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Autumn 2014

Demand for software at the forefront of TMT M&A

Key observations

Global market leaders are targeting innovative UK companiesA number of the most high profile acquisitions in 2014 to date have involved specialist UK technology companies that have developed innovative software solutions and capabilities. Given the fast moving nature of the sector, large corporates are looking to acquire these capabilities rather than develop them in-house so that they can continue to stay ahead of the competition. Google’s acquisition of online advertising fraud specialist Spider.io is a great example.

Private equity continues to be a significant investorHigh quality innovative companies are keenly fought for by private equity (PE). The majority of software companies have asset light platforms, long-term recurring revenue streams and the potential to be scaled very quickly. This, combined with the ability to use the platform as a buy and build vehicle, is very attractive to PE. Software companies in niche verticals which are highly fragmented, such as healthcare IT, fintech and adtech, are of particular interest. All are benefiting from high levels of PE funding.

Valuations remain very buoyant From a trade perspective, acquirers view these software targets as a ‘must have’ and are therefore prepared to pay – missing out is not an option. Likewise, given the amount of capital held by PE, coupled with the attractiveness of the software business model, the multiples being paid are considerable. In both the corporate and private equity arena, double digit multiples are increasingly prevalent.

2015 will be another strong year for M&A volumes Private equity and corporate acquirers still have considerable appetite for high quality software assets and are willing to meet price expectations. As such, the prospects for continuing M&A activity in the space remain very positive.

TMTSector update

“ The pressure on major technology players to stay competitive is higher than it has ever been. Recent acquisition activity shows that the fastest way to meet this challenge is to acquire niche providers with innovative services and technologies.”

Jamie Hope Partner, Catalyst Corporate Finance

The volume of TMT M&A activity remains strong, with software transactions continuing to dominate activity. Strategic buyers are taking advantage of improved liquidity to acquire expertise and innovative solutions whilst a series of successful exits is giving investors confidence and encouraging new investment into the software sector.

TMT Sector update

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Significant public funding pressures and the rising demand for IT to improve the efficiency, cost-effectiveness, quality and safety of health and social care delivery means that the UK healthcare IT sector is growing fast. A number of major initiatives are supporting this growth and creating a positive environment for M&A.

Digitisation of the NHS: The NHS Safer Hospitals, Safer Wards (‘SHSW’) Technology Fund (the ‘Fund’), launched in 2013, provides NHS Trusts with £500 million to support initiatives including electronic record keeping, online GP appointment booking and digitally connecting health and care organisations. The Fund’s first phase, worth £210 million, has been approved (see Figure 1).

Running parallel to this initiative is the Department of Health’s target to achieve a paperless NHS by 2018. This includes giving patients access to online health records by 2015, having digital information available across the NHS by 2018 and ensuring that data can be shared between primary and secondary care. All successfully funded SHSW bids are to provide Application Programming Interfaces (APIs) to ensure interoperability (see Figure 2).

NHS Trusts are targeting best of breed providers: The collapse of the National Programme for IT in 2011 has given NHS Trusts more autonomy over IT strategy. IT providers now have more opportunity to secure long-term contracts as NHS Trusts are no longer restricted to procure from centrally endorsed IT vendors and are targeting best of breed departmental systems. For example, radiology information system provider Healthcare Software Systems (HSS) has contracts with over 50 trusts for up to seven years.

UK growth trends are mirrored internationally: Pressures on healthcare budgets and the need to achieve significant cost efficiencies exist in other healthcare systems. The global healthcare IT sector is forecast to grow at 8% per annum to 2018. Electronic medical records (forecast to grow at 10% per annum to 2017), patient relationship management, business intelligence and analytics, and big data and coding are the areas which will benefit most.

Regulatory change is driving M&A activity: Strategic acquirers and financial investors are attracted to the long-term dynamics discussed above.

- Elysian Capital has backed the management buy-out of healthcare IT group Wellbeing Software, which includes Healthcare Software Systems (HSS), Euroking and Apollo Medical Systems. The investment will be used to expand Wellbeing’s product range.

- GP software specialist EMIS Group Plc acquired software and IT services provider Ascribe in 2013 for £57.5 million (c9x EBITDA). Seventy-five per cent of NHS secondary care organisations use an Ascribe solution and the acquisition increases EMIS’s access to secondary care. The deal was an exit for ECI Partners, which had taken Ascribe private in a £33 million public to private transaction in 2009.

- A second exit for ECI Partners in 2013 was the Montagu Private Equity-backed secondary management buy-out of CliniSys Group, a pan-European supplier of IT systems to clinical laboratories. Montagu’s investment will support international expansion and systems development.

