Unspent euros

by Brenon Daly

The synchronized growth that characterized the world’s economy in recent years has broken down. Individual protectionism has replaced broad cooperation. The fallout from this shift to self-serving economic and political policies, however, is being unevenly distributed around the globe, with weak countries suffering even more.

Consider the EU, a semi-unified body that has half again as many people as the US (512 million vs. 325 million) but generates less overall economic activity than the US. With its fractious membership and ever-increasing separatist sentiment, the EU finds itself fraying more right now than at any point in its half-century history. Raucous political discord complicates the EU’s efforts toward economic expansion.

The International Monetary Fund has noticed that, recently lowering its forecast for economic expansion in the EU to a mere 1.3% in 2019, just half the comparable rate of the US. As alarming as that outlook is, it is still a ‘tops down’ view from a group of technocrats. A far more informed view comes from the actual participants in the economy, the people whose livelihood depends on successfully reading and adapting to real-world business conditions.

And the view from them, as captured in a just-published Voice of the Enterprise (VotE) survey, is fairly dour. Customers in Europe aren’t spending nearly as freely as they are elsewhere. Our latest quarterly VotE survey looked at various spending plans and macroeconomic concerns from some 1,100 respondents, most based in North America.

As you might expect, almost all of them (90%) said the company they work for does business in their home region of North America. Europe emerged as the second-most-popular region, with more than four in 10 (43%) indicating their company currently rings up sales there.

However, when it came to assessing the current business climate in the various regions, respondents to our VotE survey ranked Europe in last place. Just slightly less than half of the respondents (48%) said their customers on the Continent had a ‘green light’ to spend on new products and services. That is almost 20 percentage points lower than North America, where two-thirds (66%) said their clients have a ‘green light’ to buy.

Europe’s increasingly global M&A ambitions

by Brenon Daly

As economic growth slows across Western Europe, tech acquirers there are increasingly looking to do deals outside their home market. The 451 Research M&A KnowledgeBase indicates 2019 is on pace for fewest number of ‘local’ deals (with both Western European acquirers and targets) in a half-decade. Based on our data, this year will see one-third fewer Continental transactions than any of the previous three years.

The slump in shopping comes as Western Europe weathers a broad slowdown that the International Monetary Fund recently said would rank the region as the slowest-growing of all the major economic regions around the globe this year. The IMF forecast that European economic activity would increase a scant 1.3% in 2019, half the comparable rate of the US.

We have noted how that has cut the overall tech M&A activity by acquirers based in the once-bustling markets of the UK, Germany and elsewhere. Collectively, Western Europe is the second-biggest regional buyer of tech companies in the world, accounting for roughly one of every four tech acquisitions announced globally each year, according to our data.

What’s more, the decline comes through sharpest in those deals that are closest. Western European acquirers have picked up fellow Western European targets in just 29% of the tech deals they’ve announced so far this year, our M&A KnowledgeBase indicates. That’s down from the five-year average of 32%.

Granted, the shift in shopping locations isn’t huge, but it is significant. Decisions on where to buy can swing hundreds of millions of dollars into and out of a local tech scene. Further, there’s a rather ominous implication about the politically fractured and economically sluggish Western Europe.

If we make the economically rational assumption that M&A dollars get spent where they can generate the highest return, then Western European tech acquirers don’t appear to be finding anything too attractive around home. On both an absolute and relative basis, they are shopping locally less often right now than at any point in the past half-decade. Instead, the M&A strategy for Western European acquirers is taking them more and more on the road.

PE’s UK holiday

by Scott Denne

Amid the uncertainty surrounding Brexit, private equity (PE) firms are slowing their activity in the UK for the first time in five years. With an October deadline on the horizon and little clarity about how the UK’s exit from the EU might proceed, buyout shops are scooping up fewer targets in that country than they did last year. Most of the decline, however, has occurred at the edges of the market.

