By Sheana O’Sullivan
I recently spoke at a tech M&A event run by FTI Consulting in San Francisco. Our panel discussions focused on the latest trends in M&A, how these have changed over the last 5 years, and how companies should adapt to a new world order in the era of digital disruption and changing business models.
Attendees included buyers from leading US tech companies and private equity firms, as well as my fellow panelists from Symantec, FTI and Nokia.
There were a few key take-outs from the discussion which have relevance for anyone looking to sell a tech company, in particular if you are looking to access US buyers.
Trend 1: Increase in deal size and activity in tech
The panel agreed that indicators point to a general acceleration of tech M&A activity in 2018 compared to 2017. In particular in 2018, although deal volumes have declined somewhat year to date, the deal sizes have gone up. Pitchbook’s 1Q2018 M&A report shows a 25% increase in median deal size in North America and Europe to $48mn in 2018 vs 2017, with growing activity in the tech sector. There have been a number of notable deals in tech, including Microsoft’s purchase of Github, Salesforce’s acquisition of Mulesoft and others like Amazon’s acquisition of Ring. The panel also expected to see more megadeals, which are deals valued at or above $5 billion.
There’s no doubt that Europe will benefit from this trend. There have been several high-profile acquisitions in Europe already so far this year, including Oracle’s acquisition of Grapeshot and PayPal’s acquisition of iZettle. There is a good pool of interesting tech companies rapidly developing in Europe, and in fact, Dealroom recently counted around 35 unicorns in Europe that are looking for big exits.
Trend 2: More fire power for acquisitions
There’s a lot of fire power in the market, with corporates having more cash than a year ago. Strong stock market valuations act as an additional currency and the ready availability of debt financing is equally adding to this momentum. The Trump tax cuts and subsequent slashing of US corporate taxes are giving US companies more money on the balance sheet to potentially spend on M&A. In addition, inflation is under control, unemployment is low and there is low market volatility as well as strong GDP rates.
These positive economic indicators, along with US buyers having more money to spend, are good news for European companies looking to sell. There’s also a perception in the US that European companies are a better bargain. In Silicon Valley, start-ups tend to get more funding than their European counterparts and valuations are generally higher. Overall, lower European valuations continue to represent good value for US buyers.
Trend 3: Companies are in it for the tech
Traditional M&A was more about cost reductions – now it’s all about tech acquisition and growth. In fact, the latest Deloitte report on M&A trends forecasts that a third of all transactions in 2018 will be because of the tech. Whether it’s digital pursuit, transformation or convergence, the panel talked about the importance of integrating the tech as fast as possible across product and services to result in a quicker route to revenue.
With more companies making bets on future technology, Europe may do well, particularly in key areas like artificial intelligence where Europe excels. In fact, a third or more of M&A deals in AI in the last 5 years have involved European targets as more and more companies seek to integrate AI into their product and services. We’ve heard from a number of the top US corporates that they consider Europe to have a highly educated pool of “amazing talent” in AI. Key deals in this space include Facebook’s acquisition of Bloomsbury.ai, based in London.
Trend 4: Potential reduction in private equity activity
Record levels of private equity (PE) fund raising over the last few years has meant that there are record levels of untapped capital, or dry powder, amongst financial buyers. As a result, PE funds and PE-backed companies have been very active in the market. But this may change. The panel suggested that because corporates now have more cash – owing to pro-business legislation and a potential rise in interest rates making debt more expensive – this may make it harder for PE firms to compete.
The jury is still out on this one, but a reduction in appetite or competition among buyers would tend to impact on M&A activity and valuations, offsetting some of the positive trends above.
The right technology deal can be highly effective at facilitating digital transformation and generating business growth. The panel discussion reaffirmed that tech M&A is expected to continue at high levels throughout 2018. This will be driven by high levels of corporate cash, strong valuations and a need to stay competitive on technology in the face of market pressures.
The outlook for European sellers is positive, with good levels of enthusiasm for European deals. However, we know from experience that the general level of awareness amongst US buyers of the European landscape is relatively low, as most of the large US tech companies don’t have anyone on the ground in Europe and manage their corporate development from the valley.
There has never been a more critical time for European start-ups to make connections and to build relationships with US buyers to ensure that the buyers are aware of them ahead of any transaction. At FirstCapital, we have great relationships with US buyers, and continue to build these relationships with daily contact on the ground. If you’d like to discuss how we can help you access strategic buyers and deliver a SMART deal, then come and talk to us.