European Tech Financings Slowing Down Even Before Brexit Effect, While M&A Activity Remains Unusually Strong
European tech financings have cooled since early 2015, while European tech exits remain strong and M&A deal sizes are approaching US levels for the first time ever, according to Magister’s just-released “State Of European Tech Up To Brexit.”
LATER STAGE FINANCINGS COOLING FAST
The cooling of European late stage financings reverses a 5-year trend of ever-larger financings that have fuelled future the next generation global challengers who are choosing to compete from Europe. Companies as diverse as Delivery Hero, Transferwise, Blablacar, Spotify, and Supercell have emerged as potential European “unicorns” attracting unprecedented interest, and money, from international investors.
This has now fundamentally changed. Series C and later financings have dropped by more than half in value since 1H 2015. Even adjusting for the large Spotify financing in 1H 2015, later stage rounds have still fallen by almost 50% in value these last 18 months. This is in sharp contrast to Series A and B rounds, which remain strong as local EU investors continue to support start-ups. We think big-ticket rounds have dropped for several reasons:
- US investors have generally cooled on large, later stage deals everywhere, and this has in turn slowed the flow of capital from US investors to these rounds in Europe
- There are still just not that many European tech companies worth $200m+ (which is generally required to attract $75m+); it takes 5-10 years to create a potential future leadership company, slowing quality supply
- Many European tech companies are dependent on EU economic growth since much of their business is, for example, tied to consumer spending in the EU. The EU is now growing at half the rate of the US and shows no sign of accelerating
But perhaps the single biggest reason is the lack of VC-backed $1B+ exits in Europe. Of the 16 exits since 2013 valued over $1B, only 2 where VC backed. Nearly all were former PE backed buyouts which were then sold or IPO’d (e.g. Worldpay, Nets etc.). The lack of a clear path from Series C/D to $1B+ exits will continue to restrict invested capital.
M&A SURPRISINGLY STRONG
The surprise is that M&A activity remains strong, and consistent. In fact, European tech M&A deals averaged $72m in value 1H-2016, not far off the $104m average US level. It’s one of the smallest gap we have ever recorded; normally US deals on average are close to twice the value of European ones, reflecting the much deeper pool of US tech companies available, and the maturity of the US industry overall.
Overall European M&A totalled $39B in 1H-2016, up nearly 100% from the same period last year, while M&A deals numbered 203, essentially flat in the same period. $100m+ M&A deals now represent 2/3 of all $100m+ exits (the rest are leveraged buyouts, and IPO’s).
We believe the strength of European tech M&A is due to several factors:
- European companies across many tech segments have “come of age” and are now both attractive to international buyers, and have reached a scale where they are worth “real money” (i.e. $50-100m+ deal values).
- Several of tech’s hottest segments, in particular AI and fin-tech, are equally well developed in Europe and the US, and deals for European targets are done at international not European prices.
- International buyers across all sectors of tech are facing a slow growth, zero interest rate environment, while sitting on an unprecedented $1T+ aggregate cash pile. They can afford to pay record-setting prices to buy fast-growing earnings and high quality products/technology, irrespective of where the targets are based
- Finally, the cost of developing technology in the US’s core Silicon Valley hotbed has become prohibitive, with real estate, salary, and benefit inflation running way ahead of the US average. It makes more sense than ever for tech majors to ramp up their development capabilities in lower cost areas, including many sites across Europe, which is a driver of interest
Brexit can only create greater uncertainty as the months transpire. Uncertainty is most likely to dampen the late stage financing environment even more as we roll into 2017. Perversely, Brexit seems to have had little impact on tech M&A. Since we completed our analysis Softbank has committed $30B to acquire ARM plc, and more $1B+ M&A deals are mooted for European segment leaders.
It is our view that many larger private tech companies will begin to take advantage of this trend by running “dual track” processes in the next year or two. This means that while they gear up to raise their next required round of funding, in the face of growing uncertainty, many will also want to consider M&A at the same time, if only to reduce risk and uncertainty.
Inevitably some people will be concerned that more European “stars” will end up “selling out.” The reality is that nothing will fuel the European tech eco-system more than a spate of high value exits in the next 1-2 years.
Perversely Brexit (or rather, the uncertainty created by Brexit) could end up benefitting the European tech industry over the next decade.
Posted by Victor Basta @MaExits