Tech's turning point: looking back at 2023 and looking forward to 2024

In this conversation with Robin Brown, Managing Director, Mid-Market M&A, HSBC they pick out the key themes of the past year and assess the tech sector’s trajectory in 2024.

At the macro-economic and geopolitical level, 2023 was an uncertain year. “It’s been a time of reflection, preparation and, to some degree, of a pause,” said Robin Brown.

“We still see tech companies outperforming other areas of industry,” he continued. Businesses were looking for cost savings across their technology estate or to use technology to enhance their go-to-product or go-to-market efforts. Capital projects for future growth were delayed in favour of driving efficiencies.

“One of the biggest drivers of the UK tech landscape is digital transformation,” said Roland Emmans. “In 2023 there was a real focus on ROI as companies weighed up spending to achieve cost savings against expenditure for gaining potential longer-term benefits.”

What this meant was that many tech companies had continued to trade well and deliver growth but the levels had been below expectations.

Some sub-sectors, however, had shown particularly strong growth in 2023. “Software, IT managed services and telecoms have been very resilient,” added Roland.

This is because boards across all business sectors are recognising the critical nature of their technology decisions, said Robin. “Digital evolution is seen as critical and boards have been focusing on how to use software to drive efficiency. Cyber was also an increasingly important concern. It’s certainly no longer a nice-to-have; boards want to see cybersecurity protection designed into technology platforms.”

The use of the word ‘AI’ has been over-hyped this year, said Robin, “but its fundamental potential is certainly not. We are seeing real life examples of businesses gaining direct and measurable ROI from day one through the implementation of AI.”

“Companies want to exploit the potential of AI but need to invest in their infrastructure in order to do this,” added Roland, “so the businesses who can support them – by providing the picks and shovels – are well-placed.”

ESG is increasingly in the mainstream and its importance is multifaceted, said Robin.

Investors want due diligence across the ESG landscape. For example, he said, “private equity funds are being measured on the amount of money they deploy into ESG focused businesses, as well as measuring how their portfolio companies are performing against various ESG measures.”

“Legislation and regulations around ESG are more prevalent, more real and better understood,” he added. “And staff and business owners are taking ESG ever more seriously, with more people entering the workforce demanding that a company’s ESG credentials be very real.”

It’s not about having all the answers, said Roland. The important point is for all tech businesses to be prepared for the questions. “You need to demonstrate that you have thought through your ESG position carefully, can articulate what you're doing, and be able to have it diligenced.”

While deal volumes were down, 2023 had still been an active market: Roland noted that 27% of UK M&A transactions in the first half of 2023 were in the TMT sector accounting for £10bn of deal value.

Investors wanted to deploy their cash into good businesses and invest for the future but valuations had been harder in 2023, said Robin. “Price discovery is hard in a market where there aren't lots of transactions.”

But the signs are that 2024 will be much more active. “We are seeing some narrowing between expectations of vendors and buyers,” said Roland.

“I see a very busy year of transactions ahead,” said Robin. More US companies are looking to grow their footprint outside of their domestic market. More US private equity firms have established a presence in the UK. And tech companies have been investing in R&D and in their growth pipeline.

For all the pent-up demand, the market still requires some companies to come out and take the deal-making lead. “All it takes,” observed Roland, is “for somebody to get on the dance floor and throw some shapes, as that will get everybody else up and dancing too.”

While it has been a year of consolidation, businesses have been investing for growth rather than retrenching, said Roland. “I am hearing much more positive sentiment than negative from all the businesses I meet.”

He thought that the shift towards greater levels of automation will continue, as tech solutions aggregate AI, mobile and the cloud.

“We will see continuing growth in the use of remote technologies,” said Robin, “not just to improve home working but also extending the use of remote teaching and healthcare.

“There's a lot to be positive about. The ecosystem is in a good place. I am seeing huge amounts of innovation, a wave of good businesses looking for investors, and savvy investors who are looking for opportunities. We have got a very positive year ahead of us.”