Takeover boom in prospect with tech stocks likely to be high on predators’ shopping lists

Everyone likes a bargain and for those companies that have survived the pandemic, a bargain hunt could be about to begin.

Two thirds of UK private sector firms expect an increase in business activity during the year ahead, compared to just 9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} that project a reduction, according to the /IHS Markit’s UK Business Outlook survey released today.

Subtracting that 9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of doom-sayers from the 67{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of optimists gives a net balance of 58{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca}, the index’s highest level in six year.

Meanwhile, there is a net balance of +37{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of firms expecting profits to increase over the coming year and with increased profits comes higher valuations, so now is a good time as any for companies with access to cash to swoop for weaker competitors.

Bean counters are on the prowl for acquisitions

According to a survey by another business consultant, , finance officers are focusing on acquisitions now more than at any time in the last 11 years.

The survey of finance leaders at 107 of the country’s biggest companies indicated that more than half have already recorded a full recovery from the pandemic or expect to do so by the end of the year.

Yet another business consultant – do these companies get paid for advising on post-merger integration, do you think? – PWC says the global mergers & acquisitions (M&A) market is in overdrive.

The fourth quarter of 2020 saw completed M&A deals top US$1,000bn and this rose to US$1,3bn in the first quarter.

Rob Kindler, the global head of M&A at US investment bank (MS) says all the elements are there for an active M&A market in 2021, “from corporations looking for scale and growth to private equity firms and SPACs looking to invest capital”.

Access to inexpensive and plentiful capital is feeding the M&A boom, according to MS.

“As the global economic rebound reaches for a higher gear of growth this year, persistently low interest rates are expected to keep the cost of borrowing down. Those conditions, combined with the prospect for companies’ renewed confidence to deploy capital, could fuel increased deal flow,” MS said in a paper on its M&A outlook for 2021.

Technology stocks in favour

In 2020, merger activity was strongest in sectors least affected by the coronavirus pandemic while the hard-hit sectors, such as commercial aerospace, energy, property and retail were the wallflowers at the M&A party.

Industries more affected by the pandemic may release their pent-up M&A demand in 2021, Morgan Stanley suggested.

PWC said the technology sector was flavour of the year in M&A last year, especially those operating in the Cloud and/or software-as-a-service sectors, as customers accelerated their cloud migrations in light of developments such as the shift to remote-working

Conversely, consulting and IT service companies did less well, as customers pushed back non business-critical projects, PWC reported.

“Today, as we reach the mid-point of 2021, M&A interest in the technology sector has focussed further: digital platforms such as online marketplaces and comparison tools are increasingly in acquirers’ sights, powered by changing consumer behaviour and strategic buyers looking to gear up their capabilities in areas like artificial intelligence (AI), cloud transition (applications, connectivity and security) and Internet of Things (IoT),” PWC said.

The UK’s FTSE 250 is not long on these sorts of companies, however; PLC () and () are about all she wrote on that score.

With an enterprise value (market capitalisation adjusted for borrowings or cash) that is 36.6 times annual earnings, Bytes does not look exactly cheap but Moneysupermarket, valued on the same multiple at 13.3, might interest some predator.

On the subject of predators, we have seen an increasing number of private equity firms sniffing around, bidding for the likes of , Morrisons, St Modwen Properties, and perennial bid candidate with varying amount of success.

READ Smiths Group mulling £2bn offer from US private equity firm for medical division, report says

Meanwhile, a number of companies, to quote Danny Blanchflower (the footballer, not the former economist), appear keen to get their retaliation in first, with the PLC () today announcing plans to sell off bits of its business with a view to taking the rest private, while PLC () has announced a split of its business as it is selling a stake in its plant-based arms to private equity group KPS Capital Partners for £900mln.

The Smiths, DMGT and Tate & Lyle announcements all came today, suggesting that the business consultants may have a (self-interested) point when it comes to predicting a takeover boom.

Guessing where the takeover spotlight will fall is another matter.

READ Morrisons is on private equity’s shopping list; could Sainsbury’s be next?

READ Dixons Carphone may be next on private equity target list, City analysts say