According to 451 Research’s M&A KnowledgeBase, PE firms and their portfolio companies have bought just 45 UK-based tech targets in 2019, on pace for an 18% decline from last year’s total (122). That shift counters a years-long increase, as the number of sponsor acquisitions of UK-based vendors has previously risen each year since 2014. Questions about a target’s ability to hire or sell its wares abroad post-Brexit seem to be having the most impact on those buyers that don’t often purchase UK-based companies, and lowering the appetite for discounted targets.

The most frequent acquirers remain active. The PE firms that have bought the highest number of UK-based vendors this decade (TA Associates, Vista Equity, Inflexion and HgCapital) have all continued to purchase there this year. All but Inflexion have acquired more than one UK-based company in 2019. And the decline seems concentrated on deals with below-market valuations. The pace of UK-based vendors trading to buyout shops for more than 3x trailing revenue has risen, our data shows, while transactions where companies sell for less than 2x have declined.

A valuation gap across the Atlantic

by Brenon Daly

Europe’s underdeveloped venture industry, combined with its slowing economic activity overall, is turning the Continent into a bargain market for tech M&A. Over the past half-decade, Western European acquirers have consistently paid roughly one turn lower than their North American counterparts. The valuation discrepancy on the two sides of the Atlantic is even slightly more pronounced when it comes to VC-backed startups.

According to 451 Research’s M&A KnowledgeBase, Western European buyers have paid a median valuation of 1.9x trailing sales in their tech deals across all sectors since the start of 2014. During that same time, our data shows North American acquirers paid 2.9x trailing sales overall. (To be clear, we are looking at buyers headquartered in the respective regions, regardless of the target’s location. Just to give some sense of scale, over the past half-decade, acquirers in America and Canada have announced nearly three times as many tech transactions as their European cousins.)

In both regions, the broad market multiples have been led higher by the valuations for VC-funded companies. The M&A KnowledgeBase shows European buyers have paid a median of 4x trailing sales for venture-backed startups since 2014, while North American acquirers have been even more generous, paying 5.3x trailing sales.

That’s a fairly substantial premium for any startup, and it’s one that is paid far more often by North American buyers. In fully one of every five tech deals, a North American company picks up a VC-backed startup, which is almost twice the rate of European acquirers. With more plentiful funding, which can fuel faster growth rates, bigger paydays are being found on this side of the Atlantic. When it comes to tech M&A, risk capital can be rewarding.

Future farmers of Europe

by Michael Hill

Europe is leading the agricultural technology revolution as IoT and other emerging technologies transform large-scale agricultural operations into connected farms. A combination of European farm subsidies and European IoT deployments is boosting acquisitions of European agricultural technology (agtech) companies.

According to 451 Researchs M&A KnowledgeBase, a record $4.8bn was spent on agricultural technology deals in 2018 – more than the previous five years combined. Of that record spend, $4.6bn went to Europe-based targets, which are currently on pace to exceed 2018 in terms of deal volume.

While a genuine showstopper of an agtech deal has yet to emerge this year, Merck’s $2.4bn reach for Antelliq, a French provider of livestock tracking software, certainly fit that description last year. As in that deal, the emergence of IoT is partly driving the trend (that deal was 2018’s largest acquisition of an IoT company). According to 451 Researchs Voice of the Enterprise: IoT, businesses are expanding their IoT investments in EMEA. Our recent survey shows 21% of respondents are planning to deploy projects there, up four percentage points from the year before.

Farm subsidies from governments are also bolstering European agriculture, making companies that serve that market more attractive targets. According to the Organisation for Economic Co-operation and Development, since 2014 subsidies for European farmers, such as the EU’s Common Agricultural Policy, have grown 8%, while subsidies for US farmers, by comparison, have declined 13%.

When England sneezes, Europe catches a cold

by Brenon Daly

As Europe fractures politically, it is slowing economically. The International Monetary Fund (IMF) recently forecast that Europe would post the lowest growth of any major region of the globe in 2019. The IMF clipped its outlook for economic expansion across the EU to an anemic 1.3%, which is just half its forecast for US growth.

