Why momentum is building for tech M&A in Europe

Julie Langley’s monthly column on M&A

This is a contributed piece by Julie Langley, partner at Results International

We recently released our 2017 stats on global M&A activity in the enterprise software market. At first glance, the aggregate deal metrics didn’t reveal too much that’s new – total deal activity has been broadly constant year-on-year since 2014, hovering around the 1,600 mark. The 2017 figures were a little ahead of the previous year’s but not markedly so. All-in-all good news and the M&A market remains strong, but it doesn’t necessarily make for a very interesting column! Thankfully, digging into the geographic details does reveal a trend worth investigating further.  

Transactions involving European targets have increased each year since 2013, both in the absolute number of deals but also as a proportion of total deal activity. In fact, the proportion of European deals has grown from 22% in 2013 to 28% last year. Of the 439 deals involving European targets in 2017, UK-headquartered companies accounted for 30%, followed by Germany edging out France for second place with 16% and 14% respectively, and the Nordics accounted for around 8%.

This growth has come largely at the expense of North American targets. While the USA and Canada still represent the lion’s share of all activity with 1,004 completed in 2017, the proportion of transactions in the region has dropped from 69% in 2013 to 63% last year – a six per cent loss against Europe’s gain.

Admittedly, these are not massive shifts but we are still seeing a consistent trend over a five-year period. So, what might be behind this?

The strength of the European tech market: An enormous amount of capital has flooded into the European tech scene over the last decade, from an ever-wider number of sources. In addition, Europe has proven itself to be particularly strong in some of the fastest growing areas such as AI, cyber security, fintech and a wide range of deep tech applications. That being the case, it’s little surprise that buyers are following the influx of money with their own investments.

US acquirers require growth: Around 30% of deals completed in Europe go to US buyers and this is very often driven by the requirement for growth outside the maturing US market. Acquisition is quicker than growing organically and Europe is usually the first point of call for international expansion

Increased Private Equity activity: Nine of the 10 most active acquirers in the enterprise software space in 2017 were US PE firms, such as Vista Equity Partners, Thomas Bravo and Insight. PE has invested heavily into some of the largest US enterprise software vendors over the last few years. A key part of PE’s investment strategy in these deals is often ‘buy and build’, i.e. accelerating growth via acquisition. Many US PE funds, including AKKR, Thomas Bravo, Insight and TA Associates, have acquired European software companies via portfolio companies in 2017.

Domestic consolidation: Many European entrepreneurs see acquisition by a US buyer as the most attractive exit route. This is because there’s a perception that US acquirers are able to be more aggressive on valuation, plus they offer access to the very large US software market. However, while the percentages vary by country, broadly half of all enterprise software deals in any given market remain domestic in nature.  As European software companies strive for topline revenue growth and the scale to improve margins, domestic consolidation has continued to drive European deal activity.

Much is written about the state of the tech IPO markets in Europe – and with Sage the only constant software company in the FTSE 100 for example – it’s hard to disagree. However, IPO is just one indicator of the success of Europe’s tech companies. What the latest stats show is that Europe’s ability to create and build software companies that are attractive to acquirers, global or domestic, is as strong as ever. Asian buyers are not really making a significant impact as yet, US and intra-European M&A will continue to dominate.

Looking forward, Brexit hasn’t yet hit the popularity of the UK as a target for US acquirers, this country remains the largest enterprise software M&A market in Europe. While a shared native language has made the UK a logical stepping stone into European markets for US companies, our ability to attract and retain tech talent post Brexit will be critical to maintaining this favorable position.