Technology Barometer

Transcription

1 The Taylor Wessing Technology Barometer Tracking the temperature of the UK technology sector Q Edition Powered by:

2 Technology Barometer Contents 01 Contents 03 > Taylor Wessing view > MBTW Momentum slows in Q1 04 > Trading and confidence 06 > M&A and > fundraising Technology sub-sector 10 trends 07 > About Taylor Wessing 12

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4 Technology Barometer Taylor Wessing view 03 Taylor Wessing view Your # guide to the top takeaways from this quarter s Technology Barometer: # boardroomconfidence mixed sentiment surprisingly given the economic backdrop of growth. An increase in the number of respondents who are more confident and a slight increase in the number of respondents who are less confident. # rationale economy is picking up but budgets remain tight for companies in this space. # corporateactivity overall decline in corporate activity the technology sector. # M&A decrease in M&A activity. 41 M&A deals vs. average of 55 deals in each of the last two quarters. # largestdeal largest M&A deal, Vodafone s acquisition of ONO for 6bn. # privateequity almost at a halt. # tradesale of the 3 PE exits this quarter, 2 of these were through a trade sale. # capitalmarkets ten placings in the last quarter. 38m raised from two IPOs. City Fibre and Manx Telecom. # IPO&equitymarkets - despite the hype surrounding IPO markets, equity markets have performed poorly. The MBTW all-share index, up 26.6% year-on-year, continues to out-perform the general market. # MBTW - within the MBTW the software sector has been the strongest performer, with the Media & Telecoms software sector declining 4.3% year-on-year.

5 04 A standout year comes to a close Technology Barometer MBTW momentum slows in Q1 index index Chart 1: Megabuyte Index Series Q Jan Jan Feb Mar Mar-14 Source: Megabuyte, Capital IQ Chart 2: Megabuyte Index Series since inception Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Source: Megabuyte, Capital IQ MBTW All-Share Software ICT Services MBTW index performs strongly with 26.6% growth year-on-year MBTW All-Share Software ICT Services After what had been an exceptional 2013, through which the index had rallied more than 40%, the momentum of the Megabuyte Taylor Wessing (MBTW) All-Share slowed in the first quarter of That said, in line with previous quarters, the MBTW All-Share continued to outperform the wider market, which actually declined in the first three months of the year. Following a double digit return in the final three months of 2013, the MBTW All-Share posted a more subdued 5% gain in the first quarter of However, despite its weaker performance, the MBTW All-Share continued to outperform the FTSE All-Share, which declined 1% over the same period. The weaker quarterly performance meant that annual returns eased back considerably, with the MBTW All-Share now 26.6% ahead on a 12 month view, compared to 44.3% just three months ago. Meanwhile, the FTSE All-Share has returned just 5.2% on an annual basis. In contrast to 2013 where, in three of the four quarters the ICT Services sector outperformed the Software sector, it was the latter that has started 2014 on the front foot. Over the last three months, the Software sector has returned 5%, marginally outperforming the ICT Services sector, which gained 4% over the same period. Within the Software sector there was, a 7% return for Accounting & Enterprise Software and a 6% uplift for Banking & Insurance Software. This was in comparison to a flat three months for Security & Infrastructure Software and a 4.3% decline for Media & Telecoms software. At the peer group level, index returns from the ICT Services players could be viewed as stronger. 8% gains for both the Consulting & Systems Integration and Telecoms & Networks peer groups were offset by a 4% decline by the large-cap heavy Data Centre & Hosting Services group.

