Technology M&A Mid Year Review
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TECHNOLOGY M&A MID YEAR REVIEW July 2017 D E C 1 6 4 , FTSE TECHMARK 3 7 1 3 N 5 U / J 4 4 , 0 4,501 5 3 0 , 7 1 / FTSE +4% J 7 U N 1 1 1 7 , HIGHLIGHTS 7 D 6 7,304 EC 1 16 C 5 E , D +3% 4 3 7 2 N 1 / JU 6 O , T 1 M • Global equity markets continue to hit new 4 6 9 0 highs. Shares in the US have been driven by the 4 J / NASDAQ U 0 N performance of FAANG stocks, namely Facebook 3 1 1 7 GLOBAL TECH Amazon, Apple, Netflix and Google who have risen 6 1 7 1 N IPOs over 17% so far this year N 6,140 U U J J O T 0 • The number of Technology M&A deals is down so 3 +13% M . US$ GB£ 6 49 1 far this year, although comparison is with a very / 3 EXCHANGE RATE strong 2016 2 –62% . 1 6 • A key trend in the UK was the increase in cross 1 C 1.30 border deals to 43% of the total in the first half of E D +6% this year, up from 35% in the same period last year, TO JUN UK TECH 07 6M 17 despite sterling rallying /9 44 IPOs 0 7 Valuations remain at record levels as investors , 1 • 1 6 N 1 U acquired high growth/high price assets in AI, IoT, J N U O T 1 J and cloud software O 17 T M 6 UN EU TECH J M 1 –89% TO The Global IPO market remains weak with only 6 • M / 6 M&A DEALS (No.) 9 3 6 49 Technology IPOs globally - the lowest since the 1 7 1 N U 2008/9 credit crunch. It was a similar tale in the UK / J O T 3 907 M 7 6 2 UK TECH 6 1 –13% N M&A DEALS (No.) U 2.9 6M TO J J /2 UN .3 1 17 O 3 7 T N 2 6 U 1 J M O 6 173 N U T J M 17 O 6 N T JU TO M % M –37% 6 6 TECH M&A DEALS 3 0 4 2 5/3.0 6M TO / 6 2. JUN ,3 1 1 PRICE TO EBIT N 7 % 2 JU UK PERCENTAGE of 5 / TO 3 M 4 6 (X) 12m AVERAGE CROSS BORDER DEALS 2 6 GLOBAL TECH 1 7 , N 2 U M&A DEALS (No.) J 6 1 O 22.9 T % 43 N M U 6 J O –2% T TECH M&A DEALS +23% 2,320 M 6 –15% PRICE TO REVENUE (X) 12m AVERAGE 3.0 +20% ICON Corporate Finance, 2017 Creating wealth from technology 2 GLOBAL TECHNOLOGY M&A DEALS (No.) 3000 2500 MACRO OVERVIEW In brief, we will be living in a low growth, low interest TECHNOLOGY M&A VALUATIONS rate world for a while yet. So although almost all assets are highly priced they are likely to stay that way. That is 26 3.5 great news if you are an asset/business owner. 24 ‘‘ 3.0 Almost all assets are 22 ‘‘ highly priced 20 2.5 0 Price/EBIT 2007 2009 2011 2013 2015 2017 (LHS) 18 UK TECHNOLOGY M&A DEALS (No.) 350 2.0 2016 politics were totally unpredictable with the 16 appointment of Trump and the Brexit decision. While the French election result was pro-business, the recent 300 UK election decision again highlights that we live in 14 Price/revenue (RHS) very unusual times, with a wave of populist voters 1.5 seeking change. 12 250 Most of Donald Trump’s pre-election promises have failed to materialise so far, yet corporate America is 10 1.0 2006 2008 2010 2012 2014 2016 benefiting from the anticipation of economic stimulus. As a result, the US corporate results this year have been a little better than forecast, helping boost equity markets. Hopefully the planned tax break to unlock the huge $1.2tn off-shore cash reserves that US companies have stock-piled will provide a further confidence boost (as and when it happens). Technology companies will be a major beneficiary of this. For example Apple now has a sell off, sterling has strengthened a bit too. However, a mind blowing $250bn in cash reserves, which is greater minority conservative government is hardly ideal and than the cash reserves of the UK! while overseas investors pile into UK the domestic mood remains more cautious, with economic growth slowing. 0 In the UK, since the Brexit vote last June, equity So, while inflation has risen, expectations for interest 2007 2009 2011 2013 2015 2017 markets have been quite strong and, after an initial rate hikes remain pretty modest in the UK. ICON Corporate Finance, 2017 Creating wealth from technology 3 GLOBAL TECHNOLOGY IPOs (No.) 259 IPO MARKET 199 175 173 168 between private “unicorn” valuations of many PE backed far there has been just one technology IPO in the UK – 146 149 businesses and lower listed market valuation. That gap Alfa Financial (asset finance software). may take some while to bridge. 