UK technology sector mergers and acquisitions may fall short of expectations

A significant analysis by Equator, a digital transformation consultancy, reveals that the merger and acquisition (M&A) landscape within the UK technology sector in 2023 has exhibited trends that may not meet anticipated outcomes. Last year saw the completion of over £9 billion in M&A deals, yet this figure is poised to perform below expectations.

According to data from PwC, the UK technology sector recorded an increase in activity, with 955 transactions valued at approximately £14 billion finalised throughout 2023. Notably, private equity (PE) firms played a substantial role in this growth, accounting for 64% of these transactions. However, approximately £5.8 billion of the private equity investments made in technology deals are expected to underperform.

Research indicates that roughly 65% of M&A deals fail to meet their expected performance metrics. In practical terms, this statistic implies that out of the £9.1 billion in tech deals completed in 2023, a significant portion is likely to be underwhelming in terms of returns. Historical studies have suggested that the shortcomings of M&A deal performances may range from 70% to 90%.

Lesley Fordyce, the change director at Equator, highlighted the longstanding issues associated with M&A, noting that despite extensive knowledge of these challenges, companies continue to overlook crucial elements contributing to the success of these deals. “The people aspect of M&A deals is like going to the gym – everyone knows they should be doing it, but there are easier ways to spend your time,” Fordyce stated when speaking to UK Tech News. She further elaborated on the complexities, stating, “The bit which makes all of this other stuff actually work, of course, is people. That’s a trickier and less quantifiable thing to tackle, so it tends to be forgotten completely or left until later, by which time it’s too late.”

Looking ahead, the prospects for dealmaking in 2025 appear optimistic. Analysts suggest that the private equity sector currently sits on historically high levels of unallocated capital, often referred to as “dry powder,” waiting to be invested. Indicators such as rising business and consumer confidence, along with stabilising interest rates, are expected to stimulate further M&A activity as 2025 approaches.

Mark Bell, another change director at Equator, voiced a positive outlook on the potential for improved deal performance, saying, “No-one is saying this is easy, but we are saying it’s worth it. If you’re putting the money and time into a deal, there’s a disproportionate advantage to spending a little more effort on engaging people right at the start of the process.” He continued to emphasise the importance of addressing employee concerns regarding the integration of new systems and processes, which can otherwise hinder productivity and diminish the expected benefits of the deal. Bell noted, “All of these little things slow down integration, eat into productivity and ultimately stifle the value that you can expect from a deal.”

In summary, while the UK technology M&A market witnessed significant activity in 2023, a substantial proportion of deals are anticipated to underperform. Industry experts advocate for a renewed focus on the human aspects of mergers and acquisitions to optimise outcomes as the market heads towards a projected upturn in 2025.

Source: Noah Wire Services