6 Technology Barometer A standout year comes to a close 05 Valuations creep slightly higher Given that valuation multiples attached to the MBTW All-Share reached fresh highs in the latter stages of 2013, it is unsurprising that index performance has slowed. However, the slowdown wasn t enough to stop valuations creeping marginally higher in the first quarter. On an EV/EBITDA basis, the MBTW All-Share s valuation increased by a further 2% to 11.2x, whilst the PE ratio jumped 7% to 22.8x. From a sector perspective, despite experiencing the slightly weaker index performance, it was the ICT Services sector that saw the greatest PE valuation increase through the first quarter, up 9% to 24.9x. This compares to a 5% uplift for the Software sector, which now trades at a 19% discount to the ICT Services sector, compared to a 15% discount three months ago. The ICT Services sector s valuation multiple was driven by the sector s two most highly valued peer groups; an 11% increase in the PE multiple attached to Telecoms & Networks to 27.1x and a 9% uplift for Mobile, Wireless & Satellite to 24.7x. By contrast, the sector s lower-rated peer groups, Consulting & Systems Integration and Infrastructure Services, remained relatively flat at 18.3x and 12.7x respectively. Meanwhile, the Data Centre & Hosting Services PE multiple continued to slide, down by a further 4% to 17.9x. In the Software sector, it was one of the most highly valued peer groups Specialist Applications that came under the most pressure, with a 5% contraction in its PE multiple to 20.2x. However, as a whole, the sector s valuation was helped by an 8% increase for the Banking & Insurance Software peer group to 26.5x and a 7% increase for Accounting & Enterprise Software to 19.1x. Meanwhile, the Media & Telecoms Software and Security & Infrastructure Software PE multiples increased below the sector average, up 4% and 5% to 22.3x and 15.8x respectively. Chart 3: Valuation statistics Forward looking PE ratio Source: Megabuyte, Capital IQ Table 1: Peer Group valuations Peer Group MBTW All-Share Software ICT Services 10 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 ICT Services shows the highest PE valuation increase Weighted average current year valuation EV/Sales EV/EBITDA PE ratio Accounting & Enterprise Software 3.3x 12.4x 19.1x Banking & Insurance software 2.8x 12.4x 26.5x Media & Telecoms software 2.6x 11.7x 22.3x Security & Infrastructure Software 4.6x 11.9x 15.8x Specialist Applications 4.2x 13.4x 20.2x All Software 3.5x 12.5x 20.2x Consulting & Systems Integration 2.5x 11.9x 18.3x Datacentre Hosting Services 4.7x 10.3x 17.9x Infrastructure Services 0.3x 6.3x 12.8x Mobile, Wireless & Satellite 6.1x 11.5x 24.7x Telecoms & Networks 1.8x 9.7x 30.0x All ICT Services 3.4x 10.0x 24.9x Megabuyte All Share 3.4x 11.2x 22.8x

7 06 Trading and confidence Technology Barometer Trading and confidence Chart 4: CXO change in confidence in Q More confident No change Less confident Source: Megabuyte % Chart 5: CXO level of confidence over next 12 months Very positive Positive Neutral Cautious Very Cautious 0% 0% 0% Mar-14 Dec-13 Sep-13 Jun-13 % Mar-14 Dec-13 Sep-13 Jun-13 Boardroom optimism continues The results from our boardroom confidence survey for the first quarter of 2014 indicate a slightly more mixed sentiment across the group, with the proportion of respondents who were either more confident or less confident both increasing during the quarter. In total, 49% of CXOs were more confident about market conditions; up from 47% in the prior period, while those that were less confident also rose slightly, from 3% to 4%. Respondents that noted no change in confidence made up 47% of the group, down from 51% in the prior quarter. Looking at prospects for the coming 12 months, 31% of CXOs gave a very positive response, up from 29% in the fourth quarter and 22% in the prior year period. Despite positive responses falling slightly, from 63% to 60% of the total, the aggregate optimistic result for the quarter was nevertheless a record 91%, just ahead of the previous quarter (90%). Meanwhile, the number of neutral responses was up slightly to 7% and, while those recording a cautious sentiment reduced from 3% to 1%, one respondent noted a very cautious outlook; this response has not been observed since June The qualitative replies to this quarter s survey once again showed a mixture of opinion. While a number of respondents noted an improved UK market on the whole, mostly driven by the wider economy picking up, tight customer budgets are still affecting some peer groups. In addition, different geographic regions, particularly across Europe, are being treated with more caution than others. Source: Megabuyte

