How Britain gave up on its tech companies

Britain can produce technology champions, but our nation's talent will leave if there is no ecosystem created by prosperous tech companies

This year is the tenth anniversary of an incident that has had a significant impact on the UK stock market. No, not the Brexit vote. In 2016, SoftBank, a Japanese company headed by founder and CEO Masayoshi Son, paid 24 billion to acquire Arm, the top technology company in the UK. The collapse of the technology, media, and telecom bubble in 2000-2002 left professional UK fund managers, in contrast to American investors, permanently disillusioned with the technology sector. As a result, they were thrilled to see its flagship domestic representative sold for 40% more than the current share price.

Pension funds were desperate to abandon stocks and purchase more gilts, even leveraging up in their pursuit of the "liability-driven investment" delusion that would cost them hundreds of billions of dollars six years later, since the yield on ten-year gilts was at record lows below 1.5 percent. Following the 2008 financial crisis, new solvency regulations mandated that insurance companies make investments in "safer, more liquid" securities, such as short-dated gilts. Wealth managers might boast to their clients about their immediate results.

The only significant investor who strongly disagreed was James Anderson, the manager of Scottish Mortgage Trust at the time, who harshly condemned the sell-out on behalf of Baillie Gifford, who owned more than 10% of the company. The fact that Arm's chairman and management were so swayed by short-term shareholders was extremely disheartening to us. According to Anderson, it was "Britain's sole serious shot at building a global tech giant" and an early sale of the country's top intellectual property and technology advocates.

When SoftBank listed Arm on the New York Stock Exchange in September 2023 at a valuation of £40 billion while keeping 90% of the shares, Arm went public once more. Not surprisingly, requests to list the shares in London were rejected, despite the fact that Arm is still based in Cambridge. Even though the shares are currently down 17% from their peak in early June, they have more than sixfold increased since then.

Arm would be by far the largest company on the London Stock Exchange if it were listed in the UK. London's stock market is currently only the eighth largest in the world, making up only 3.1% of the MSCI All Countries World index. Due to its minimal exposure to the technology sector, which makes up only 1% of the FTSE 100, it has been gradually declining in the rankings. This is in contrast to 89% in Europe, 27% in the US (excluding Alphabet and Amazon), and 37% in Asia.

Technology companies in Britain are doomed to stagnate.

The 2014 sale of Britain's DeepMind, an AI pioneer, to Google for just £400 million is another easily overlooked event. Solexa, the UK-based company that invented gene sequencing, was acquired by US-based Illumina in 2006 for £315 million. Although the shares have dropped by two-thirds over the past five years, it became a crucial component in Illumina's ascent to a market value of over £50 billion. These and other examples demonstrate that Britain has a strong track record of producing and developing technology champions; however, due to unambitious management and uninterested, short-sighted institutional investors, they sell out rather than grow as American giants have demonstrated is feasible.

Without the "ecosystem" created by prosperous tech companies, Britain's talent pool will migrate abroad, there won't be a capital pool searching for the next big innovation, risk appetite will decline, and there won't be a list of success stories to motivate aspiring business owners. The London Stock Exchange is now a value trap with a dwindling number of solid, well-managed companies with mediocre prospects. Such a market is doomed to an ever-diminishing share of global capitalization in the absence of a cadre of appropriate growth firms, though it may occasionally experience a catch-up year of outperformance. This process didn't begin with Arm's sale to SoftBank, which is currently the biggest company in Japan, but it did mark the point at which it became irreversible.