London's so-called Tech City has been getting a lot of favourable press recently. There's a real buzz around the epicentre in gritty Shoreditch, reminiscent perhaps of the heady optimism that fuelled the dot-com bubble in the late-90s. Back then, Cambridge was the place to be and, despite the odd casualty, the development of 'Silicon Fen' as a tech hub has been a huge success. Clearly, the question now is whether the current surge in merger and acquisition activity, slew of initial public offerings (IPOs) and rocketing share prices is sign of future growth, or a warning cry that the sector is beginning to overheat.
Already this year the Aim technology index has risen by nearly half and has almost doubled in the past two years. Incredibly, the index recently breached a level last seen at the back-end of the internet boom in December 2001. And it’s not just the little guys enjoying a renaissance, either. There’s been similarly spectacular success among the bigger players, too, and the FTSE 350 technology index is up four-fold since the darkest days of the financial crisis at the end of 2008.
Recent takeover bids for Andor Technology (AND), a high-tech camera maker, and Delcam (DLC), which develops advanced software for the manufacturing industry, would seemingly point toward better times ahead. Andor's suitor, Oxford Instruments (OXIG), has made an indicative offer of 500p per share in cash. Sales are recovering and Andor has negotiated hard, yet Oxford clearly sees value in the business even at these levels. Delcam, meanwhile, is being bought by US-based rival Autodesk (US: ADSK) for £172.5m in cash, a deserved premium as record demand for its software translates into soaring revenue and profit.
There's been an abundance of smaller M&A activity among London-listed tech stocks these past few months, too, most recently at managed service provider Redcentric (RCN), which said this week it will pay £65m for peer InTechnology. The deal, classified as a reverse takeover, will be funded largely by institutional money.
It is the IPO market, however, that has really captured the imagination of investors this year as companies and speculators alike capitalise on the robust capital market environment. Shares in microblogging site Twitter (US: TWTR) soared as much as 70 per cent on their first day of trading after the loss-making company raised $1.8bn (£1.1bn) earlier this month. And more than a few eyebrows were raised when Evan Spiegel, the 23-year-old founder of photo messaging app firm Snapchat, turned down a $3bn offer from Facebook (US: FB).
London, however, is popular, too. Servelec, a provider of software and services to the healthcare and power industries, is set to complete the largest fundraising for a UK-listed software company since 2000 when its shares list on the main market on 2 December. A heavily oversubscribed IPO - also billed as the largest UK tech IPO by market value since March 2010 - will raise £122m.
Servelec isn't an isolated example, either. Another 18 technology companies have tapped the London market so far this year, double the number in 2012 and 2011. "The market is improving such a lot now, there is a completely different appetite for raising money," notes Sam Smith, chief executive of broker finnCap. "The small-cap environment is definitely seen as less risky than it has been for a long while. There's so much interest in initial public offerings... it's now a viable option for a lot of businesses."
It certainly helps that shares in many of the tech floats have rocketed following their debut. In 2013 alone, you would have made an average gain of nearly 17 per cent had you invested in all 18 tech IPOs on their first day of trading, based on exclusive research from the Investors Chronicle and S&P Capital IQ.
| Technology IPOs in London in 2013 | ||||||
| Company Name | Exchange | Ticker | Industry Classification | Current Market Capitalisation | Listing date | Share price performance since float |
| EU Supply | Aim | EUSP | Software & Computer Services | £13m | 11/13/2013 | -7.2% |
| Kromek Group | Aim | KMK | Technology Hardware & Equipment | £74m | 10/16/2013 | 17.2% |
| Tungsten Corporation | Aim | TUNG | Software & Computer Services | £244m | 10/16/2013 | 4.3% |
| Progility | Aim | PGY | Software & Computer Services | £16m | 10/04/2013 | -1.5% |
| Macromac | Aim | MACC | Software & Computer Services | £17m | 09/20/2013 | 206.7% |
| CentralNic | Aim | CNIC | Software & Computer Services | £48m | 09/02/2013 | 64.9% |
| RapidCloud International | Aim | RCI | Software & Computer Services | £18m | 08/14/2013 | 18.2% |
| Gaming Realms | Aim | GMR | Gaming | £34m | 08/01/2013 | 8.3% |
| 24/7 Gaming Group | Aim | 247 | Gaming | £46m | 07/31/2013 | -37.0% |
| Centrotherm photovoltaics AG | LSE | 0QGX | Technology Hardware & Equipment | £114m | 07/26/2013 | 3.8% |
| Frontier Developments | Aim | FDEV | Gaming | £35m | 07/15/2013 | -27.5% |
| Keywords Studios | Aim | KWS | Gaming | £46m | 07/12/2013 | -22.9% |
| IBEX Global Solutions | Aim | IBEX | Software & Computer Services | £85m | 06/28/2013 | 39.9% |
| Outsourcery | Aim | OUT | Software & Computer Services | £37m | 05/24/2013 | -7.5% |
| Redcentric | Aim | RCN | Software & Computer Services | £58m | 04/24/2013 | 12.2% |
| CloudTag | Aim | CTAG | Technology Hardware & Equipment | £19m | 03/20/2013 | -33.8% |
| Starcom | Aim | STAR | Technology Hardware & Equipment | £17m | 02/27/2013 | 3.3% |
| Digital Globe Services | Aim | DGS | Software & Computer Services | £79m | 02/14/2013 | 59.8% |
Average 16.7% Source: Investors Chronicle, S&P Capital IQ, London Stock Exchange | ||||||
IC VIEW:
The technology sector may be red hot but this isn't a bubble, at least not of the kind seen in 1999 and the early noughties. Despite rising significantly this year, the Aim technology index remains way below the levels seen back then and companies now actually have a business plan and logical pathway to profits. Sure, shares in Twitter appear overvalued given the early stage nature of its commercial operations. This has prompted murmurings of "dot-com bubble 2.0", but Twitter simply isn't the same as Pets.com, which filed for bankruptcy just 268 days after raising hundreds of millions of dollars and floating on Nasdaq.
That said, there is certainly a strong case to be made for equity markets as a whole being overvalued. Cheap credit and endless money printing by central banks have inflated equity valuations, despite only modest economic growth across much of the developed world. But so long as the electronic printing presses are dialled up to the max, investors can gain by riding the credit wave up. Growth plays are back in vogue following the rush into value stocks earlier this year and the technology sector stands to be a major beneficiary should the stock market rally materially from here. We see both valuations and M&A activity increasing in the months ahead, but how much longer the rally lasts ultimately depends on the central bankers.
