Gareth Davies and Matt Stamp join forces to evaluate the possibilities in technology this year…
AI set to conquer all?
2016 saw a number of landmark deals within the UK technology arena. Despite the backdrop of political turbulence and uncertainty in the latter half of the year there was no sign of deal flow relenting.
Indeed the favourable exchange rate dynamic – following the deprecation of sterling post the Brexit vote – has seen many acquisitive international suitors, including both Private Equity and strategic trade bidders, achieve real value for money in some of the UK’s most high profile and successful technology assets.
Precedent UK bulge bracket deals included:
- Japan’s Softbank acquiring smartphone chip designer ARM Holdings for £24.3bn – the largest acquisition of a European technology business;
- China based Ctrip’s acquisition of Edinburgh online travel portal and air ticketing specialist Skyscanner for £1.4bn, providing a substantial return on investment for Private Equity backers Scottish Equity Partners; and
- IT Services behemoth, CSC’s acquisition of business automation solutions provider Xchanging for £480m, after the US technology consulting company topped an offer from Capita Plc.
Whilst the mid-market also saw a number of high profile assets sold to international suitors, including:
- Charlesbank Capital Partners backed Ensonso acquiring Darwin Private Equity backed hybrid IT Services and critical applications provider Attenda (deal value undisclosed) – providing a significant UK platform for Ensonso;
- New Jersey headquartered Datapipe’s acquisition of Lyceum Capital backed managed services and private cloud platform provider Adapt (deal value undisclosed);
- The sale of email and web security solutions vendor and Lyceum Capital backed, Clearswift, to Swiss defence technology supplier, RUAG (deal value undisclosed) – Near-neighbour, Abingdon based Sophos, is now the only security products developer of any meaningful scale left flying the British flag;
- Acuity advised Hitec Laboratories, a market leader in governance, risk, and compliance, and information governance software, acquired by TA Associates backed Mitratech – who can now offer a comprehensive total risk management portfolio focused on helping executives manage enterprise risk; and
- The sale of Acuity advised Allinea Software, a spin-out from the University of Warwick which develops tools to optimise performance in high end servers and supercomputers, to ARM Holdings for £18m – Although a small meal for ARM it does show that ARM is clearly still in control following its acquisition by Softbank and helps the continued diversification away from its smartphone core.
With a number of the above deals taking place in H2, it is clear that any thoughts of Brexit have not tarnished the appetite for high quality UK technology platforms from international buyers. Indeed, many tech businesses are well insulated from any would-be political and economic turmoil via truly global business models with exposure to multiple geographies and underpinned by a focus on long term contracted recurring revenues.
The Acuity team believes that technology M&A is set to continue to perform robustly in 2017, with a number of fast moving tech sub-sectors providing opportunities for consolidation.
Moreover, there are certain prolific and exciting trends which will provide a common denominator that is set to permeate multiple end markets and the broader tech ecosystem…
Artificial Intelligence (“AI”)
AI has traditionally included a multitude of technologies such as neural networks, deep learning and natural-language processing, however it is increasingly encompassing more advanced systems that comprehend, learn, predict, adapt and will eventually operate autonomously. AI is already lending itself to a spectrum of intelligent implementations, including robotic automation, autonomous vehicles, consumer electronic, as well as applications and services.
The celebrated Cambridge physicist Stephen Hawking called AI “the biggest event in human history” while raising concerns shared by a few other tech luminaries, such as Elon Musk and Bill Gates, who worry that AI, in the distant future, could become smarter than humans.
In terms of its impact today, AI has already begun to pervade a number of industry vertical markets. For example, Wells Fargo is among a plethora of financial services institutions that are testing AI technology. According to Braden More, head of payment strategy, they are “… exploring how AI technology can enable [Wells Fargo] customers to conduct a banking transaction while on social media. We’re also exploring AI virtual assistants that can proactively support customers through alerts, reminders and contextual suggestions“. In 2014, Google forked out £400m for UK AI start up DeepMind with little clarity on how they were going to employ its technology. However, it is now using a DeepMind-built AI system to control the huge air-conditioning units in its power hungry data centres, where servers consume enough energy to power entire cities and become very hot in the process. The AI technology predicts how much air conditioning will be needed to deal with an anticipated change in data centre temperature, which varies as demand for services like Google Maps, Youtube and Gmail fluctuates – DeepMind says its AI can make the cooling units in Google’s data centres 40% more efficient, ultimately decreasing the data centres’ overall electricity consumption by 15%. Whilst in the outsourcing arena, business process services provider Arvato has recently formed a new partnership with Robotic Process Automation pioneer Blue Prism, following a successful pilot project at one of its local authority customers, Sefton Council. RPA had proved far more successful than they initially expected, hence the formalisation of the partnership.
It is clear that many technology software and IT services providers are incorporating a clearly defined AI strategy into their plans in order to capitalise on what is already a potential game-changer, in terms of the way we will live our lives in the future and in realising significant commercial value.
