Deals Dispatch - UK Technology

Author: Mark Allen, Partner and Pete Marshall, Assistant Manager, Corporate Finance.

The UK technology sector has navigated another eventful period in Q1 2025. Sadly, there was little encouragement for the sector announced in the Spring Statement, despite continued sluggish growth in the wider UK economy. There were, however, further (if not new) references to investment in technology for the MoD and probation services and new digital skills for the civil service. Businesses have been bracing for the recent changes to National Insurance (effective 6 April), which will have had a significant impact on people-based tech companies. A reduction to Business Asset Disposal Relief has also now taken effect, but the impact on deal volumes is expected to be minimal.

Looking at the global picture, adverse US economic data and speculation around US tariffs resulted in the NASDAQ closing 13% down at the end of the quarter from its peak in February 2024. While the UK technology sector will not be immune to global uncertainty, the UK remains the leading tech ecosystem in Europe, contributing £150 billion Gross Value Added (GVA) to the UK economy each year while growing faster than any other sector.

Unsurprisingly, deal volumes were 25% lower in the quarter, which was expected after the Budget-induced spike we saw in the previous quarter. Year-on-year deal volumes were also down 7%. Deal values were more significantly impacted; 47% down on the quarter and 39% down on the year, largely due to a lower number of high value (>£250 million) transactions.

• UK cyber success story: Reading-based £40 million turnover cybersecurity services business Bridewell combined with France-based Managed Security Service Provider business, I-TRACING, backed by Oakley Capital, Eurazeo and Sagard NewGen. At a reported 20x EBITDA multiple, this is a significant success story for exiting investor GCP and the UK cyber sector.
• Altnets enter consolidation phase: Following the surge in investment into fibre infrastructure between 2021-2023, the market has now entered a consolidation phase. CityFibre's acquisition of Connexin’s fibre infrastructure is their second acquisition after buying Lit Fibre in March 2024, and we expect M&A activity to continue as CityFibre looks to sustain its position as the largest fibre altnet in the UK.
• AI demands record valuations: In the US, AI research company Open AI raised $40 billion from SoftBank at a $300 billion post-money valuation this quarter, setting a record for private company fundraising and surpassing the previous record by over 1.7x. The chart below shows that five out of the top 25 private company valuations ever recorded, have been AI technologies.

• Inflation remains stubborn: Despite progress over the last 12 months, inflation has remained stubbornly above the Bank of England’s target of 2%. The outlook for inflation and interest rates remains uncertain. Confidence in these two key indicators will be crucial in terms of unlocking the debt markets and easing the trading environment for UK technology businesses.
• Stronger quarter for trade vs PE: Trade deal volumes were up 8% this quarter, with a number of interesting strategic acquisitions reported. We continue to watch the large backlog of PE-backed assets (with more than five year holds) with interest as investors favour buy and build strategies while they wait for more favourable conditions.
• US technology stocks come under pressure: The end of this quarter saw tension amongst investors in US public companies. Any macroeconomic shocks (such as arbitrary tariffs) are likely to have a greater impact on US technology stocks than on other global markets. This is because there is more positive sentiment baked into valuation multiples based on earnings expectations, liquidity and favourable regulatory conditions.

Deal volumes seem to have settled at a level above where they were in 2019. Software companies have led the charge, with typical characteristics including recurring revenues and predictable cash flows underpinning investment confidence in an unstable economic environment. We expect this trend to continue in the short term.

Domestic stagflation is being compounded by international trade wars between the world’s largest economies. The Bank of England has urged not to presume a preset path of rate reductions, given the current environment. This uncertainty remains a blocker for the UK technology M&A market, and we are unlikely to see significant growth in transaction volumes until it resolves.

However, growing demand for new technologies and related services has meant the sector has proven itself to be resilient. Embedding technology into business strategy and operations is essential for driving growth, productivity and cost saving. As we enter the era of AI, it is crucial for companies across all sectors to continue investing in technology (selectively) to avoid being left behind. This bodes well for the UK technology sector. With CGT rate changes remaining minimal (for now), we expect owner-managers with exit ambitions to be considering their options. The buyer/seller value expectation gap that existed following the decline in pricing from the peak of 2022 has now also tightened, which should also help the momentum of transactions. Overall, we maintain a positive but cautious outlook for the rest of the year.

Q1 2025 saw a landmark deal in the cybersecurity sector as technology giant Alphabet acquired cloud security business Wiz for a staggering $32 billion, or 45x ARR. Founded less than five years ago in 2020, Wiz reached $100 million ARR within 18 months and is currently reporting a run rate of $700 million, expecting to hit $1 billion ARR by the end of 2025. The acquisition aims to boost Google’s position in the cloud services market (12% share), competing with Amazon (30%) and Microsoft (21%), and will enhance its credibility in cybersecurity. Wiz is a multi-cloud vendor and should allow Google Cloud to compete for larger enterprise clients with highly sophisticated security requirements. It will be interesting to see how Google manages Wiz’s established relationships with competing cloud vendors AWS and Azure.

The acquisition is a significant positive for the cybersecurity sector and will likely attract more funding into the space. In the UK, it has recently been announced that a new £50 million cyber specialist fund, Osney Capital, has been set up to support early-stage cyber businesses. Osney is partly funded by the British Business Bank.

After a six month consecutive period of strong returns for global US technology stocks, the end of this quarter has seen significant volatility as they come to terms with the economic impact of a tariff war. For the first time since we launched Deals Dispatch, the UK technology software index has outperformed the Nasdaq over a 12-month period. While positive for the UK, we suspect it is largely due to the relatively low base for UK stocks. There were no UK technology IPOs this quarter as UK stock markets continue to struggle to attract new listings relative to its global competition. We still await more substantial reform in the public markets to redress this imbalance.

Key highlights in the lower-mid market this quarter

• Uptick in Human Capital Management (‘HCM’) software deals: We saw an increase in the number of lower-mid market HCM deals, including Cezanne HR acquiring Occupop, CharlieHR acquiring Fair HQ, Kester Capital investing in Re-flow and Tenzing backed PSSG investing in Appogee HR.
• Signs of life in Telecoms M&A: The Telecoms and IT services sectors saw a significant fall in M&A activity over the last year, mainly due to a reduction in appetite for acquisitions by the top 10 PE-backed consolidators. We suspect this is due to less favourable debt markets hampering leverage opportunities. However, there was a slight uptick in deals this quarter as Gamma, SCG and Firstcom made acquisitions.
• PE sentiment remains strong in the technology lower mid-market: PE deals were relatively flat quarter-on-quarter, but with easing debt markets and PE firms reportedly sitting on record levels of dry powder, we expect continued interest in the technology lower-mid market. There remains plenty of opportunity to acquire innovative, fast-growing technology owner-managed businesses in the UK, and we continue to see highly competitive PE processes for quality technology companies.

Q1 2025 transactions we advised on:

• Sale of Clear Box Analytics to Crisp Inc.
• Acquisition of Hosted Desktop UK by Your.Cloud.

Sources for article: Pitchbook, Megabuyte, ONS, Bank of England, Calastone.