIM in 2014 with 97 of those companies raising funds on Admission. The point to note though is that for tech companies we weren't seeing so many tech companies listing on AIM or on the Main Market as we have in previous years, particular in 2013, in fact on the main market there were no tech companies that listed on the Main Market in 2014 but there were two companies that listed on the new high growth segment that was Just Eat and Matomy Media now the high growth segment is being specifically design to encourage fast growth businesses in London it has only been around since 2013, it's meant to be attracting companies that would historically have looked at NASDAQ and so it will be interesting to see whether more companies continue to look at the high growth segment in the next couple of years.
Stuart: So on the M&A side just to supplement that with some other stats if you like, we work closely with Merrill Corporation, they are a great source of reports on the market and from them we have got some really interesting stats, I mean globally M&A activity is at a high anyway, I mean the first quarter of 2015 saw 3213 deals globally and that valued out at USD$719.1 billion and that is a 13% increase from Q1 2014 which was itself already a pretty high quarter within TMT, so the technology media and telecoms aspect of that. The industry hit a record of USD$764 billion in 2014 so it has been really active. If you hone in on the UK, the most active industry for Q1 this year was TMT and deals in the UK totalled $25 billion and that made up nearly 50% of the deal activity in the UK so it clear that as well as looking at where the trends are within technology it is clearly a very very active sector at the moment.
Rebecca: And I think that is right that tech and TMT in particular being an active sector in the UK is correct for M&A but I think it is correct also for the ECM market although there have been less deals, 9% of the companies listed on AIM are in the tech sector, and when we are talking about the tech sector we are actually excluding telecoms and we are excluding also consumer services and I think if you look at consumer services you might actually see that a number of those companies that have decided to brand themselves under the consumer services sector actually have quite a big tech element. Especially with the online retail companies that have been listing on the market in the last year.
Stuart: And that highlights one of the really interesting things about tech deals generally is that floated and sold companies tend to be disruptive in other sectors so we almost get to rebrand every deal we see where there is a disruptive technology as a tech deal whether that is in consumer services or robotics or the internet of things. It's pervasive.
Sam: Thanks Stuart. OK so Rebecca, many successful tech companies grow to a certain point, why is it that more of them don't come out into the market?
Rebecca: Yeah, that is an interesting point and I think there are a few reasons for that. I think if you look back about a year ago maybe 2013 you saw a number of smaller tech companies coming onto the AIM market and at that time institutional investors were very much risk on as they say, they were prepared to accept high valuations for an interesting story with proven useable IP and decent visibility on revenues but not necessarily at the revenue stage. I think in the last sort of six to nine months what you have seen is investor appetite reducing they are more risk adverse they are now only wanting to invest in tech companies that are cash generative or if they are not cash generative they at least can show recurring revenues. So that is more difficult for sort of early stage tech companies that are looking for their next round of investment because I think you will find that the VC houses, the PE houses are more prepared to take some risks than perhaps the more sort of classic institutional investor that you are seeing in the City. I think another reason why you find that companies aren't coming onto the AIM market as much looking at other investment opportunities revolves around the valuations that you can get. Again and this sort of goes back to my first point about having to have recurring revenues or be cash generative and I think there are a number of companies which can get a higher valuation in the private market than they can in the public market.
The other issue is just around reporting, so if you are a company that is listed on AIM or on the Main Market then you have to regularly report to your investors you have to be reporting your half yearly results, you have to be reporting your annual result and you also need to be keeping the market up to date on a regular basis. Now I think for a lot of these tech companies they are still at a relatively early stage and that is quite a big demand both on management in terms of having to set aside time to do that reporting but also because their stories are changing on a very regular basis as they go through the life cycle of their company, they are testing products, the products are not necessarily delivering as quickly as they had hoped and you know, any bad message to the public market you will see a decrease in your share price, whereas if you have got private long term investors investing in those companies they probably take a little bit more of a relaxed approach in terms of the way that they are evaluating the risks with the companies.
Stuart: And of course there is a pull factor which is on the other side of this. So as long as the markets are not particularly keen on tech companies there are other players who are very keen on them particularly large corporates who, as Rebecca has said, are more willing to invest in these sorts of companies. They perhaps understand the risks a bit better because they are in those industries themselves already and also provide routes to market. An emerging tech company, particularly a non-device company, a software company for example, doesn't have huge capital demands in order to go global, it has capital demands in order to create the product, to write the software, write the code, it has got demands in order to market and distribute but it doesn't have huge production requirements and therefore the traditional need for capital is not so much there. An investor or a creator from those companies can realise their investment very quickly by selling to a global corporate who can not only understand the product, understand the risk but can also distribute it to market and make a return on that product very very quickly.
Rebecca: There were stats recently released which said that the institutional investors, 71% identified the need to invest in SMEs they wanted to invest in high growth companies and they singled out tech companies as being particularly attractive followed by consumer goods, financials and healthcare however, whilst they are saying that they are very keen to invest in these sort of small growth companies they then go on to say that they think the future of their investments will be in investing in companies which have a market cap of over £300 million so there seems to be a disconnect between what they think they should be investing in and what they are investing in because they know that they are going to get a good return in those larger company investments.