The slowdown across the Continent is starting to hit M&A. Tech deals by Western Europe-based acquirers in Q1 2019 slumped to its lowest quarterly level in two years, according to 451 Research’s M&A KnowledgeBase. More tellingly, the ‘market share’ held by European buyers is starting to erode.

In both 2017 and 2018, the M&A KnowledgeBase shows European buyers accounted for one in four tech acquisitions and 16% of overall M&A spending. So far this year, both of those measures are running three percentage points lower (22% of deals and just 13% of spending).

Much of the fall-off in M&A can be traced back to the UK, which has always been Europe’s biggest buyer of technology companies. With Brexit still unresolved, dealmakers there remain uncertain. Based on Q1 activity, UK-based acquirers are on pace in 2019 to announce the fewest tech transactions since 2013. When it comes to dealmaking, if England sneezes, Europe catches a cold.

No longer dour in Davos

Contact: Brenon Daly

As the World Economic Forum opens its doors today, we expect even more backslapping and bonhomie than usual among the business leaders, politicians and other TED-types that flock to the annual gathering in Davos, Switzerland. What’s got them all so excited? Well, unlike recent years at the conference, there are some pretty favorable winds blowing across the globe these days.

Stock markets around the world are at all-time highs, economic growth is accelerating and even fractious political rifts have been mended (at least temporarily) so governments can get on with the business of business. (Germany appears to be finally on track to forming a governing coalition, after last September’s election left the economic powerhouse of Europe without a government for the first time since World War II. On a smaller scale, US President Donald Trump jetted over to the Swiss mountains after Congress resolved for the moment a stalemate that had shut down the government of the world’s largest economy for a few days.) Not for nothing is the theme to this year’s gathering: ‘Creating a Shared Future in a Fractured World.’

Of course, it’s a lot easier to get along when everyone is making money. And right now, people are making money because of the world economy rather than despite it, as has been the case for the most part since the end of the recession. In past years at Davos, economic growth and confidence had been elusive, or at least not evenly distributed. This year, in both the formal presentations and the hallway chatter, there’s a bullishness that’s been missing recently.

As an indication that business around the world is picking up, consider that one in six respondents to a recent 451 Research Voice of the Connected User Landscape said their companies are bumping up Q1 sales projections because of the global economy. That’s twice as many businesspeople as said the macro-economy is putting a crimp in their sales pipeline. For comparison, around the time of Davos last year, slightly more respondents to our survey said the world economy was dampening their sales outlook than boosting it.

In latest infosec consolidation, Avast + AVG = AV(G)ast

by Brenon Daly

Reversing the flow of typical consolidation moves, privately held Avast Software said it will pay $1.3bn to remove fellow antivirus (AV) vendor AVG Technologies from the NYSE. In addition to flipping the script on the conventional roles of buyer and seller, there’s also a fair amount of irony in the announced pairing of the companies, which share similar roots and vintage. After all, the acquisition comes four years after Avast scrapped its plans to be a public company, a decision that was partly due to AVG’s lackluster performance immediately following its own IPO in early 2012.

Terms call for private equity-backed Avast, which has secured about $1.7bn from a lending syndicate, to pay $25 for each share of AVG. Although that represents a 33% premium over the previous closing price, it is actually lower than AVG shares were trading on their own at this time last year.

Both companies, which have been in business for more than a quarter-century, have struggled to adjust their portfolios to match recent changes in the threat landscape. Specifically, they have been somewhat caught out by the ineffectiveness of their historic desktop-based AV offerings, as well as the emerging threats posed by mobile devices. Over the past two years, Avast and AVG have used M&A to help move into the post-AV world, including doing four acquisitions to bolster their mobile security portfolios.

