After Apple’s record-breaking quarterly earnings announcement last week, it’s not hard to see why the upward trend in tech valuations is set to continue this year. We’ve been here before and cash-rich technology companies often spur on acquisitions in the industry, but are the high values outpacing the speed of innovation?
Last week’s panel event, ‘Ahead of the Curve: The Growth of European Technology M&A’, heard voices from tech specialists in corporate finance discussing their views on valuations, new markets and trends in the industry. I was on the panel chaired by Nick Cheek from Mergermarket, and we discussed these issues and, perhaps surprisingly, agreed on most of them.
Both values and volumes of Tech-sector M&A were up in 2014, and are expected to increase again in 2015. Disruptive start-ups grab the headlines and will always crop up with new products, and mid-market companies – especially those specialising in niche e-commerce technology, subscription-based online information and vertical software such as fintech – are ripe for purchase, consolidation or private equity investment.
Everyone on the panel mentioned Germany at least once during the discussion. We all see it as a growth market and the ‘country to watch’ for tech M&A, mainly due to its leadership in the European technology market. Scandinavia is another market that exports a lot of tech and we expect more activity to and from the region.
We continue to see US companies dominating tech M&A, perhaps due to their more aggressive and strategic approach to growth by acquisition. As Debu Purkayastha of Octopus Investments pointed out, the US tech majors tend to acquire companies that fill longer-term strategic gaps that outsiders may not have even realised are strategically relevant for them – viz Facebook and WhatsApp, or Google and Nest. European businesses, on the other hand, tend to be more tactical and invest in or purchase companies whose technology fills a current gap in their offering.
No business panel is complete without a discussion of China, and the collective opinion of the panellists was that while China has the potential to be a key player in tech M&A, it will be another couple of years before they gain a strong enough foothold (and wade through regulations) to be a dominant player. Chinese businesses tend to learn fast, however, so we need to be ready for a new force in the market come 2016 or 2017.
Winning out in a competitive process
One important question the panel explored in some detail was how an acquirer or investor can win in a competitive auction process. The key here is to win the ‘hearts and minds’ of the sellers or the management team, so that you are competing on factors beyond the headline valuation. The best way to do this is to build a relationship before the process starts, and to spend as much time as possible with the team both beforehand and once it’s underway.
This in turn should help you to understand exactly what they are trying to achieve – whether it’s a complete exit, bragging rights at having sold to a high-profile acquirer/investor, personal ‘de-risking,’ a culturally-aligned partner for ongoing growth, and so on. Knowing what they’re looking for helps make sure you deliver these key factors, rather than simply increasing the headline value.
Our advice to clients when we are selling their companies is that the best deal may not be the highest price; an acquirer or investor which wants to maximise its chances of being successful in a competitive process would do well to bear this in mind.