In focus: Fast growth forecast for Healthcare IT

£793m

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£883m

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Figure 1: NHS Trust IT spend in England Figure 2: NHS Safer Hospitals, Safer Wards Technology Fund

Eligible projects

Safe, digital record keeping underpinned by NHS Number

as primary identifer

Integrated digital care records including information sharing

within and between organisations

Electronic prescribing in secondary care

Advanced scheduling

TMT Sector update

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M&A analysis: High growth opportunities driving dealsDeal volumes remain robust, with activity in 2014 showing momentum across all sub-sectors.

Strategic acquisitions driving software and telecoms M&A: Strategic acquirers are targeting innovative businesses with technology and access to new customers. NYSE-listed Premiere Global Services Inc’s (PGi) acquisition of UK voice and web conference calling specialist Powwownow expands its customer base to include UK small and mid-sized businesses and provides cross-selling opportunities. US-based Quantcast, best known for its internet traffic data, recently acquired London-based Struq which enables online marketers to retarget their most profitable prospects. Struq had raised US$8.5 million of venture capital funding in 2012.

PE investing in software developers: PE is attracted to the long-term growth prospects across a range of end-markets and a typically fragmented provider base. Access Technology Group, the supplier of business application tools, backed by Lyceum Capital, has made seven acquisitions over the last three years including the applications division of reseller Atlas

Business Systems. LDC has carved out Anite Travel from its London-listed parent and aims to grow the business through product development, entering new markets and potentially buy and build.

Online media assets continueto dominate targets in the media sector: Strategic acquirers are attracted to high growth online assets, in particular travel, property and education. For example, Saga, the LSE-listed over-50s UK insurance group backed by Charterhouse, Permira and CVC, acquired luxury online tour operator Destinology.

M&A activity will accelerategoing into 2015: PE will continueto target strong scalable digital assets. Buy and build strategies will increase as PE looks to consolidate fragmented markets, an example being LDC’s acquisition of Clifford Thames. Large legacy players from the UK and overseas, particularly the US, will look to acquire software-as-a-service assets to counteract the slowdown in traditional revenue streams. Consumers’ increasing use of smartphones will drive mobile M&A activity, in particular mobile-related services such as social gaming, advertising and payment technology.

65

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Media

Mobile andFixed Line Telcos

Software andComputer Services

Technology andHardware Equipment

Source: Capital IQ *to 17th October

Figure 3: M&A activity by TMT sector

Figure 4: Select transactionsDate Target Country Target Description Acquiror Country Deal

value (£m)

Oct-14 Textlocal Ltd UK Distributes marketing messages to mobile phones Imimobile Plc UK 13.1

Sep-14 Perform Group Plc UK Produces and distributes digital sports content Access Industries Inc US 352.0

Jul-14 Phlexglobal Ltd UK Develops trial master file software Bridgepoint Development Capital UK 40.4

Jul-14 Agencyport Software Europe Ltd UK Software to property, casualty, health insurance markets Xchanging Plc UK 62.9

Jul-14 Vero Software Ltd UK Develops software for the manufacturing industry Hexagon AB Sweden n/d

Jul-14 Total Objects Ltd UK Develops insurance software Xchanging Plc UK 21.0

Jul-14 Atego Group Ltd UK Develops software for the engineering industry PTC Inc USA 29.5

Jun-14 Autodata Publishing Group Ltd UK Publishes and distributes automotive technical data Bowmark Capital UK n/d

Jun-14 McKesson Euro healthcare software business UK Healthcare software and UK social care business Symphony Technology Group USA n/d

Jun-14 Metronet Ltd UK Wireless and fibre internet solutions LDC UK 45.0

May-14 Information Management Group Ltd UK Provides data insight and management consultancy Hitachi Consulting Corp USA n/d

May-14 Datasys Integration Ltd UK Rail management software solutions Tracsis Plc UK 4.5

May-14 Anite Travel Ltd UK Provides e-commerce solutions for the leisure sector LDC UK 45.0

Mar-14 XLMedia Plc UK Provides digital publishing and marketing services Initial public offering n/a 41.8

Feb-14 Wellbeing Software Group Ltd UK Software solutions for the healthcare industry Elysian Capital LP UK n/d

Feb-14 Manx Telecom Ltd UK Provides telecom products and services to the Isle of Man n/a n/a 89.2

Jan-14 Trader Media Group Ltd (remaining 50.1%) UK Operates autotrader.co.uk, online marketplace for vehicles Apax Partners LLP USA n/d

Jan-14 Deepmind Technologies Ltd UK Develops artificial intelligence systems Google Inc USA 242.0

Jan-14 NaturalMotion Ltd UK Develops mobile games Zynga Inc USA 319.7

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Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421)Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 5ALCatalyst Corporate Finance LLP is authorised and regulated by the Financial Conduct Authority (number 478406)

www.catalystcf.co.uk

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Selected Catalyst TMT sector deals

Growth capital investmentManagement buy-out Management buy-outAdvisor on sale to