According to Freshfields Bruckhaus & Deringer, up until September 2008, the UK technology, media & telecoms (TMT) sector has attracted the second strongest and most widespread M&A investment since the dotcom boom. Only 2006 had higher levels of investment but this was due to the purchase of O2 by Telephonica – a deal that was worth some £17bn. £12.6bn has already been committed by foreign acquirers across 132 deals. A recent example has been the purchase of Messagelabs by Symantec for $700m.

The £12.6bn invested up until September 2008 is over three times the amount spent on TMT companies in the whole of 2007 and much higher than any year between 2001 and 2005. This has been also helped by more realistic valuations of UK TMT companies.

Foreign investment levels in UK TMT market
2000 £47bn
2001 £5.2bn
2002 £758m
2003 £4.1bn
2004 £1.6bn
2005 £3.9bn
2006 £22.5bn (Telephonica acquires O2 for £17bn)
2007 £3.8bn
2008 £12.6bn

Back in 2000 the highest investments, in the TMT market, were made in the wireless industry which attracted £29bn. By comparison, in 2008 the highest investments were in the publishing industry with £9.9bn completed including the acquisitions of Reuters by Thomson Corp for £7.9bn and the sale of Emap to Heinrich Bauer for $1.4bn. By far the biggest nation investor into the UK TMT market is the US.

Natasha Good, TMT partner at Freshfields said “In keeping with the global picture, UK publishing companies have been hotbeds of investment this year followed by operators in the software and computer systems industry. As advertising revenue continues to migrate from print media to online, depressed valuations of publishing companies, that are cash generative, have attracted buyers whilst some players are looking for consolidation opportunities to achieve economies of scale in a changing market.

However, investment levels by UK companies seeking to complete acquisitions abroad has fallen significantly to just £628m from a high of £159bn in 2000. In 2008 the US featured as the most popular country to invest in with £260m worth of investment across 35 deals. Last year India was popular with £6.4bn worth of deals.
Global M&A in the TMT sector for 2008 has unsurprisingly fallen significantly below the levels seen in the last 2 years. This in part has been due to the difficulty in securing financing recently for the sometimes very large transactions in this sector. It is likely that only corporates with strong balance sheets will be able to expand globally through M&A activity.
One large market for technology companies has been to supply banks and regulators with sophisticated trading and compliance software. The fall in volumes of trades and general activity in the finance sector will put pressure on these businesses and may therefore depress values. In addition the development of software by small businesses requires much investment so without the support of the banks innovation may be restricted.

In conclusion, due to the continued need to innovate in the technology arena it is likely that as long as sector valuations remain realistic there will be deal flow throughout 2009. Cash-generative publishing businesses that do not rely heavily on vulnerable sectors for advertising or subscriptions will continue to be attractive. to investors.

Gordon Brown’s promise to make Britain into a strong knowledge based economy is now more important than ever if investment is to be encouraged.

Last year saw a wave of consolidations across the media and technology sectors, and my view is that 2008 will see this trend continue, perhaps even more dramatically.

My hot category picks are:

• Mobile – particularly location-based devices and applications
• Energy and green technology
• Micro devices and nanotechnology
• Online video
• Social media
• Search engine optimisation

Many medium to large companies are struggling to keep up with new areas of specialist technology and organic growth strategies are just not keeping up. My colleague attended the Library House Mediatech event in November last year and quoted one of the speakers announcing that M&A is the new R&D, which sums up the prevailing attitude succinctly.

So you have a number of these switched-on companies keeping close tabs on smaller tech and media businesses ( including start-ups ), with a view to taking over the specialist technology and the trained specialists with it. Experts in the hot tech areas are increasingly hard to find, and buying a tranche of them in a single acquisition is sometimes an easier option.

Larger technology businesses have particularly highly active over the past six months. Witness Microsoft snapping up in November of UK-based Multimap, one of the world’s leading internet mapping businesses. Or Warner Bros recent acquisition of the UK’s largest independent interactive games publishers, TT Games. Nokia Siemens is about to swallow up Apertio, the telecoms data platforms provider.

Mid-cap companies are also starting to enter the arena in quantity and this is where I predict a new wave of merger activity over the next twelve months. ESRI (UK), the GIS ( geographic information solutions) company has just taken over the geospatial division of Tadpole Technologies. Ingram Micro has announced it is buying Paradigm Distribution, the point-of-sale (POS) technology company.

Pressure to create scale is also coming from the VCs who have backed the myriads of technology and media start-ups over the past two years, and are happier seeing no more than a handful of businesses dominate each sub-sector.

Whether the credit crunch continues or not, the driving forces behind the technology and new media industries are too strong to prevent a storming round of consolidations throughout 2008.