Late December has seen a rash of takeover news hit the technology sector. and NSB Retail has agreed a bid from US business software provider Epicor. With technology and telecoms stocks underperforming the market, analysts expect low valuations to attract yet more bidders to the sector.
The software and computer services sector underperformed the FTSE All-Share by around 10 per cent during 2007, according to analysts at Landsbanki, with IT hardware and telecoms services also down for the year. That could have been even worse without standout performances from the sector's leaders, such as Autonomy and Aveva. But even these quality companies are , with previous star performer Axon losing 40 per cent of its value in the last three months.
The tech sell-off suggests investors are taking a dim view of the , with consumer demand also looking shaky. Nonetheless, trade buyers - and perhaps private equity - are returning.
"The market is discounting a doom scenario that companies and corporates just don't share," says Evolution analyst Roger Phillips. "Recent M&A multiples from trade buyers don't leave the software sector looking expensive by any means." He suggests Intec Telecom and could be prime takeover targets in the medium term.
Technology companies traditionally have more cash on their balance sheet, leaving them well placed to gain customers or niche solutions by acquisition. But companies that are themselves roll-ups of several acquisitions, such as Sage or Microgen, may be too complex for a buyer to integrate.
"Companies that can't prove they're consolidation targets are going to have a very tough time," says Andrew Darley of KBC Peel Hunt. "Those that are unappreciated by the market might consider going private while prices are so low."
Dozens of companies trade below the software sector's average forward PE of around 14. "The trick is to find the ones that are not going to warn - because most of them probably are," says Landskbanki analyst Kevin Ashton. But with Northgate in talks, and for selling one or more of its disparate divisions, Mr Ashton adds: "It's deafening the amount of interest we are hearing in public-sector IT."
