Further M&A expected as private equity groups and cash-rich overseas companies take advantage of depressed prices

31 March 2008, London – Over £2.6 billion of equity, or the equivalent of 15% of the current total market capitalisation of the London-listed software and IT services sector, has been delisted through takeovers since March 2007, according to research conducted by Close Brothers, a leading European corporate finance house.

The £190 million MBO of software group Civica, backed by 3i, which was announced on Friday, is the latest in a series of deals that has seen the number of London-listed IT companies fall by approximately 10% in the past year, says Close Brothers.

The corporate finance house says that the sector has seen a high proportion of ‘public-to-private’ deals, with nearly one in three of the deals announced in the past year featuring private equity buyers.  Companies include: Civica, Northgate, Calyx, Chelford and Computer Software Group.

Close Brothers believes that falling share prices, combined with the fact that, with the exception of Telecity, there has been no major technology IPO in over a year, has left many stocks suffering from severe illiquidity.

Commenting on the research findings, Paul Lewington, a Director at Close Brothers, said:

“Small and mid-cap publicly-listed companies in the sector feel unloved and are voting with their feet, which has resulted in the quoted sector suffering from large-scale equity leakage. Normally, money from delisted stocks is recycled into new listings or other sector peers, but this is no longer the case and equity value appears to be leaving the sector altogether. The scale on which this trend is happening is startling.”

Close Brothers calculates the average price-earnings ratio (PER) multiple for IT companies under £100 million market capitalisation is now less than 9x 2008 forecast earnings.  Companies with a market capitalisation of over £250 million are on average trading at a PER multiple of between 15x and 20x 2008 forecast earnings.

Lewington continues: ‘The low multiples we’re seeing at the lower end of the sector have created opportunities for speculators and we expect further M&A activity as both private equity groups and cash-rich overseas companies take advantage of depressed prices.  In addition, our research shows that the average takeover premium in the IT sector over the past year has been just over 50 per cent.  With chunky premiums like this it is no surprise that management teams are turning their backs on the public markets.”

Most of the takeover activity in the last year has involved ‘mid cap’ stocks, which has driven polarisation between a small number of large and highly rated companies in the sector, including Autonomy and Aveva, and a crowd of ‘small cap’ stocks which look increasingly abandoned by the market.