8 Technology Barometer Sub-sector trends 07 Technology sub-sector trends Peer group trends Accounting & Enterprise Software Highlighted by the successes of Salesforce in CRM and Workday in the HRM space, we have reached a point where large enterprises have truly started to embrace Accounting & Enterprise Cloud-based solutions. In contrast to the SME and mid-market, where SaaS strategies have been largely organic, legacy enterprise software vendors have taken a much more acquisitive approach in building a portfolio of Cloud-based solutions, with mixed success. We estimate that legacy vendors, such as SAP and Oracle, have spent approximately 12-13bn on around 15 SaaSrelated acquisitions over the past five years, with valuations averaging 9x trailing EV/Sales. Banking & Insurance Software A number of recent high-profile failures in the systems of large UK banks underlines the view that most core banking technology is still in need of modernisation. Many large banks have often relied on in-house software development. However, we believe that the need to upgrade legacy systems in a relatively short time frame should benefit independent software vendors. Meanwhile, the leading insurance software providers are starting to reap the rewards of increased regulation and extremely tight margins in the insurance industry. More generally, regulation and the need for cost savings are affecting financial markets more than ever, leading to a steady wave of start-ups and smaller players looking to exploit new niches. Security & infrastructure Software On the whole, both the security and infrastructure sectors are experiencing a step change in growth, as the adoption of new technologies gathers momentum. In security, the move towards next generation offerings has reinvigorated the market, as more enterprises are finding that their traditional defences are falling short of increasingly sophisticated, targeted and persistent threats. The rise of Cloud, Big Data and the consumerisation of IT has driven a wave of security and infrastructure offerings aimed at both enabling and protecting an extended enterprise network. In line with this, there has been a considerable rise in consolidation and fundraising activity, which is allowing both legacy and next generation vendors to build out their offerings. Specialist Applications The Specialist Applications peer group is formed of a range of vertically focused software vendors primarily targeting the Healthcare, Construction, Manufacturing and Engineering sectors. Amongst these, we see current developments in the UK Healthcare sector as the most interesting. Here, the NHS appears to be finally settling after significant reform, which has had a positive impact on vendors such as Servelec, Advanced Computer Software and EMIS, particularly in the community care and mental care space. Meanwhile, we expect the market for acute electronic patient record systems to be particularly active in the coming periods, following the deployment issues throughout the National Programme for IT. Media & Telecoms Software Across the Media & Telecoms software space there is a divide between vendors trapped in a market that is in a structural decline and others that are benefitting through targeting new niches, such as SaaS-based comms services. Here, vendors such as USbased Twilio provide a full range of comms services through a simple API, offering all the benefits of a SaaS solution; rapid deployment,

9 08 Sub-sector trends Technology Barometer scalability, and capex-free, volume driven pricing. Meanwhile, in the media space, there has been some notable consolidation in recent months with LDC merging its two portfolio companies Snell and Quantel, whilst Pilat Media has been acquired by SintecMedia. Telecoms & Networks The Telecoms & Networks peer group continues to be a solid share price performer, aided by its defensive qualities of solid profitability and cash flow, albeit with limited or no overall market growth. This has helped two companies Manx Telecom and CityFibre to IPO in the UK whilst confidence in the sector has seen significant M&A by Alternative Networks (of Control Circle and Intercept IT) and Capita (of Updata) among others. On a broader European perspective, fixed/cable and mobile convergence continues with Vodafone buying ONO in Spain and Numericable buying SFR in France. Data Centre & Hosting services The Data Centre and Hosting peer group has yet to refind favour with investors, with a poor share price performance over the last year reflecting concerns about market growth, pricing etc. Nevertheless, the peer group is still one of the more attractive financially, with solid double digit organic growth for well placed suppliers in colocation and managed/ Cloud hosting and good profitability and cash flow, albeit that data centre focussed players continue to have to invest heavily in new capacity. M&A also continues to be a feature of a very fragmented market, for example with Claranet bulking up its activities in France and Portugal. Mobile Services Mobile money has been very much in focus in the last quarter as players jostle for position. Monitise raised 109m for a transition to a SaaS model, bringing in Mastercard as an investor alongside Visa, whilst Mastercard also completed its investment in eservglobal s HomeSend international mobile remittances venture. There have also been IPOs and fund raisings by mobile commerce companies, typically on very low revenues. M&A activity has picked up with strategics making bitesized add on deals, though for some sellers such as Probability this marks the end of attempts to find a viable business model. Infrastructure Services The Infrastructure Services peer group continues to underwhelm in share price terms and remains the lowest valued peer group in the Megabuyte universe, at 6.3x EV/ EBITDA. The Cloud transition continues to heavily impact on the financial performance of these vendors, while the end of support for Windows XP has provided a fillip to business in this space. There are a number of PE backed companies which could be coming up for an exit in the next twelve months, though some providers, such as Esteem and Calyx Group, have seen their progress falter and this may put their potential sales processes on hold, as they restructure. Consulting & Systems Integration This quarter there was major consolidation in the European IT services market, as French systems integrators Sopra and Steria announced their intentions to merge, creating a 3.1bn revenue company. At the heart of this move are two key factors: the lack of organic growth opportunities in the European IT services market, and the necessity for SIs to shift their business models to accommodate for trends around the Cloud, enterprise mobility and data analytics. M&A continues to form a key part of this transition, as demonstrated in recent times by Accenture (of ClientHouse and Procurian), Capgemini (Euriware) and Steria (Beamap).

