Thursday, 16 October 2008

Regent reports declining European tech M&A

(By Anthony Miller) We’ve just received the latest M&A stats from leading European corporate finance firm, Regent Partners (nee Associates), and there’s little there to surprise us in light of the current market turmoil. The 11% (sequential) decline in deals (to 692) – perhaps not as bad as feared – belied a 22% crash in total consideration, to $41.7bn, bringing the average deal size down 12% to around $60m. Deal flow declined in Northern Europe (UK, France and the Nordics) and in the US, whereas in mid-Europe (Germanic and Benelux countries) it increased. Even Eastern Europe saw fewer transactions except in Telecoms. Although there were fewer US buyers of European companies, deal flow the other way grew 13%. IPOs followed the downward trend with just 11 tech companies launching on European stock markets last quarter.

Regent recorded the biggest deal declines in the Hardware and Equipment sectors, reflecting the reality that hardware purchases are the easiest to switch off when budgets get squeezed. However, this usually presages a reduction in software purchases a couple of quarters later, after which IT services then follow. The data yet again confirms – if not heightens – our pessimistic predictions for 2009 market growth – by which we actually mean decline.

Regent noted a slight increase in Private Equity M&A involvement (15% of all Q3 deals), perhaps contra to expectations. Indeed, divestments are holding steady (26% of all deals) and we feel sure that these will increase as the recession really begins to bite. This should give the Private Equity guys (at least those reasonably well funded) some great opportunities. Interestingly, PE and trade buyers – traditionally with an eye on the longer term – are still paying ‘fair value’ for acquisitions, with average deal price/earnings ratios pretty stable at 17x. This is of course in stark contrast to public company valuations which are all over the floor (if not under it!). Regent remarked that price/sales ratios, now sitting at 1.2x, have shown greater volatility and have in fact been in quarterly decline since Q207 (1.5x).

Whichever way you want to read these numbers, it doesn’t bode well for the sector. If you look at the chart you will see that the decline in deal flow seems to mirror that of the dotcom crash (Q1/Q2 ’00) though IPOs are already near trough levels. It’s encouraging that PE and trade buyers are still willing to pay a realistic price where they see true long-term value, but their view of that value will surely become more myopic . Then it’ll down be to the sellers to be realistic too!

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