March saw continued levels of M&A activity in the telecoms and IT services market, reports Marcus Allchurch, Telecoms M&A Specialist at BDO Corporate Finance.
M&A activity continued last month with Micro-P acquiring Advent Data for an initial cash consideration of £10.2 million. More will be payable up to a maximum of £15 million if Advent Data hits its targets for the three periods to 31 March 2012, 2013 and 2014. At the end of February, Lumison, which was itself recently acquired by Bridgepoint Development Capital, snapped up the Blue Square Data Group, a Thames Valley based provider of IT solutions and data management services. The price paid for Blue Square was around £22 million, making it the bigger part of Lumison by some margin and setting the business off on its course as a new consolidator in the sector. Watch this space for more Bridgepoint/Lumison acquisitions.
Buyers have also been bullish when talking about M&A. Some have taken the confident step of giving interviews or releasing statements which inform the market of where they are looking for opportunities and how they anticipate structuring transactions. It’s a promising sign that many are including new equity as the source of acquisition firepower, which reinforces investors’ appetite for the sector. So, as predicted, 2011 has seen a significant increase in M&A activity. And importantly, it’s no longer just one or two players who are driving activity in the market. As we’ve seen, with the passing of each month the number of companies making acquisition increases.
Does this activity signal a bubble in UK telecoms? We believe the answer is no. BDO has reviewed the performance of the FTSE Telecoms index against the FTSE 100 index since January 1995 and the results make for interesting reading. Using data from Bloomberg, the first thing you notice is how closely the two indices follow each other. Secondly, you can see that after an initial surge (followed by a period when the telecoms stocks rose dramatically) the FTSE 100 has tracked above the telecoms index consistently over the period. Finally, and most importantly, from 1997 to 2000 the previous technology bubble drove the telecoms index to increase by nearly 225% in only two years, and that was followed by the technology bubble bursting as we all remember only too well.
Compare that to what is happening in the market today, where the telecoms index has risen by just over 35% in the last two years, and any anxiety around overpricing appears unfounded.
What’s more, in 1997-2000 the FTSE telecom index raced up much higher and faster than the rest of the market, whereas today the indices are moving broadly in line with one another (over the same period, the FTSE 100 has increased by 40%) which suggests that what we are seeing is actually just the result of a broader economic recovery and a return to confidence among investors.