The quiet revolution at the heart of the UK’s digital sector
Jeremy Swift, Partner and head of Square One Law’s company commercial team, has over twenty years’ experience as a transactional lawyer. His experience in the acquisition and sale of digital businesses leads him to believe the sector is entering a new age in which investors can reap substantial rewards. In this article, he asks whether the ‘silent revolution’ at the heart of the UK’s digital sector has potential to generate real investment opportunities.
There is little doubt that there is a quiet revolution going on at the heart of the digital business sector in the UK. The change centres on the development of digital platforms in multiple sectors of the UK economy, driven by the need to innovate to maintain and grow market share.
The idea of a digital business is no longer new and many of the most successful enterprises are entering the next generation of their business models. The next phase of the digital revolution is increasingly attractive to investors and, as the economy changes and grows, there is new enthusiasm for digital business, which can demonstrate innovation, and potential for growth.
America still leads innovations in digital business but digital start-ups in the UK are increasing day by day. Investment opportunities are also crucially on the up, as there has been a clear shift in buyer interest from a focus on traditional business models to a broader internet-based business offering.
A good example is the UK media sector; businesses such as newspapers, with higher exposure to advertising spend, are mapping out a clear digital strategy. Retail has changed radically too. The British Retail Consortium produced data about Christmas shopping throughout the festive period but only when online spending was added did the real picture of our spending habits emerge. The emergent digital sector is now having a very marked effect on the economy as a whole.
Digital platforms are no longer confined to computers in the home and office. Online is now mobile and, according to Ofcom, the UK is the largest and most profitable mobile market in the EU with revenues of over £12 billion of which mobile content is around £1 billion and growing significantly due to improved mobile devices and flat rate monthly billing for calls and data. In addition, it is Europe’s largest market for MP3 players, digital music downloads, flat panel TVs and video games and it is Europe’s leading market for take-up of digital TV services, and also lead market for ICT related services.
The market has been strong, even during the second downturn in the double dip recession. The level of UK deals started to recover in 2010 and the trend is now very much upwards as more and more investors seek to capitalise on what they see as potentially significant increases in earnings. Companies, particularly those aiming products and services at consumers rather than the business-to-business market, are becoming more adept and astute at maximizing digital revenues from a broader variety of channels.
A factor which could well influence the market for investment into digital businesses in 2013 is the speculated move by institutional investors out of gilts and into equities which are perceived to be cheap that should result in an increase in the value of stock markets. Many of the deals I have worked on have been for national and international businesses and serve to illustrate the increasingly strong demand for digital businesses. The Alternative investment Market (AIM) on the London Stock Exchange is a key focus for digital media companies looking to raise equity through share issues.
These projects include the raising of over £70 million on behalf of Monstermob, which sold ring tones, music downloads and apps over mobile networks and online. Funds were raised through AIM and acquisitions were made via earn out arrangements in the UK, China, Philippines, Russia, Hong Kong and Singapore, among others. Other projects included advising Springdoo, a video messaging app provider, on its acquisition of a New Zealand based video messaging app provider and fund raisings on AIM and advising on the reverse of a management team into NetPlay TV plc, as well as advising NetPlay TV on fund raisings of over £25 million, various acquisitions and a £30 million authorised capital reduction.
The need for more traditional business to access digital platforms has become rapidly more urgent. This has led to a measurable increase in trade buyers looking to invest in acquisitions. The private equity market is buoyant too as private equity investors seek a portfolio that is not just balanced across business sectors but also balanced between traditional and digital sales platforms.
Overseas buyers, many from emerging digital media markets are also increasingly taking a keen interest in UK companies. Zed Worldwide SA is a digital media company with operations in over 65 countries, where I provided advice on acquisitions in Russia, Cyprus and Kazakhstan, as well as in the UK for this global company. Emerging countries are a growing area of specialism for Square One Law, and we are increasingly being called on by potential investors in particular for our advice.
So, what now for the future of the digital media industry in the UK? There is certainly much more scope for investment and acquisition. While the investor model in the UK has tended to focus on AIM, US investors tend to buy businesses outright. As a sign of the growing importance of the UK technology scene global heavyweights such as Google, Amazon, Intel, Microsoft and Cisco have established a presence in the East London area.
Despite all the activity and potential, some investors simply do not understand the digital media market and at the moment there is a lack of specialist expertise within the investment community to take positive investment decisions. This is however changing at some pace as investors recognise the potential for digital businesses.
The UK needs more experts in the professions who are able to champion the vibrancy of the sector. Many digital media businesses need expert financial and legal advice to help them to monetise their digital media offerings. In my experience the earlier a digital business becomes connected with professionals who have the track record and understanding of the digital sector the better quality strategic decisions are made by the executives of those businesses in the sector. An additional benefit to the digital business is the process and advisory efficiency, which these advisers provide.
The good news is that there is a very creative pool of talent in the UK’s digital media industry and in the North East there is a strong emerging market unlike some other sectors. This all bodes well for the future of digital businesses in the UK, and investors requiring long-term growth would do well to consider digital platforms in a new light.