Tech investment advisors disclose top shares to invest in for substantial gains due to anticipated UK technology acquisition sprees
Here Comes the Exit:
British tech's bouncing off the dancefloor and into the arms of foreign partners. It ain't pretty, and it's not just a one-night stand.
Three bright, budding tech giants stepping out in the UK were swooped up this week, and the timing couldn't be worse. Prime Minister's face is flushing red as Nvidia's chief, Jensen Huang, warns Starmer's ears that the UK is woefully unprepared for AI's potential—all while witnessing the scene.
Huang built his Silicon Valley chipmaker, Nvidia, from scratch 30 years ago. Now, it's the world's largest public company, worth a whopping £2.6 trillion—that's almost the UK's entire annual GDP. The chances of a British tech unicorn scaling up to that mammoth value? Slim to none.
So why the mass exodus to foreign shores? Can anything halt this flow? And what can you make from this tempest?
Two hefty deals went down this week. Microchip designer Alphawave inked a £1.8 billion takeover by US software giant Qualcomm. In a second move, scientific instrument maker Spectris received a £3.7 billion buyout recommendation from US private equity firm Advent. Shares soared for both companies after their suitors offered steep premiums to secure control.
The week's third deal went to Oxford Ionics, a quantum computing startup founded by two Oxford University PhD students. Privately owned, it was snapped up by a larger US tech firm for over £800 million.
This funding gap problem has plagued Britain for years. New, innovative companies would grow, only to find they couldn't shake loose the fresh capital needed to reach the next phase. The banks were too timid to offer long-term funding, and companies themselves were too small to grab cash from outside investors by listing their shares on the stock market.
The venture capital firm, 3i, was born from this mess back in 1945. Set up by the Bank of England and major British lenders, its mission was to provide long-term investment funding to small and medium-sized companies (SMEs). The Alternative Investment Market, launched 30 years ago, opened up the stock market to more domestic companies eager to grow.
But SMEs, especially tech ones, are risky investments. Their financial backers could strike it rich or lose everything. Big investors—like pension funds—kept their distance. Just 1% of UK pension and insurance assets are invested in private, unlisted UK companies. Soaring demand for stakes in domestic firms decreased, dropping their share prices. This left companies exposed to bigger overseas competitors or tempted to make the move to New York, where their shares might fetch higher values.
Cambridge-based Arm, maker of chips for Apple's iPhones, switched its main share listing from London to New York back in 2023. Fintech payments firm Wise is now planning to do the same. What was once a trickle has become a flood.
Pundit Charles Hall at stockbroker Peel Hunt points out 30 deals so far this year valued over £100 million each—the largest being for Alphaware and Spectris. Buyers are paying an average premium of 43% to take control.
"This shows the scale of under-valuation in the UK," Mr. Hall notes. "Our companies are more attractive to predators than to investors."
The strong pound used to make British companies easy pickings for US buyers, but things have changed.
Investment guru Will Walker-Arnott at broker Charles Stanley explains, "We're in a doom loop where lower valuations attract takeovers, leading to more delistings of shares."
He pins the blame on the UK pension industry for the growing exodus.
"It's highly fragmented, risk-averse, and until that changes, we're not going to see an uptick in UK valuations." Labour wants pension funds to merge to boost returns.
Starmer vowed to create AI makers, not AI takers, though experts say much more is needed to achieve this goal.
"We have a strong history of building and starting companies here," says Eleanor Lightbody, Luminance's boss. However, she adds, "There is some work to be done to make them scale here and stay here."
Who's Next?
We may deplore the trend of UK tech companies being swept away, but shareholders could profit. Bidders usually pay a handsome premium over the share price to win control—meaning nice gains for investors.
But beware! Buy shares hoping for a bid, and you'll be playing a fool's game. Although a potential purchaser might express interest, a deal might never happen. If the bid falls through, you could be left with a hollow wallet.
"Buying a company just for a bid is a mug's game," says Russ Mould, AJ Bell's investment director.
Shares should be bought based on the company itself, its competitive position, financial strength, operational performance, and the quality of its board. "If a bid comes along, all well and good, but the idea is to buy good assets," Mr. Mould adds.
Here are some tech investment ideas:
- Oxford Instruments: Fought off a £31 per share bid from Spectris in 2022 while trading around £20. Mr. Mould thinks it could be primed for a takeover again.
- Renishaw: Supplies laser components used in drones, self-driving cars, and 3D printers. Failed to find a buyer in 2021 but declared former founder Sir David McMurtry wanted a long-term supportive buyer.
- GB Group: Targeted by US private equity firm GTCR in 2022 but deal fell through. Shares are down 75% from their all-time high. Mr. Mould thinks an opportunistic buyout could be on the horizon.
- Sage Group: Accounting software giant with a £12.3 billion market cap. Might not be an obvious target, but analysts at Peel Hunt say it has potential.
- Alpha Group: Already "in play" after business payments tech group Corpay made a preliminary offer. Shares hit an all-time high but could climb higher if a deal happens. Talks ongoing.
- The UK's tech industry is facing a mass exodus to foreign shores, with British tech companies being purchased by overseas buyers, such as US software giant Qualcomm and US private equity firm Advent.
- One of the factors contributing to this trend is the financing gap problem in the UK, where venture capital firms and pension funds have shown reluctance to invest in private, unlisted UK companies.
- Pension funds, in particular, have been criticized for their risk-averse nature and fragmentation, which is believed to be hindering the growth of UK tech industry.
- To address this issue, some experts have suggested measures such as encouraging pension funds to merge, improving the regulatory environment, and increasing government support for tech startups and innovation.
