IT firms adopt "buy and build" strategy for growth

Corporate finance adviser encourages IT firms to continue acquisition trend

Hope advises that IT businesses in the UK can continue growing by acquiring smaller players

The UK’s IT firms are acquiring small and struggling businesses to revitalise their operations, according to a corporate finance advisory firm.

“There has been a significant uplift in M&A activity compared to this period last year and there are some interesting trends among trade acquirers” explained Jamie Hope, technology expert at Catalyst Corporate Finance.

Hope advises that in fragmented markets, acquiring businesses is a good way of making a mark on the industry. Sectors that are not necessarily mature markets with few large players and a cluster of small businesses are optimum grounds for growth by acquisition.

One such sector is the healthcare space, argues Hope. Leading the way for acquiring firms in this market has been business process services provider ACS, which made a number of acquisitions in 2009 and lost no momentum in 2010, recently announcing the acquisition of business accounting software provider COA Solutions for £100m.

Hope also considers the telecoms space to be a fragmented sector, citing the example of Daisy Telecom, a firm that continued from where it left off in 2009 – snapping up smaller telco providers, such as Managed Communications, and placing them in its successful acquisition model.

He also encourages businesses to supplement organic growth with acquisitions, citing the example of outsourcing firm Capita’s recent purchase of integrated education solutions provider Ramesys.

“Back in 2009 Capita bought Carillion IT Services and then Synetrix, both of which span education and BSF contracts. The addition of Ramesys will massively enhance their offering in this arena. I am sure [educational software provider] RM will be looking nervously over its shoulder,” he said.

Savvy firms are also acquiring “stressed assets”: companies that are heading for or already in a state of bankruptcy or administration.

“Last year, as you would you expect in a recession, there were a lot of distressed sales as companies ended up in administration, and acquirers had rich pickings,” explained Hope. “A great example of this in the IT services arena is 2e2’s recent acquisition of Morse.”

Morse had been struggling for some time and was subject to almost constant bid speculation. As Hope explained, any acquisition has risk attached to it, but it is even more prevalent when buying a stressed asset.

“It is not until you own the asset that you will really know how ‘stressed’ it is as a business. 2e2 obviously sees a great opportunity in Morse. I will wait and see if they can deliver,” he concluded.