The Software, Media and Technology sector experienced a significant change in investor expectations following the rapid digital transformation of the pandemic.
Technology valuations corrected as investors returned their attention to future cash generation, profitability and sustainable commercial growth. However, funding remained available for attractive businesses, while corporate buyers continued to seek technology capable of strengthening their existing operations.
Polestar CF’s Software, Media and Technology review examines public-market valuations, UK deal activity, selected transactions and the themes expected to influence the sector over the following 12 months.
Lower listed-technology valuations affected private-company pricing and made fundraising more difficult for early-stage businesses unable to demonstrate revenue and profit growth.
At the same time, international buyers continued to view UK technology businesses as attractively priced. Strong assets still achieved high valuations, particularly where their technology could be introduced to a larger customer base.
During the pandemic, technology companies benefited from accelerated digital adoption and strong investor demand.
As market conditions changed, valuations moved away from relying principally on revenue growth. Investors placed greater emphasis on profitability, future cash generation and evidence that a business could convert its technology into a sustainable commercial model.
Trade buyers remained interested in acquiring attractive solutions, including technology businesses that lacked commercial scale but had relatively low levels of technical debt.
Earlier-stage businesses faced greater difficulty raising capital unless they could demonstrate both revenue and profit growth. This created opportunities for larger companies to acquire technology from smaller businesses at more acceptable valuations.
Generative AI emerged as a major area of investor attention following the launch of OpenAI’s ChatGPT in November 2022.
ChatGPT reached 100 million users within two months, becoming the fastest-growing user platform at the time. The speed of adoption encouraged investors and corporate buyers to seek exposure to Generative AI.
AI start-up Mistral raised £105 million only four weeks after it was founded. Its three founders had previously worked for Meta and Google, demonstrating the value investors placed on an experienced management team and specialist technical knowledge.
The investment also reflected European appetite to develop alternatives to AI models emerging from Silicon Valley.
The average Software and Technology business within the public-market index was trading at:
Public companies typically attract higher multiples than private businesses because of their greater scale and perceived reliability. A discount would therefore normally be applied when using listed multiples to assess a private company.
Credit Data and Risk Information achieved the highest revenue multiples:
Data and Analytics businesses were trading at:
Meaningful EBITDA multiples were not available for the subsector.
Financial and Accounting Software businesses were trading at:
Infrastructure businesses were trading at:
Human Capital Management software businesses were trading at:
Cybersecurity businesses were trading at:
Banking Technology and Capital Markets businesses were both trading at:
Payments businesses were trading at:
Machine Learning and AI businesses were trading at:
Lending businesses were trading at 4.2 times trailing revenue and 15.5 times trailing EBITDA.
Wealth Technology businesses were trading at 4.1 times trailing revenue and 15.7 times trailing EBITDA.
Application Software businesses were trading at 3.6 times trailing revenue and 14 times trailing EBITDA.
Digital Media businesses were trading at 2.3 times trailing revenue and 11.5 times trailing EBITDA.
E-commerce businesses achieved the lowest revenue multiple at 1.4 times but were trading at 17.3 times trailing EBITDA.
There were 198 reported UK Software, Media and Technology transactions during the six-month period covered by the review.
Activity was divided as follows:
Software, AI and Machine Learning accounted for more than three-quarters of reported activity.
International buyers completed 77 of the 198 reported transactions.
This included:
Interest came from buyers in the United States, China, Canada, Europe and Australia. US buyers were particularly active because UK valuations remained lower than comparable valuations in the US.
Although overseas buyers identified opportunities within the UK market, high-quality businesses continued to attract strong prices.
The correction in listed-technology valuations also affected private markets.
International buyers pursued both established technology businesses and smaller companies without fully developed commercial models. This aligned with the increasing fundraising difficulties experienced by early-stage companies that could not yet prove their ability to generate sustainable revenue.
The value of a technology business therefore depended on more than its existing commercial scale. Buyers also considered the quality of its solution, levels of technical debt, management expertise and the potential to distribute the technology across a larger customer base.
Believe acquired digital-media company Sentric Music for £40 million.
