The landscape for technology acquisitions post-Brexit

There are many stories appearing in the media about how Brexit either provides a world of opportunity or could lead to the destruction of our way of life. You must never allow economic uncertainty to be an excuse not to grow the profitability of your business.

Instead, you should concentrate on understanding the impact of economic uncertainty, and plan your business accordingly. From a historical perspective, Brexit is merely the ninth period of economic uncertainty in the last 50 years. UK companies are now relatively cheaper because of the fall in the dollar exchange rate.

Will we see a rise in acquisitions by US companies?

I would argue no. In May 2016, the last month before the Brexit referendum, US$1 bought you 69 pence. In February 2019, the exchange rate was $1 for 76 pence. The change was only 10%.

Clearly you need to update those numbers for the present time, but my point is this – reducing the price of your business by 10% doesn’t suddenly make a bad business worth buying. It merely makes buying a good business a slightly better deal. Lending patterns Most acquisitions of small and medium-sized enterprises are funded by debt.

Acquisitions are therefore likely to continue to be funded by debt when interest rates are at historic lows. In years of economic uncertainty, it can be hard to grow revenues.

The amount banks will lend often determines how much a buyer can buy or pay. I can see no evidence that these bank ratios are changing.

Is anyone brave enough?

I still think that no one will be brave enough to raise interest rates immediately post-Brexit, because of the uncertainty surrounding the economy.

That’s why you see more acquisitions of companies that can be merged with another to create economies of scale. You can still grow profitability, even if you cannot grow the top-line revenue, and we must never forget that bit.

Megatrends…

Every recession I’ve navigated has the same highly predictable characteristic. Families stop spending money that they can often ill afford in family restaurants on a Friday or a Saturday night. Instead, they stay at home and download the latest blockbuster film and buy a big bar of chocolate.

I would hope in reading this article, you cannot guess my politics. In truth, I’m an ardent Remainer. I think we’ve spent over 40 years removing trade barriers, and they’re now going to be erected again.

The megatrends that we all study, the bigger trends that are affecting technology, are nothing to do with Brexit. Online shopping is killing the high street retailer, and the lack of footfall is having a knock-on effect for restaurant chains, exacerbated by the TV and chocolate story that happens every time there’s a recession.

Whether we stay in the EU or leave, this will not change. When we are buying businesses, we don’t just look at what products or services the company sells.

We also look at who the customers are

I met a company which built impressive market share in a specific virtual market. This is fairly unusual for a small/medium-sized company. However, they were one of the largest suppliers of technology to the retail sector. As they say on Dragon’s Den, I’m out.

‘Generation rent’ is growing up with no expectation of being able to buy a property in the short term. As they regularly move home, they’ve got used to not wanting to move lots of possessions with them.

Generational differences

Their whole attitude to ownership is very different from my generation when the more things we owned, the wealthier we were deemed to be. I think this psychology has a huge influence on the move to the cloud or renting services rather than buying on-premise equipment.

Again, this has nothing to do with Brexit. The decision by Openreach to close the UK telecoms network as we know it and no longer provide voice services by 2025, will play an increasingly important part in deciding who we find desirable acquisition targets, and the price we are prepared to pay.

We also shy away from companies where they or their customers are affected by foreign exchange currency fluctuations.

Don’t get carried away with the economic forecasts

We want certainty in uncertain times, but my advice is to be wary of post-Brexit economic forecasts. I think Ronald Reagan got it right when he said if Trivial Pursuit had been designed by economists, there’d have been 100 questions and 3, 000 answers. Certainty in uncertain times I hope that I’ve convinced you at least in part that in terms of economic uncertainty, some things are more certain than others.

I would hope in reading this article, you cannot guess my politics. In truth, I’m an ardent Remainer. I think we’ve spent over 40 years removing trade barriers, and they’re now going to be erected again.

We’ve also seen the longest period of peace in Europe since we started working together. However, and this is a very important point, in business, we have to deal with the world the way it is, not the way we would like it to be. Don’t let your politics confuse you in business.