2007 sees rise in delisting of tech companies

Recent research carried out by Close Brothers Private Equity (CBPE) has found that the delisting of technology companies grew significantly in 2007, with one in three deals featuring private equity buyers.

Since March 2007, more than 15% of the current total market capitalisation of the London-listed software and IT services sector has been delisted, equating to an equity value of £2.6bn. Falling share prices combined with no major technology IPOs - with the exception of Telecity in October 2007 - has left many stocks suffering from severe illiquidity.

Paul Lewington, director at Close Brothers Corporate Finance, believes the fragmented nature of the market has encouraged the trend. "In an environment where potential for organic growth has decreased, you can only grow through buying your competition." This opportunity for consolidation is a key motivation for private equity. The sector consolidation offers potential to create synergies and scale up operations, and offers attractive returns.

As a result of this delisting activity, equity value is leaving the sector altogether, and all signs are that this trend will continue throughout 2008. In order to avert this, "investors need to reconsider valuations in the hope that the conditions will improve for companies who want to list", says Lewington.

CBPE calculates that the average price/earnings ratio (PER) multiple for IT companies under £100m market capitalisation is now less than 9x 2008 forecast earnings. Companies with a market capitalisation of more than £250m are on average trading at a PER multiple of between 15x and 20x 2008 forecast earnings.

Buyers, both private equity and corporate are willing to pay unusually high premiums to delist what are seen as under-valued assets. "The average takeover premium in the IT sector has been just over 50%. Sector premiums as significant as this underline the disconnect between the public market trading values and the fundamental valuations of these businesses," states Lewington.

The table below shows that while private equity houses are willing to pay fairly high premiums for assets, they are more cautious than their corporate counterparts.

However, it is not all bad news. For an investor that can create value, the stock market still represents an excellent exit route. "The traffic hasn't all been one way. The successful IPO of Telecity last year, with a pricing representing a market capitalisation of £436m, indicates how companies can prosper under private equity ownership and return to the public markets stronger than before," Lewington says.

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