By Jason Purcell
As the financing environment continues to change and evolve for technology companies in Europe, the impact on start-ups in every industry is going to be considerable. It is critical to take the time to evaluate where the market is heading and think strategically about the context in which businesses are operating, especially before diving into any transaction.
On 23 May, I had the pleasure of speaking at the Tech M&A Forum, run by TMT Finance, in London, where our panel discussed these challenges, and the implications for technology M&A.
There was a high quality of attendees, including from start-ups, investment banks and tech media outlets as well as corporates like Google. The potential and application of new technologies in industry, including AI, SaaS and Blockchain were widely discussed.
For my roundtable session, I was joined by speakers from Clipperton Finance, Cambon Partners and Nokia, and our Chair, Isabelle Guyot of Linklaters. The focus of our conversation was Assessing the next wave of deal flow. Through our discussions on new digital business models and disruptive technologies, we were able to highlight key investment opportunities in the market and pinpoint the direction of current acquisition strategies.
Here are five key tech M&A learnings which came out during our roundtable, and how they will affect the market:
Trend 1 M&A: the new catalyst for transformation
There is a shift taking place in the tech M&A market. Previously, when selling a software company, we would be selling it to another software company. Increasingly, we are now selling into industry corporates which want to leverage the software to transform themselves.
Take the case of NetDespatch and Royal Mail. Via their SaaS platform, NetDespatch provides a delivery tracking platform for a wide range of eCommerce partners, including UK parcel companies and overseas postal services. For Royal Mail, the most traditional of postal delivery companies, their acquisition of NetDespatch was a great opportunity to deploy technology that would transform the eCommerce side of their business, putting them in a strong position for future growth.
In future, corporate acquisitions of start-ups will be increasingly motivated by internal culture transformation and acceleration of innovation from the corporate acquirer’s perspective.
Trend 2 Fintech’s innovation strategy matures
Fintech companies are going down the same path – though it may have taken a while longer to get there. In the early days, the large incumbents of the banking world were ignoring the fintech start-ups, while the start-ups’ focus was on disrupting the incumbents. Then the main players in financial services began to wake up.
Initially, the big banks tried partnering as a strategy to manage this disruption, then it was investment. Now, they have just started to acquire innovative start-ups to help transform their own businesses. Examples of this include multinational Spanish banking group BBVA, which has invested in Atom Bank and acquired Finnish banking startup Holvi, providing the expertise to help both companies grow.
We will see increasing numbers of banks and financial services corporates acquiring the start-ups disrupting their market, becoming the preferred strategy over partnerships and investment.
Trend 3 Start-ups reap benefits of corporate partnerships
It is far from just the corporates who are benefitting from all this M&A activity in Europe’s tech scene. Start-ups in the fintech space are beginning to recognise big players’ advantages in the market – e.g. strong internal processes, global growth toolkits – and are looking to leverage these for themselves and collaborate. The recent PayPal-iZettle acquisition is a good example.
Fintech start-ups will increasingly be interested in how corporates can help them scale and grow when considering M&A ventures.
Trend 4 Fewer investments but larger sums
Investment is at record levels in terms of value. However, we have seen a sharp drop in the number of financings over the past two years, with deal volume dropping 49% in 1Q18. This reflects a smaller number of bigger deals in Europe – Portuguese software company OutSystems raised $360mn from Goldman Sachs and KKR in early June for instance, becoming the latest European unicorn.
Despite a big fall in the seed deals particularly, which peaked in 2014-2016, overall more money backing European tech companies is great – if the money is there to back them, increasingly European companies have the tech and the ambition to go global. Encouraging deal flow is a priority, however, to ensure that activity is maintained.
The growth in average deal size provides European companies with the platform to grow faster and further, and we expect to see more global winners emerging.
Trend 5 Deal activity emerges in new corners of Europe
As many of the transactions mentioned during our roundtable discussions illustrate, there is increased interest in European tech hubs beyond the traditional London, Stockholm or Paris. New clusters of tech M&A activity are emerging in capital cities like Amsterdam, Berlin, Helsinki and Barcelona.
We will see more global corporates looking beyond London, Stockholm and Paris for investment and acquisition opportunities. With the help of trusted advisers, high growth start-ups in capital cities across Europe will be able to make connections and partnerships with global corporates.
The journey towards a successful M&A transaction is not always a smooth one, particularly if the implications of the market have not been fully reviewed and assessed. At FirstCapital, we use our proven SMART dealmaking methodology to ensure deals get off to a strong, strategic start.
Our in-depth knowledge of the European tech scene and unrivalled network of US technology buyers result in informed, insight-driven, strategic deals. With support and expertise provided at every stage of the process, our approach to SMART transactions could be the right option for your business.