118 The lack of activity in 2017 is all the more odd as some 110 In the UK the IPO market seems as reliable as The recent IPOs such as Blue Prism have been a great Southern Rail timetable. Back in 2015 there was a success since listing. Blue Prism supplies robot software significant uptick in activity and things were looking to manufacturers and on the back of some good results up with listings of bigger tech companies such as the shares have gone stratospheric, increasing 10x since 49 Sophos, Kainos and Softcat. Then in 2016 there were a IPO last year. With market value approaching £500m it reasonable number of listings but mainly much smaller is now valued at over 25x revenues. AIM listings such as Blue Prism (robotics automation), Loopup (remote meeting software) and FreeAgent (online Loopup (remote meeting software) has had a steadier 2008 2011 2014 2017 accounting software) all on good valuations. This year so start to listed life. It now trades at nearly 5x revenues, whilst it is growing at 30-40% per annum. Big Sofa is another new entrant (it does not sell furniture by the There has been a real dearth of IPO activity globally so UK TECHNOLOGY IPOs (No.) way) but with just 23 staff the video analytics business far this year. Unless there is a turnaround then it could is still in its embryonic days. actually be one of the worst since the dotcom crash. In 30 the US only 9 technology companies have gone public Alfa Financial Software, a provider of specialist software IPOs in 2017: Alteryx, Carvana, Cloudera, Elevate Credit, into the asset finance industry has listed on LSE. Set up Mulesoft, Netshoes, Okta, Snap and Yext, although DELISTED in 1990, the company has more than 250 employees AppDynamics got pipped at the post by Cisco. Snap is 25 worldwide. It made profits of £17.2m on £73m of the most valuable 2017 tech IPO, valued at just over revenue last year. Alfa has built a strong position in a $20bn, although early enthusiasm has waned as the complex niche of the financial services business, in shares are now below the IPO price of $17. Interestingly 20 particular asset finance. Its share price rose over 30% only one of the IPOs had a value of less than $1bn. ‘‘ on IPO. Focused on the vehicle leasing market, it is a well-timed IPO, with record car sales in UK. 15 Blue Prism has gone stratospheric UK Technology IPOs ‘‘ 2015 2016 2017 Defenx ECSC Alfa So where is the public appetite for young tech 10 Softcat Big Sofa businesses? It’s a particularly tough question to answer Kainos FreeAgent when so many listed technology companies have done Sophos GoCompare so well. I guess part of the answer is the competition Stride Loopup from the wall of private equity cash that has been raised AutoTrader Osirium from investors that is still looking for a home, it is over TimeOut $800bn at end of last year. The other is the disconnect Blue Prism 2008 2011 2014 2017 ICON Corporate Finance, 2017 Creating wealth from technology 4 US TECHNOLOGY M&A Key trends in US activity are: Mobileye’s CTO and Co-Founder Amnon Shashua said was compelling but it paid down debt and may well the company is working with 27 car manufacturers, free up Quest to return to acquisitions which were a key In an ever more connected world the Internet • including 10 production programs with Audi, BMW feature of its growth before 2012. of Things is exploding and others going into 2017. Brian Krzanich, Intel’s • The automotive market faces massive disruption as CEO, in a statement said “Together, we can accelerate Many of the larger technology deals in 2017 so far driverless cars move ever closer the future of autonomous driving with improved have been less familiar high growth businesses from performance in a cloud-to-car solution at a lower cost a broad range of sectors such as Viawest (co-location Restructuring/spin off by major tech groups last • for automakers.” This looks like a key development in services), Ixia (telecoms testing), Readsoft (document year (HP, Dell, CSC, eBay), particularly in IT services the relentless push for driverless cars. Combined with processing), KCG (forex trading), Cologix (network • IBM’s revenue fell short of analysts’ projections in recent announcements that France is to bar diesel cars neutral connections) and Covermymeds (prescription April, marking a 20th consecutive quarterly decline, and Volvo are to stop making them then this sector is authorisation software).