Looking ahead to 2025, it's a pivotal year for policymakers. We're at a crucial juncture where inflation is flattening, and interest rates are starting to fall. The key takeaway here is that the technology sector continues to remain resilient compared with other sectors, regardless of the macroeconomic climate. This resilience is driven by the increasing integration of technology solutions in our daily lives and the rapid growth of AI-powered solutions to drive much needed productivity gains.
While the Bank of England cut interest rates from 5% to 4.75% in November, the Monetary Policy Committee voted to hold the rate at December’s meeting, signalling that we're not out of the woods yet. The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to December 2024, up from 1.7% YoY in September, and it is expected to rise again in early 2025. The Bank of England will need to tread carefully as we move into 2025, balancing the timing of further interest rate cuts to avoid unfavourable outcomes. Growth is also fragile, with GDP flatlining in October and November and UK businesses fighting to mitigate the National Insurance and other changes announced in the Autumn Budget.
Despite the macroeconomic challenges, the chart below shows that UK Technology M&A activity has settled at above pre-pandemic levels, reflecting growing confidence and optimism in the sector. Q4 2024 was a standout quarter, with deal volumes up 20% to 215 and disclosed/estimated deal values up 46% to £9.8 billion, likely driven by the anticipation of a CGT rate increase in the Autumn Budget.
The UK technology deals market has been relatively flat over the past 24 months. While the Q4 2024 activity spike is likely a one-off Budget bounce, sentiment is improving, and we expect 2025 to be more active than 2024. With fiscal uncertainty now resolved, at least in the short term, technology business owners should remain optimistic. There is good appetite from both trade and financial acquirers for quality technology businesses that can demonstrate growth and strategic value. The weakened pound, compared to its peak in September, should also help tempt US acquirers. Valuation expectations may need to be more modest though, particularly compared to the risk-off era of 2021-22. The Bank of England base rate has lagged inflation as the chart below shows, so we look forward to further reductions, particularly in a year of predicted low growth.
Below is a heat map of UK technology M&A activity, showing the key statistics in the sector and their movements on both prior quarter (QoQ) and prior year (YoY).
Key: Green (positive change) and Red (negative change).
In January 2025, the UK Government unveiled its ‘AI Opportunities Action Plan’, designed to boost the UK’s AI capabilities and infrastructure, including significant investment over the next five years. A key part of this strategy is building a new supercomputer (previously announced in 2023) to position the UK as a leader in the global AI race. This powerful machine will join existing high-performance computing systems like Isambard-AI at the University of Bristol and Dawn at the University of Cambridge, enhancing the UK's computing power by a factor of 20.
The Government-owned supercomputer will support AI research and development in academia and public sector applications.
While this initiative is a positive step, it's important to recognize that building a world-class AI ecosystem takes time and sustained effort. The financial details of this ambitious project are yet to be disclosed, with funding expected from the Department for Science, Innovation and Technology's R&D budget.
Despite these considerations, the initial response from the private sector has been overwhelmingly positive, with over £14 billion in new investment which has flowed into the UK's AI sector. This surge aligns with significant commitments from global tech giants like Microsoft and Vantage Data Centers, signalling growing confidence in the UK's AI ambitions.
Over the last quarter, Crowe is pleased to have advised on the following UK technology transactions.
Sources: Pitchbook, Megabuyte, Calastone, LSE, FT
Our Corporate Finance team are here to assist you with every step of your M&A journey. Please contact Mark Allen or your usual Crowe contact for more information.
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