Virtual Reality (“VR”)
“2017 will be the year where VR becomes normalized, where the sudden influx of consumers will meet a virtual tidal wave of content developed by both small and large studios alike, facilitated by the big guns behind the Vive, PlayStation VR, Oculus Rift and more,” says Andrew Abedian of VR content designer, Survios. Many tech giants are making a play to dominate the VR space. For example, Sony has recently launched its Playstation VR, which is compatible with the existing 40m PS4s already in use. This comes hot off the heels of Google‘s VR launch in late 2016, when it released its first own-brand smartphone Pixel and Pixel XL, along with its Daydream View VR Headset and controller. Google is taking its VR offering to the next level and is going head to head with the likes of Oculus Rift, Sony’s PS and Samsung’s VR Gear.
With the tech and electronic giants investing heavily, it is only a matter of time before there is widespread consumer adoption of VR headsets. It goes without saying that consumer demand for content on these platforms will rapidly increase and VR will become another highly effective channel to reach audiences on.
Security and the Internet of Things (“IoT”)
Cybersecurity is changing too – it is no longer solely our computers and smartphones or other devices that provide potential access points for a would-be attacker. The Internet of Things has enabled the development of smart cities and other connected infrastructure projects, involving multiple digital access points not just on our various devices but also in our homes and streets, and it takes just one weakness in a convoluted digital chain to compromise an entire network. According to Catalin Cosoi, chief security strategist at Bitdefender, 2017 will see a “marked rise” in attacks on the Internet of Things for both individuals and organisations: “As penetration of IoT devices in industry grows, so will the threats posed to security by their uncontrolled deployment and use. Personal IoT devices will also increasingly get carried across physical and logical security boundaries by employees, compounding the issues.” The problem is that many IoT devices are built with affordability and ease of use in mind rather than with security firmly baked in and embedded. As the market penetration of smart devices grows, the population of legacy devices which remain unpatched and thus vulnerable will only grow.
As internet access points and the digital data oceans continue to proliferate, the need for effective cyber security that adapts with surfing behaviours and the broader digital revolution will become paramount.
Whist security is a key challenge to adoption, the key drivers of IoT disruption and capability (e.g. ubiquitous connectivity, ever cheaper component costs, the power of the cloud and game changing analytics) continue to see the sector mature. Different verticals are developing at different speeds but when we look across each geographic market, the trend of start-ups and disruptors reaching real critical mass will be upon us in 2017. This maturity, from an M&A perspective, will see more assets transition from VC to PE ownership – if assets are not snapped up first by strategics both from within the eco-system and larger traditional businesses looking to protect business models and market share. Three 2017 IoT predictions:
- Another $billion platform deal will follow in the footsteps of Cisco’s 2016 acquisition of Jasper;
- Connected car and connected vehicle M&A will continue to top the M&A volume tables; and
- Carriers (following, for example, Verizon’s $3bn telematics shopping spree in the summer of 2016) will be under further pressure to demonstrate that they can drive real service revenue from IoT propositions.
Security and Digital Payments
Given data breaches in government departments, major retailers and financial enterprises, security is a major concern and will definitely be a trend as we move into 2017. With digital payment technologies and banking continuing to grow at extortionate rates, managing the security of billions of daily transactions will remain a significant challenge. Tech vendors that can develop solid security and collaborate with fintech enterprises will be in high demand. Indeed, any fintech start-up must have security as a major factor in its software development, from the outset. Ripple, highlighted as one the hottest fintech start-ups in 2016 by Fortune, has already signed up UBS and Santander to test their newly developed secure protocol for cross-border payments using blockchain technology (a digital ledger in which transactions are recorded chronologically and publicly). The transactions can take place within seconds and cost banks approximately 1/3 less to process.
In general, blockchain technology is expected to gain significant traction in 2017 and beyond as a safer and cheaper solution for money transfers.
Furthermore, Nymi, an innovative authentication solution provider, has teamed up with TD Bank Group and MasterCard and are now working on a new wearable solution that will authenticate and permit payments via the individual’s heartbeat. The pilot test has proved to be successful and could well head to the mass market over the course of 2017.
Another much-hyped technology trend – we see 2017 as the year in which a number of companies that have stuck to the fundamentals (analytics with a demonstrable ROI and business case) see further significant deal activity – from both strategic and investment perspectives. Both buyer types have proved their strong appetite for stand-out assets in the space – and we believe the top end multiples being paid in 2016 will continue, particularly for those with strong deep domain expertise and focus.
2016 produced a solid year for M&A despite the political uncertainty following the UK’s vote to break away from the European Union and the results of the US presidential election; a number of high profile international transactions completed in the technology space.
Given the strong economic fundamentals in the UK, here at Acuity we anticipate that 2017 will produce a robust environment for further consolidation opportunities, particularly within the technology mid-market, despite the ongoing challenges in the political and regulatory world.
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