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11 10 M&A and fundraising Technology Barometer M&A and fundraising Table 2: Selected UK M&A deals Capital Markets remain buoyant, but PE and M&A activity slows The first quarter of 2014 saw a decline in corporate activity in the UK technology sector to 41 deals, compared to an average of 55 deals in each of the last two quarters. Private equity activity was notably lower with just one deal recorded. In contrast, Capital Markets are booming, with ten placings completed, including two IPOs. Meanwhile, we note 31 strategic M&A deals compared to around 40 completed in the final three months of Of the M&A deals, Vodafone s acquisition of Spanish cable TV operator ONO for 6bn ( 7.2bn) was the largest, whilst Alternative Networks was the most active service provider, completing two acquisitions; Control Circle from Scottish Equity Partners for 39m and Intercept IT for 12.5m. Updata was another PE-backed firm to exit via trade sale, acquired by Capita for 80m. Elsewhere in the ICT Services sector, Monitise added a presence in Turkey through its 24m Pozitron buy, while we said goodbye to AIM strugglers Probability and 2ergo, consumed by GTECH and Eagle Eye Solutions respectively. Acquirer Target Value Alternative Networks Intercept IT 13.0m SintecMedia Pilat Media 50.6m Alternative Networks Control Circle 39.4m Incadea RC Real Business Solutions 10.3m Innovation Group Crash-worth 9.8m Advanced Computer Software Compass Computer Consultants 14.5m Monitise Pozitron Yazlim 24.0m Innovation Group LAS Claims Management 35.0m GTECH Probability 16.6m Vodafone ONO 6,000m Vislink Pebble Beach Systems 9.0m Eagle Eye Solutions 2ergo 4.5m Capita Updata Infrastructure 80.0m Source: Megabuyte, company announcements In the software sector there were a couple of media related transactions, as SintecMedia acquired Pilat Media for 63.3m and LDC merged its two portfolio companies, Quantel and Snell to form a business with revenues in excess of 100m. In the Banking & Insurance segment, The Innovation Group completed the acquisitions of LAS Claims Management ( 35m) and Limited ( 11.8m), providing Crashworth the group with a greater presence in both the property and motor insurance market, whilst Acturis and Misys acquired Nordic Insurance Software and IND Group respectively, for undisclosed sums. The enterprise software market continues to attract steady levels of corporate activity, contributing circa 40% of all Software deals over the last twelve months. Advanced Computer Software returned to the acquisition trail, with the 14.5m (4.4x EBITDA) purchase of Compass Computer Consultants, which adds to its presence in the higher education sector, whilst Civica completed its third acquisition since it was acquired by OMERS Private Equity, through the purchase of Coldharbour. Private Equity activity almost comes to a halt Only one private equity investment was recorded under our coverage this quarter, meaning that this was the quietest period of activity since the final three months of 2012, and the slowest start to a year since at least Indeed, looking on a trailing twelve month basis, deal activity over the last six months has reduced to circa one quarter of that registered in the first six months. In the one deal this quarter, Mobeus Equity Partners backed the 14m management buyout of provider of business ISP communications services Entanet, with Mobeus investing 6m as part of the deal. With revenues and EBITDA of 25.9m and 3.2m in fiscal 2012, we suspect that the overall deal value was higher than 14m, with the stated value perhaps reflecting just the money changing hands.

