With engineering software company Aveva (AVV) poised to exit the stock market thanks to a takeover, it will mean losing the UK’s largest ‘tech’ firm by market value, at £9.15 billion.

Aveva has been majority owned by French industrial group Schneider Electric (SU:EPA) since 2017 and this shareholder now wants the whole business.

That’s a slightly different bid situation to most of the other tech takeovers we’ve seen this year and last. Investors have lost favour with growth stocks and the pound has fallen to a 37-year low versus the dollar, which has seen many high-quality UK technology businesses fall in value and left them exposed to overseas takeovers. And deals are coming thick and fast.

Identity data intelligence platform provider GB Group (GBG:AIM) is the latest UK technology company to catch the eye of potential buyers after Chicago-based private equity firm GTCR made a takeover approach.

If we include agreed buyouts for Avast (AVST), Micro Focus (MCRO) and EMIS (EMIS:AIM), the UK stock market stands to lose companies worth £21 billion that generated revenues of £5.35 billion in the last reported full year.

Private equity firm Thoma Bravo may have walked away from a deal to buy cybersecurity firm Darktrace (DARK), but others might be lurking in the background, preparing alternative offers.

Investors interested in the exciting growth offered by many tech stocks should view takeovers as bad news. A bid may be pitched above the market price but losing these stocks from the market effectively robs investors of longer-term wealth creation opportunities.

TECH IN ALL SHAPES AND SIZES

Software and microchip companies are among the first places that investors associate with the tech space. Yet technology companies come in many shapes and sizes. The UK has a well-developed electronics sector, for example, with eight FTSE 350 constituents from the London Stock Exchange sector.

To many, these are manufacturing businesses, yet it is hard to argue that they are not tech companies too. For example, Renishaw (RSW) is a £2.55 billion world leader in metrology and spectroscopy. It owns hundreds if not thousands of industrial patents that make its equipment unique and best in class.

Oxford Instruments (OXIG) has hundreds of patents that protect its edge in scientific and healthcare kit and components. X-ray machines in hospitals and food safety checks, for example, would be virtually impossible without the £1.2 billion company’s tools.

Internet and mobile communications would be years behind were it not for the advanced testing solutions provided by £1.6 billion Spirent (SPT). It works with governments, healthcare, defence, transport, retail companies and many of the world’s largest telecoms suppliers.

TECH CONSUMERS OR CREATORS

According to Sharepad data, there are a dozen FTSE 350 software stocks including Belfast-based Kainos (KNOS), the digital transformation specialist. In seven years, this Belfast University spin-out has seen its market value surge from £161 million to £1.7 billion, a 956% gain.

True tech investors would ignore Auto Trader (AUTO), Ascential (ASCL), Baltic Classifieds (BCG) and Moneysupermarket (MONY), as they are not software companies at all, simply businesses that use technology. 

Moonpig (MOON) used lots of tech buzzwords when it listed in February 2021. It called itself a ‘platform’, talked about its ‘proprietary technology and apps’ and said it leaned heavily on ‘data science’.

Sounds all very tech-like yet what does it do? It prints bespoke greetings cards, the sort of thing a tech-savvy 12-year-old could do with Photoshop and a decent printer.

Moonpig was a good example of how the term ‘tech’ became a badge that many companies tried to wear in recent years. It became cooler to be about the internet of things than just things, but the recasting is seductive in more tangible ways. It implies faster growth, easy and cheap scalability, and better investment returns. That opens the door to pools of investment capital that might not otherwise be available, and can push stock valuations to extraordinary levels.

That’s not to dismiss these companies. They each have their own investment pros and cons, but they aren’t really tech.

SEPARATING THE UNIVERSE

‘At Blue Whale, we make a distinction between the users of tech and the creators of tech,’ says Stephen Yiu, lead manager of the £825 million LF Blue Whale Growth Fund (BD6PG78).

‘We see lower barriers to entry for users of tech which decelerates growth as competition catch up. Creators of tech are better able to maintain their competitive edge and therefore enjoy sustainable growth for longer,’ Yiu believes.

An even greater number of ‘tech creators’, as Yiu calls it, exist on AIM. Many investors still see the junior market as a collection of flaky firms without a penny of profit to their name, but that’s not the case. In the AIM 100 index 18 tech companies have market valuations above £200 million, with meaningful revenues and, in most cases, gross profits.

As we mentioned earlier, GB and EMIS have enough about them to attract takeover interest, so there is clear interest in the wider markets for the potential of AIM-quoted businesses.

Companies such transport infrastructure and analytics software designer Tracsis (TRCS:AIM) should be relatively familiar names to Shares readers – it was one of our best-performing stock picks for 2021, up 57%.

Technology as a theme has fallen out of fashion this year, as has growth in more general terms, as high inflation and raising interest rates have impacted valuations.

Where investors may have been happy to pay 30 to 40 times earnings in the past for consistent 15% to 20% yearly growth, they’re currently prepared to pay much less.

However, Covid has demonstrated that technology is a vital function in our daily lives, almost on a par with light and heat. Businesses across every sector, from fashion to finance and food to fabrication today rely on technology to run. This means that tech is unlikely to stay passé with investors forever.

DISCLAIMER: The author own units in Blue Whale Growth.

‹ Previous2022-09-22Next ›