Tech firms court US suitors

British technology firms are increasingly willing to be acquired by US firms, according to a new report.

Research from financial advisers Grant Thornton shows that while the overall software market has been in decline since 2001, there has been an increase in the number of cross-border deals, primarily US acquisitions.

Activity in the software sector increased to its highest level in five years, the report said, reaching a total value of nearly £1.5 billion. Last year, UK firms accounted for 23% of all of European deal activity.

The study identifies certain characteristics among Britain's small technology firms that make them attractive to US companies.

These firms tend to have at least one highly advanced core development technology and are often perceived as the leading solution in their field.

Eligible firms also operate in an area of rapid growth, with the potential for higher future growth in an area where a large organisation may not have had time to develop its own solutions internally.

"The importance of [merger and acquisition] activity to expansion strategies in the technology sector has grown in recent years as the main alternatives - capital investment or organic growth - have become more challenging," said Wendy Hart, head of technology at Grant Thornton.

"As a result, companies looking for rapid growth are more open to being acquired and many are 'grooming' themselves for potential buyers.

"US companies tend to look beyond current revenue streams and are willing to consider valuations based solely on the achievable technology benefits to enable the development of new product lines."

Typically, such acquisitions by US firms follow a period of partnership with the smaller UK firm in which they try to raise the profile of the developing company, the report states.

"This try-before-you-buy approach can often lead to higher deal values for completed sales, as the acquirer has a full understanding of how the technology can be integrated," said Hart.

"Any concerns over the viability of the technology will therefore have been previously addressed."