The transaction represented approximately 12.1 times 2022 EBITDA.
Matrix SCM acquired digital-transformation software business Security Watchdog for £14 million.
The transaction represented approximately 9.3 times profit before tax.
eProductivity Software acquired enterprise-resource-planning software provider Tharstern for £9 million.
The transaction represented approximately 15 times 2022 EBITDA.
Access PaySuite acquired FinTech business Pay360 from Capita for £150 million.
The transaction represented approximately 14.5 times 2021 EBITDA.
NowVertical acquired Data and Analytics businesses Acrotrend and Smartlytics.
The two businesses were valued at combined gross consideration of £5.1 million through a cash-and-shares agreement. This represented approximately 3.42 times adjusted EBITDA.
The transaction included an earn-out, helping to address differences between buyer and seller expectations around future revenue growth.
Daisy Corporate Services acquired listed cybersecurity provider ECSC Group for £5.4 million.
The transaction represented approximately 27 times 2021 EBITDA and a 170% premium to ECSC’s closing share price on its final day of trading.
The valuation reflected the potential to offer ECSC’s services through Daisy’s direct and channel-partner customer network.
Several themes were expected to shape the sector over the following 12 months: sustainability regulation, leadership through uncertainty, automation, risk management and competition for digital content.
Legislators, investors and other stakeholders were increasing pressure on businesses to provide greater information about their environmental impact and sustainability performance.
The EU Sustainable Finance Disclosure Regulation and UK Green Taxonomy introduced requirements concerning sustainability alignment, risk and financial planning.
Regulation was developing at different speeds internationally. The US market was behind the UK, Europe, Singapore and Canada, but investment by international funds was expected to accelerate the rate of change.
Increasing regulation would create demand for software capable of managing and communicating actionable sustainability data in real time.
Reduced consumer spending, weaker product demand and falling market capitalisations placed pressure on consumer-facing technology companies to increase margins and grow revenue.
Almost 190,000 technology-sector job losses had already been announced. Further margin improvements were expected to depend on scale, strategic consolidation, automation and the modernisation of legacy technology.
Higher employee costs and inflation increased the need for companies to reduce costs and automate processes.
This created opportunities for B2B technology providers offering effective automation and AI solutions. Businesses owning and managing high-quality data could also build value as AI applications became more specialised.
Companies needed to develop a better understanding of interconnected risks during a period of market uncertainty.
Large advisory firms showed interest in specialist consulting and risk-advisory businesses capable of helping clients respond to these risks. Automation, data management and access to wider networks were important drivers of value.
Consolidation continued as digital-media businesses competed for ownership of content.
Operators sought larger content catalogues to improve their position when negotiating with broadcast and distribution platforms. This created competition for exclusive content rights and for employees with the skills and industry relationships required to develop new material.
Transaction value depended on both the target’s existing portfolio and the retention of key creative employees capable of producing further content following an acquisition.
There were 198 reported UK transactions during the six-month period covered by the review.
Software, AI and Machine Learning recorded 153 transactions, accounting for most of the reported activity.
International acquirers completed 77 of the 198 transactions. This included 59 acquisitions in Software, AI and Machine Learning.
Investor attention moved away from valuations based principally on revenue growth and returned to profitability, cash generation and evidence of a sustainable commercial model.
Buyers considered the quality of the technology, levels of technical debt, management expertise, commercial performance and the potential to sell the solution across a larger customer base.
Credit Data and Risk Information achieved the highest public-market revenue multiple at 8.6 times trailing revenue.
Early-stage businesses found it more difficult to raise capital without proven revenue and profit growth. This created opportunities for larger buyers to acquire valuable technology that had not yet achieved commercial scale.
The rapid adoption of ChatGPT and the £105 million funding round completed by Mistral demonstrated strong investor interest in Generative AI, specialist management teams and technical expertise.
Sustainability regulation, leadership through uncertainty, automation, artificial intelligence, risk management and competition for digital content were expected to influence the sector.
High-quality data supported automation, AI and risk-management solutions. Businesses able to own and manage specialised data could create additional value as AI applications became more targeted.
