Out-Law News 3 min. read

Business executives anticipating more and larger value tech M&A deals in 2015

Four out of five senior executives at technology companies and private equity and venture capital firms believe that there will be more European technology mergers and acquisitions (M&A) this year than last, and that they will be of a higher value.

Last year, a record 2,863 M&A deals were concluded across the global technology sector. Those deals were worth a total of $593.3 billion, the highest total value recorded in the market since 2006.

However, a survey of 151 senior executives in the technology, media and telecoms industry by Pinsent Masons, the law firm behind Out-Law.com, and Mergermarket found that 83% of respondents believe the volume of tech M&A deals will increase in 2015 on 2014 levels, with 79% predicting growth in the value of those deals.

A third of respondents expect the volume of deals to "increase greatly" and 33% also said they expect the value of deals to increase greatly too.

The results of the study, conducted during the third quarter of 2014, are outlined in a new report entitled 'Ahead of the curve: the growth of European technology M&A'. The 151 executives who participated in the study are based across the UK, Germany, France, Denmark, Sweden and Norway.

The fact technology businesses are cash rich and private equity companies have money to spend has helped to facilitate strong M&A activity in the technology sector, said Andrew Hornigold, a corporate law expert specialising in technology mergers and acquisitions at Pinsent Masons, said.

"We have seen transactions in the course of the year with five, six or seven private equity houses bidding for the same asset in an auction sale,” Hornigold said. "So you add three or four relevant corporate buyers on top of that and that competition is what chases up the values."

Increasing geographical reach and seeing an M&A as an opportunity to innovate were the two most commonly cited drivers of tech deals, according to the new study. Compliance with regulatory requirements, differing opinions on deal valuations and a lack of available credit are the three biggest barriers to a tech M&A, the survey respondents said.

Eike Fietz, Munich-based expert in technology M&As at Pinsent Masons, said he has seen a number of potential deals fail due to the 'valuation gap': "Because the market is so hot at the moment, a lot of sellers have unreasonable price expectations about valuation."

Businesses entering into M&A deals in new markets in Europe must be aware of local employment and tax laws, whilst Fietz also said EU data protection rules sometimes put acquiring businesses off potential deals for European companies.

Hornigold warned businesses against underestimating the importance of conducting due diligence of the enforceability of intellectual property rights and of potential differences in anti-corruption laws in the EU compared to other jurisdictions, whilst competition law expert Guy Lougher of Pinsent Masons said businesses need specialist advice to avoid falling foul of rules regarding the notification to and approval by competition authorities of prospective M&A deals.

"This requires specialist competition law advice, identifying which merger control jurisdictions may apply and ensuring that notification documents are drafted promptly and in a way which is most likely to secure relevant approvals," Lougher said. "A failure to take merger control issues seriously and upfront can easily be fatal to successful M&A, especially where the purchaser is a trade buyer."

Most of the technology M&A deals over the next couple of years are likely to involve cloud computing businesses, those in the mobile and media industries or companies involved in the provision of IT services, respondents to the Pinsent Masons and Mergermarket study said. Businesses involved with internet of things and wearables technologies are expected to benefit from the most organic growth in the next 12 to 24 months, according to the report.

Technology companies based in the UK & Ireland and in Germany are likely to be the most targeted in Europe for a potential M&A deal, it said. Hong Kong-based technology law specialist Paul Haswell of Pinsent Masons said he expects a growing number of European technology companies to be deal targets for major technology businesses based in Asia.

"Asia leads in terms of its interest in the acquisition of European technology assets and companies, and this will only increase as we move towards the second half of the decade,” Haswell said. "Cash-rich China is keen to grow its own technology brands outside of its borders, and to increase its appeal to international consumers and organisations. The acquisition and incorporation of European tech is viewed as making Chinese technology brands more attractive and more competitive on the world stage. As China leads in tech M&A, the rest of Asia will no doubt follow."

How to integrate two successful companies often with different business models and cultures is another challenge that businesses entering into an M&A deal must spend time thinking about, technology law expert Frédéric Ichay of Pinsent Masons, said.

"Companies need to define a target model for the integrated team – there is room for improvement in the anticipation of the management structure, labour law considerations and integrated technology impact,” Ichay said. "The physical organisation must also be taken into account, particularly where there are multiple locations or different countries involved. Remote management, from a different country, is not the same as being next door to someone. Dealing with these challenges is increasingly part of the due diligence process and pre-acquisition exercise.”

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