12 Technology Barometer M&A and fundraising 11 Despite the slowdown in private equity investing activity, three exits occurred in the first quarter of 2014; two through a trade sale Control Circle (Scottish Equity Partners to Alternative Networks) and Updata Infrastructure (LMS to Capita) and one through an IPO Manx Telecom (HgCapital). The acquisitions of Control Circle and Updata reflect a slight shift in balance from private equity towards cash-rich trade buyers able to unlock synergies, while Manx Telecom preferred an IPO over another private equity round, taking advantage of the buoyant capital markets. Capital Markets remain open for business There were ten capital market placings completed over the last three months, with a total of 380m raised from two IPOs (City Fibre and Manx Telecom) and eight follow-on fundraising events. The 38m average amount raised was the highest level for at least three years, more than double the average amount raised in calendar year 2013, at 17m, and was slightly ahead of the prior quarter s 33m average. However, excluding the significant fundraisings from Manx Telecom and Monitise, the average drops to 14m. Manx Telecom s IPO was the largest placing, and the first tech private equity exit to IPO for many years, raising 156m and enabling PE backers HgCapital and CPS to exit completely. At an 8x EV/EBITDA valuation and 7% dividend yield, supported by a solid market and regulatory position, the offering was priced to go. The second largest fundraise saw Monitise raise 109m at a very respectable 1.1% discount to the closing share price. The new monies will enable the company to shift to a SaaS, subscription-based model, which should lower the financial and technical barriers to entry for customers such as banks and retailers. While short term revenue guidance has been reduced to accommodate the new pricing model, the company is targeting 200m subscribers at an average ARPU of 2.50 by the end of FY2018. The other notable fundraise was that of The Innovation Group, which raised 67m to fund its current and future acquisitions and to bolster the balance sheet. Investors were also receptive to two underperforming companies; IT services provider Phoenix IT and real time location specialist Ubisense. Phoenix IT raised 8.6m for working capital purposes. Meanwhile, real time location specialist Ubisense tapped the capital markets for 4.2m, following on from another year in which the company disappointed financially. Table 3: Recent Private Equity deals Company Value Investor Deal type Entanet International 14.0m Mobeus Equity Partners MBO Control Circle 39.4m Scottish Equity Partners PE Exit (Trade) Updata 80.0m LMS PE Exit (Trade) Manx Telecom 225m HgCapital PE Exit (IPO) Source: Megabuyte, company announcements Table 4: Recent Capital Markets Transactions Company Mkt issue price Source: Megabuyte, company announcements Raised Deal type Vipera 8.6m 0.5m Follow-on public offering CityFibre 31.4m 16.6m IPO Incadea 64.5m 11.5m Follow-on public offering Manx Telecom 156.0m 156.0m IPO Coms 57.6m 8.3m Follow-on public offering Vipera 11.4m 1.1m Follow-on public offering Pinnacle Technology Group 3.6m 0.4m Follow-on public offering Innovation Group 371.9m 67.0m Follow-on public offering Phoenix IT 94.7m 8.6m Follow-on public offering Monitise m 109.2m Follow-on public offering Ubisense 50.5m 4.2m Follow-on public offering

13 12 About Taylor Wessing Technology Barometer About Taylor Wessing Key Contacts Tim Stocks Head of Equity Capital Markets +44 (0) Mike Turner Head of Technology Group +44 (0) Graham Hann Partner, Technology Group +44 (0) Robert Fenner Partner, Private Equity +44 (0) David Mardle Partner, Venture Capital +44 (0) At Taylor Wessing we have a long history of acting for technology companies or those involved more generally in the TMT space. A large portion of our work is providing advice to technology suppliers and users. This means we have a greater familiarity with emerging technologies and business practices than would otherwise be the case. Our in-depth understanding of the legal issues that can arise in connection with the use of technology is based on specialists who have the requisite experience, both legal and practical, needed to analyse that issue, undertake an informed assessment of the risks and deliver a solution. We undertake the full range of legal services for our clients in the technology sector including M&A, funding arrangements, intellectual property, commercial contracts, employment and disputes. Equity Capital Markets Taylor Wessing has one of the largest dedicated capital markets practices in Europe, with genuine cross-border capability and a strong presence in Asia and the Middle East. The ECM team advises on transactions involving public companies engaged in European and global securities offerings. As well as having experience advising many technology companies, large and small, we act for listed companies, their sponsors, nominated advisers, brokers and investment banks across all types of European securities offerings. Our particular expertise in capital markets law and regulation allows us to deal effectively with the increasing disclosure and other ongoing obligations of listed and quoted companies. Our specialist transaction lawyers are highly skilled not only in drafting and negotiating legal documentation, but also in project-managing the transaction process through all stages. This advice includes planning the deal structure and a strategy to complete the transaction, consideration of the tax consequences of the transaction, and how best to mitigate tax. Private Equity and Venture Capital Our international private equity practice has really made its mark in the private equity mid-market over the last few years. Our experience in the sector, coupled with our established venture capital and private wealth offerings, allow us to deliver what we believe to be a unique private capital model from fund formation and seed investment, through to growth capital and buy-out transactions. We are flexible in our approach, which is aimed at developing long-term relationships with our clients, and use the existing platform and resources of Taylor Wessing to add value to our clients beyond providing legal services. Our team works with institutions, individuals and management teams in relation to every aspect of the private equity process. As a leading firm acting on venture capital transactions, Taylor Wessing is involved in matters ranging from early-stage investments, subsequent funding rounds, convertible debt interim fundings, through to trade sales and IPOs. Besides our in-depth experience of structuring the corporate and tax aspects of venture capital transactions, we bring our intellectual property expertise to bear as a key component of our advice on investments in all technology-related sectors.

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