Stuart: Yeah I understand that and it is slightly odd isn't it, it is almost like there is an expectation gap in the middle, private investors and entrepreneurs can create companies that perhaps reach up to £150 to £200 million valuation and then they kind of lose people until they are back at the multi-billion capitalisation level like a Twitter or an Amazon where they are understood again by the markets and in fact they seem to be a hedge for many large corporates and institutional investors for their investment in technology so yes, I think it is a curious situation and I think it is also a situation that does drive that mid-market M&A rather than mid-market ECM.
Rebecca: Yes, and I think the point as you say is that a lot of the institutional investors are looking for sources of high yielding companies so companies that paying dividends and that really is the issue with a lot of these SMEs and SME tech companies is that they are not at a stage where they can pay dividends yet.
Stuart: And they are coming to market at a size where they are pre-dividend.
Rebecca: Exactly
Sam: So Stuart, in your eyes are there clouds on the horizon for M&A and ECM transactions in the UK?
Stuart: Well you are asking me this question on May 5th so we are two days off an election so there is one very obvious, very big and the colour of this cloud is not certain, it is a rainbow at the moment and that is a cloud in the short term because it is causing uncertainty in the markets and in how people approach their business but it is also potentially creating a cloud in the medium term depending on the composition of the government as to whether we are going to be exiting Europe whether there will be a referendum on it and whichever way that vote goes there is a period of uncertainty in the run up to it which makes it difficult for businesses to invest. So the ongoing consequences of that, particularly for inward investment into the UK and for overseas companies acquiring UK targets, is of course that they are uncertain as to where those businesses are going to go in the future, whether the UK is the right home for them and whether it is a suitable environment and also whether the government is going to commit to provide the training, the tax breaks and even support the infrastructure, the broadband infrastructure. Already within Shoreditch tech, London is criticised as not being treated like a public utility and provided in the right way so yes, there are some clouds and the biggest one at the moment for me is the uncertainty caused by the election. But you know there are some issues that are always there in the markets no matter what happens and one of those for people looking for an exit you know is whether they can consider some kind of dual track approach.
Rebecca Gordon: And I think Stuart is right, I think the clouds on the horizon and the geo political events which are happening both in the UK and also in the wider part of Europe with potentially with Grexit with what is happening in Russia and Ukraine, there is also general elections I believe this year in Spain and in Portugal all of which will have an effect on the market which in turn has an effect on whether companies want to look at doing IPOs this year and with that in mind I think there are a number of companies who are taking the approach of doing what Stuart alluded to of a dual track process where they are looking at both potentially IPOing on the market but also at the same time talking to investors about investors making a private investment and a classic example of this was a trainline earlier in the year who was actually contemplating doing a main mark at IPO but in the end took ME money. And I think we will see more of that happening especially for the bigger companies in the next year or two whilst there is still this uncertainty in the market.
Stuart: And I think that is right Rebecca. I mean there are a lot of large private equity funds out there that have still got dry powder so Trainlines was a secondary and I think we will continue to see that in the market, how much that is affected by the short term uncertainty caused by the election I don't know but we are certainly watching it very closely.
Rebecca: I think as well as the election there seems to be in the UK but also, which is partly due to the election, but also across the globe there seems to be a slowdown in the economic growth that we were seeing last year I mean I think if that trend continues, particularly, the slowdown in China then I think again, you will see a slowdown in the amount of IPOs and institutional investors will just want to sit and wait and want to see what the next couple of years bring.
Stuart: Although it could be quite interesting, if that slowdown is caused by global economic slowdown where Chinese companies aren't building as quickly it might drive more money back towards the tech end of the market which is more European and North American where the companies are based. So it could be a cloud on one horizon and sunshine on the other.
Rebecca: I think that is a very good point and the other thing that I think we might see more of is that you are seeing at the moment a number of PE houses are looking to the markets to provide an exit for the companies that they are invested in and I think that you will continue to see that over the next couple of years. Now that again will mainly be for the Main Market companies, the larger companies. But I think you will start seeing that as well for some of the smaller companies as well as the market picks up.
Sam: So what do you see the election holding for M&A and ECM in tech?
Stuart: There are a number of themes coming out of this election which are really interesting for tech companies and consequently for how those companies develop into the flotation in the future or become the targets for M&A in the future but the one that really stood out for me in this election is immigration, in the sense that the UK seems to be moving towards a more closed border kind of approach. Although there is a lot of talk about controlling immigration and doing it on a point system which would tend to support bringing talent into the country I worry that the overall tone of keeping people out of the country will cut down on skilled immigration and if you cut down on skilled immigration into the country it will cut down on our ability to grow the tech companies in the way that we want.
Rebecca: I think another issue that might be facing AIM tech companies in particular is, my understanding is that a number of the companies listed on AIM are dependent on the public sector for their revenue, I think if in the event that we have a new government which looks at serious cut backs both in the NHS or in the public sector generally then this may have an effect on a number of the AIM companies and their revenue may suffer.
Sam: Thank you Rebecca and Stuart and thank you for listening, I hope that you found the discussion interesting, if you do have any further questions please don't hesitate to get in touch with any one of the tech team here.