However, the overall transition of the business has been slow. AVG, for instance, said revenue in the first quarter expanded just 5% and indicated that sales in the just-ended Q2 actually declined slightly. AVG’s sluggish recent performance goes some distance toward explaining its rather muted valuation. Avast is paying $1.3bn, or slightly more than 3x the $433m in trailing sales put up by AVG. That’s just half the average multiple of 6.4x trailing sales in the 10 other information security transactions valued at $1bn or more, according to 451 Research’s M&A KnowledgeBase.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Brexit breaks Q2’s tech M&A rebound

Contact: Brenon Daly

For the first two months of the just-completed second quarter, tech dealmakers went about their business at the same sedate pace they had all year. Then came the June boom. Spending on tech, media and telecom (TMT) acquisitions in the final month of Q2 tripled from the average level in the five previous months, with June alone featuring six of the seven largest TMT deals announced in all of Q2, according to 451 Research’s M&A KnowledgeBase. The late flurry of big-ticket transactions helped elevate M&A spending from the middling level it had sunk to in 2016 after last year’s record run.

If Q2 ended with a bang for M&A, the same could certainly be said about geopolitics. In what is widely considered the largest reshaping – and the sharpest reversal – in Europe since World War II, the UK narrowly voted in late June to end its European Union membership. The so-called ‘Brexit’ decision immediately sparked a wave of selling on equity exchanges around the world that incinerated trillions of dollars of market value.

As the political instability and economic uncertainty sparked by the unprecedented vote by members of the world’s fifth-largest economy rippled around the world, shell-shocked dealmakers stepped out of the market. In the final week of June – a period that covers the results of the UK vote and the immediate aftermath – the number of deals dropped by fully one-quarter compared with the weekly average of the first three weeks of the month. More dramatically, transactions announced in the post-Brexit week accounted for only 4% of the total spending in June. (Obviously, these are very short-term reactions to the historic event. See our analysis of the potential longer-term impact of Brexit on the tech economy, including employee movement, taxes and tariffs, privacy, and capital markets.)

Yet even as June ended with a whimper, the robust activity before Brexit boosted overall Q2 spending to $107bn, about 50% higher than the $73bn recorded in Q1, according to the M&A KnowledgeBase. (However, for some perspective on just how far M&A spending has fallen from last year’s historic levels, spending in the just-completed Q2 stands at just half the level of Q2 2015.) Still, the flurry of sizable deals in the first three weeks of June lifts the total value of year-to-date transactions to about $180bn, putting 2016 on track for the third-highest-spending year since the end of the recession.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2016 1,008 $107bn
Q1 2016 1,031 $73bn
Q4 2015 1,052 $184bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

The tech M&A ‘Brexit’

Contact: Brenon Daly

As the United Kingdom gets set to vote in a historic referendum on its membership in the European Union, we would note that a ‘Brexit’ has already been happening when it comes to tech M&A. The island’s trade relations with the 27 other EU countries are just a fraction of its domestic deals and its acquisition activity with its former colony, the US. It turns out that not many tech transactions flow across the Channel.

Over the past half-decade, just 164 UK-based tech companies have sold to companies based in fellow EU countries, according to 451 Research’s M&A KnowledgeBase. Proceeds from the EU shoppers have totaled only $7bn, with most of that ($4.9bn, or 70%) coming in a single transaction (France’s Schneider Electric picked up London-based Invensys in mid-2013). After that blockbuster, the size of UK-EU transactions drops swiftly, with just one other print valued at more than $300m.

Those paltry totals stand in sharp contrast to the UK’s transatlantic dealings. Some 597 British tech companies have been picked up by US-based buyers, with total spending hitting $57bn, according to 451 Research’s M&A KnowledgeBase. For perspective, that’s more than the $53bn that UK tech companies have paid for fellow UK tech companies in the same period.

Of course, the US and the UK share a primary language and a ‘special relationship’ – in the Churchill sense – that doesn’t extend to other EU countries. And the US has the world’s largest economy, along with the most-acquisitive tech companies, many of which have mountains of cash from European operations that they can’t bring back to the US without taking a significant tax hit. But still, when we compare US-UK and EU-UK acquisition activity, we can’t help but notice the union ties just don’t bind.

Acquisitions of UK-based tech companies since Jan. 1, 2011

Headquarters of acquiring company Deal volume Deal value
European Union 164 $7bn
United States 597 $57bn
United Kingdom 891 $53bn

Source: 451 Research’s M&A KnowledgeBase

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.