FT.com / Companies / IT - Technology predators on the prowl

FT.com / Companies / IT - Technology predators on the prowl

Technology predators on the prowl
By Philip Stafford

Published: December 28 2007 01:21 | Last updated: December 28 2007 01:21

KKR’s £600m takeover last week of Northgate Information Solutions was proof that the UK technology sector remains fertile territory for dealmakers.

November was a turbulent month as fears began to bite that the credit crunch would force the financial services industry to curb discretionary technology spending, such as on consultants.

A profit warning from Detica, one of the sector’s largest players, contributed to the FTSE Software and Information Technology sector’s worst month since the dotcom bubble burst in March 2000.

Mild cautionary statements were treated like heavy profit warnings and the long distrust the City has held for technology resurfaced, culminating in early December with the pulled initial public offering of Sophos, the IT security group, despite solid recurring revenues and a 25-year track record.

The coming year is likely to prove a tough one for many, especially those with exposure to financial services. After five years of sequential growth, Gartner, the consultancy, is predicting global growth of 5.5 per cent, down from about 8 per cent in 2007.

Yet beneath the headline fears, investors, bankers and analysts remain optimistic that corporate earnings and activity will not dry up.

The Northgate deal capped a flurry of bid activity in December as predators emerged to sniff out undervalued assets.

They appeared willing to pay chunky premiums.

Northgate was taken out at 40 per cent more than its prevailing share price, while NSB Retail Systems agreed a £160m deal with US-based Epicor at a 60 per cent premium.

Other recent deals include Pace Micro Technology‘s purchase of the set-top box and connectivity business of Dutch group Philips for £68m.

Xploite, the IT managed services group, is in talks with several bidders.

Investors have grown more comfortable with technology stocks as many companies in the sector have matured and proved far more efficient at converting their cash into operating profit.

Furthermore, IT operations are embedded into corporate life as never before.

“In a tougher market, there will be more focus on outsourcing tech activity,” said Mike Tobin, chief executive of Telecity, the data centre hosting company.

FDM, the IT staffing company, actually forecast results would be materially ahead of previous expectations as a shortage of specialist IT skills meant banks could not rely solely on in-house teams.

“Product cycles are typically stronger than the economic cycle – so we are relaxed about the prospects for well-placed product companies like Autonomy, Aveva, Fidessa, Micro Focus and Innovation,” said George O’Connor, an analyst at Panmure Gordon.

Will Wallis, an analyst at Numis Securities, said Northgate’s takeover could boost the share prices of companies that have been subject to takeover rumour or talks with private equity, such as Misys, Intec Telecom and Coda.

He pointed out that Northgate was sold on a prospective multiple of 18 times enterprise value/net operating profit after tax.

“It’s in line with multiples paid by private equity in the UK software sector prior to the credit crunch,” he said.

He also predicted it would boost other local government software companies, such as Civica and Anite.

“This deal opens up the possibility of consolidation in the public sector, led by private equity,” he added. “Both Civica and IBS ... are valued at just half the multiple that KKR is paying for Northgate.”

Yet Northgate could still be the largest deal for some time.

Graham Bird, fund manager at SVG, which invested in Northgate, said: “I wouldn’t be surprised if there was a pick-up in merger and acquisitions activity as many valuations are extreme.”

“Many of these companies are run far better. In the sell-off, there was no distinction between good and bad companies and I think private equity will spot this.”

But he added: “There’s unlikely to be mega-deals while the banks are not open properly.”

Deals concluded are likely to be “without the need to syndicate with other banks,” he said.

Trade buyers flush with cash are also likely to remain interested. Datatec, one of the largest IT services companies on Aim, has a long standing plan for further acquisitions and Jens Montanana, chief executive, remains bullish.

“It will play into the hands of operators and not the private equity players as we have assets to make synergies,” he said.

“We think there is going to be an opportunity for us,” he said. “But it will take time to work its way through. Some sellers still have silly ideas for valuations.”

Nevertheless if the UK and US economies fall into recession, valuations could yet fall further.

Copyright The Financial Times Limited 2008