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.

Black swans roil tech M&A market

Contact: Brenon Daly

During the six-year bull run on Wall Street, corporate treasuries have been as flush with cash as executive offices have been flush with confidence. Put those two factors together and we have the makings of an M&A boom like the one that has put spending on tech acquisitions so far this year already twice as high as it was in the recession years.

Remove either of the crucial components of cash and confidence, however, and deals don’t get done. It’s hard to go shopping when your head is spinning with volatility and your guts are clenched in uncertainty. That hesitancy comes through clearly when we look at the prints for August.

In the first two weeks of the month, it was business as usual. Private equity shops and corporate buyers around the globe announced 172 tech, media and telecom (TMT) transactions with an aggregate value of $21.6bn, according to 451 Research’s M&A KnowledgeBase. In the two weeks that followed, as black swans flew above the equity markets around the world, dealmakers announced just 145 acquisitions worth $4.6bn. As uncertainty erased trillions of dollars of stock market capitalization over the past two weeks, spending on M&A plunged almost 80%.

Heavily skewed to the first half of the month, August spending totaled $26.2bn, which is roughly half the average amount for the previous seven months of 2015. Yet even with the mini-recession in tech M&A since mid-August, spending on 2015 deals overall is still tracking to its highest level since 2000. Through eight months of the year, dealmakers have announced transactions valued at about $375bn, roughly $45bn short of the $420bn recorded in 2007.

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

Wall Street confidence July 2015




Datacenter consolidation hits a record pace as Europe gets more international

Contact: Mark Fontecchio

Global datacenter consolidation in 2015 is on a tear, and the reason varies by continent. European MTDC suppliers on the hunt for regional diversity are printing an unprecedented increase in the number and value of deals, while North American providers are outpacing overall M&A volume as they move up the stack to offer more managed services.

Through the first seven months of this year, there have been 11% more tech deals compared with 2014, yet colocation and hosting transactions are up 49%, according to 451 Research’s M&A KnowledgeBase. Western Europe alone is up 67% in datacenter deal volume. Datacenter consolidation is clearly outpacing the rest of the field.

Western European datacenter deal value has skyrocketed more than the rest. Last year, 4% of all datacenter M&A value went to Western European targets; this year, it’s half. Equinix buying UK-based TelecityGroup accounts for most of that – the $3.6bn price is the largest datacenter transaction in the KnowledgeBase. As we have previously noted, one of the key reasons for all of the consolidation activity in Europe is because customers in traditional markets are seeking reach into locations where new builds are difficult. The highly fragmented European market still has many regional providers with significant pull in their locales. They are now being subject to M&A conversations as bigger players look to enter territories without building new facilities.

In North America, it’s different. While geo-based deals are still aplenty (e.g., CyrusOne’s $400m purchase of Cervalis ), more large transactions have focused on providers moving up the stack and offering additional managed services. Digital Realty’s reach for Telx and QTS Realty’s pickup of Carpathia Hosting are prime examples.

Biggest datacenter deals of 2015

Date announced Acquirer Target Target HQ Deal value
May 29 Equinix TelecityGroup Western Europe $3.6bn
July 14 Digital Realty Trust Telx Group North America $1.9bn
March 2 NTT Communications e-shelter Western Europe See estimate
January 14 Zayo Group Latisys North America $675m

Source: 451 Research’s M&A KnowledgeBase

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

In a time of sky-high infosec valuations, Sophos goes for down-to-earth debut

Contact: Brenon Daly

The tech IPO market is so quiet these days that even those companies that do manage to go public do it understatedly. Consider the almost under-the-radar offering from Sophos, a giant in the infosec market that nonetheless raised a relatively small $125m on the London Stock Exchange (LSE) last Friday. Compared with the noisy funding events we’re accustomed to seeing in this current frothy investment environment, the Sophos IPO was almost refreshingly reserved.

Sophos has been around for 30 years, which makes it positively middle-aged relative to many flashy startups that still haven’t seen the ink dry on their business plans. Also, Sophos was born and raised in the UK, several time zones – and even more distant culturally – from the epicenter of tech hype in Silicon Valley. To illustrate, Sophos spends less than 40% of its revenue on sales and marketing, about half the level of some US-based IT firms (e.g., Apigee, Box) that have also come public in 2015.

Yet even as Sophos runs a business that’s clipping along at nearly a half-billion dollars in revenue, it raised the same amount of money that some startups one-tenth its size have landed from private investors. Another way to look at it: The $125m that Sophos raised in its IPO is also less than half the amount collected by Etsy, which is smaller than Sophos, in its April IPO.

And Sophos is raising money at a very down-to-earth valuation, compared with some of the sky-high valuations garnered by both public and private infosec vendors. Sophos started life on the LSE at a market cap of about $1.6bn, roughly 3.5x its trailing sales of $447m. That’s a sharp discount to many of the infosec providers trading on the NYSE and Nasdaq. For example, Proofpoint, Qualys, FireEye and Imperva, among others, all trade at more than 10x trailing sales.

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