The number of completed technology merger and acquisitions (M&A) deals in the UK fell by 60 percent last year, according to PricewaterhouseCoppers (PwC), but 2010 will see a bounce back, the consulting firm is predicting.
Analyst firm Ovum is less optimistic than PwC, about 2010.Its UK and Ireland Market Trends 2009: IT Services report forecast that 2010 will continue to be challenging, and that recovery will not begin until next year at the earliest for the UK and Ireland’s IT services market.
PwC’s Technology M&A Insights 2010 report revealed that the number of completed deals fell from 66 to just 25. The value of the deals more than halved, declining by 52 percent from €6.8 billion to €3.3 billion.
Despite these being the lowest levels reached since 2003, average deal values remained relatively stable, and exceeded 2008 figures in the software and IT services and hardware sectors.
PwC predicts that technology M&A activity could start to pick up in 2010.
Andy Morgan, partner at PwC, said: "Recovery in UK tech M&A appears less pronounced than in the US where mega-deal announcements have provided momentum. However, the right conditions appear to be in place to mean a tipping point into the next stage of the deal cycle and local confidence is starting to return.
"That said, extended transaction timetables are still a feature of the market and successful completions will depend on vendor price expectations."
The report reveals financial technology, Software-as-a-Service (Saas), and the growing importance of mobile internet access for consumers and businesses as the deal “hotspots” for 2010.
The financial technology vendors sector, hit hard by the banking casualties in 2008, has benefited from increased financial regulation and greater demand for risk management solutions.
Banks have also boosted activity by expanding and upgrading IT systems in order to reduce their cost base and improve efficiencies.
In addition, PwC said the launch of Google’s Nexus One handset paves the way for more software providers, handset manufacturers, infrastructure vendors and carriers to enter new models in the market throughout 2010.
Morgan added: "The real hotspot in the world of applications is software-as-a-service (SaaS) as organisations see the benefits of moving large-scale software expenses from their capital budget to their operating budget, which will certainly drive increased M&A activity."
In terms of private equity activity in the UK, PwC said that PE exits are likely to return in the second half of this year as PE firms look to generate returns and raise more funds. Only seven technology buyouts completed last year in the UK, compared to 19 in 2008.
Meanwhile, Ovum predicted in its report that real-term growth will be less than two percent in 2010, and that recovery will be slow.
Dr Alexander Simkin, co-author of the Ovum report, said: "Some IT services vendors are pinning their hopes on a marked uptick in the UK and Ireland in 2010…[but] the market will remain challenging for at least 12 months with only modest growth overall during 2010."
While infrastructure outsourcing and support services have been relatively steady, consulting was particularly hard hit last year, and will be slow to make a comeback, said Ovum.
Nonetheless, application-led outsourcing is expected to benefit from pent-up demand this year after a difficult 2009.
Ovum also predicted that the UK and Irish IT services market will grow to over £32bn by the end of 2013. However, less than a third of this will come from the public sector, which is facing severe cuts.
John O’Brien, co-author of the Ovum report and specialist in the UK IT services market, said: "The UK public sector has been relatively shielded from macro-economic forces. But that’s going change.
"By 2012, we project that the public sector IT services market will be growing slower than the private sector, an inversion of the historical pattern."