The COVID-19 outbreak is now easing out in the Europe but the economic uncertainty continues and there isn’t any clue about when the situation might get better. Several industries were impacted during the pandemic outbreak all over the world and the level of impact varies from one industry to another. Eventually, there is a global economic downturn as there isn’t much business happening except for specific industries such as healthcare, fintech, etc.
Impact of COVID-19 in tech M&A in 2020
Likewise, during the crisis, tech mergers and acquisitions (M&A) is unlikely to surpass the milestone set last year in terms of deal volume. However, a report by PwC suggests that the deal activity will not come to a grinding halt but in 2020 is unlikely to top the 2019 peak in terms of deal volume in the M&A market in the Netherlands and Belgium.
Commenting on this, Colin Toh, M&A Advisor at PwC said, “In the past few months we are seeing a slowdown in the number of tech deals compared to the same time last year. I think the main reason for this is that transactions are being postponed, as a result of uncertainty regarding valuation. In addition, travel restrictions are putting a dent in deal negotiations. If I look at the current situation, I think the number of deals is likely to pick up after the summer, unless there will be a second wave of Covid-19 infections.”
It notes that strategic buyers will use M&A in a defensive manner even during the tough time. Corporates are expected to use M&A to accelerate their digitisation roadmap to enhance flexibility and efficiency in cost structures.
He added, “Corporate buyers make up the largest percentage of buyers, but we looked a bit deeper and found that only one third are purely corporate buyers and another third are corporate strategic buyers backed by private equity funds. So, two thirds of the executed deals in 2019 have a financial sponsor one way or another, which means private equity buyers dominate the tech M&A market.”
PE buyers dominate tech M&A market
Currently, private equity houses will consider investments as there is a low interest rate. The tech companies will be attractive assets for investors as these firms let them get considerably higher earnings. Also, the risk exposure to macro-economic factors is lower than assets from other sectors.
Private equity houses in the Netherlands and Belgium are likely to be inclined in enterprise software providers, especially those that are specialised in industry-specific software and horizontal applications. And, there’s a reason for the same. Well, enterprise or B2B software is more recession-proof than B2C software as it is required for essential business processes and the cost of switching is usually more expensive. Moreover, the market growth is high reaching double digits in some industries such as SaaS and cloud. Also, these countries have a competitive landscape is fragmented to a great extent, which presents an attractive option for equity firms to buy and build.
Furthermore, Toh added, “Roughly two thirds of tech deals are related to software, particularly software that is used by companies and government entities.” PwC’s tech M&A report mentions that software for a specific industry or market (vertical software) and software for a wide array of industries (horizontal software) constitute the largest portions of software deals with 46% and 45% respectively.
What was the scenario in the tech M&A before COVID-19?
The tech M&A markets in the Netherlands and Belgium offer attractive investment opportunities for equity firms. Over the past five years, there has been a steep surge in terms of number of deals (81 deals in 2015 to 148 in 2019) in these countries, which is an increase of over 80%. While there are many key drivers in the overall M&A activity in this region, the tech segment is a key factor. Making this evident, back in 2015, a staggering 9.1% of the Dutch deals related to tech companies. And, it reached 12.4% in the year 2018. In 2019, every new tech deal has been closed in 2.5 days on an average.
The drastic growth in the number of tech deals over these years is in line with the growing IT market in these countries. Notably, the Dutch enterprise IT spend is estimated to be €40 billion in 2019 and the same in Belgium is nearly half of it at €21 billion in the same year. To make it clear, it is possible for Belgium and the Netherlands to be frontrunners in this aspect due to a couple of factors as detailed below.
Digital infrastructure and human capital: One reason for the same is the high-quality broadband infrastructure, R&D activity in the tech world, and availability of human capital with critical digital skills. Also, these countries have a favourable regulatory landscape in the European IT landscape. For instance, the Dutch government stimulates corporate innovation with tax initiatives.
Drastic cloud adoption: Both the Netherlands and Belgium have witnessed cloud investment by big international IT players including Google, Microsoft, and IBM. And, the Netherlands has achieved the unique position as the European cloud hub3 and its favourable regulatory environment. The cloud adoption is evident with the spread of SaaS applications in recent years. Notably, both the Netherlands and Belgium have witnessed a growth in the cloud adoption rate since 2016 and among the leaders in Europe in the cloud penetration.
Best M&A deals by value in 2019
Last year was a massive progress in the tech mergers and acquisitions in terms of deal volume. There were some megadeals that were announced in line with the past five years, which isn’t expected in the coming years.
Interxion Holding deal: The top most deal in the list is that of Interxion Holding N.V., which is a Dutch data services company. It entered into a definitive agreement to be acquired by Digital Reality, which is a US-based and listed real estate investment trust for a €7.6 billion deal.
Exact Holding deal: Another megadeal is the acquisition of Exact Holding N.V. by Kohlberg Kravis Roberts & Co. L.P. (KKR). The Dutch software company supplies e-business and Enterprise Resource Planning solutions. The value of this deal is €1.7 billion.
TomTom deal: Japan-based Bridgestone Corporation, which is engaged in sales of tires and rubber products acquired the Telematics business of TomTom expand its telematics business line globally and its digital activities for a deal value of €910 million.
SecureLink deal: French provider of telecommunications, publishing, and internet services Orange S.A. acquired SecureLink, a Dutch cybersecurity services provider for a deal value of €515 million. The joint entity explore synergies and offer complex security services required by its customers globally.
Newtec Cy deal: Finally, Newtec Cy, a Belgium-based developer of satellite communication equipment and technologies was acquired by Singapore Technologies Engineering Ltd (ST). For a deal value €250 million, this acquisition will add intellectual property, products and market access to ST.
What future holds for M&A beyond 2020?
While 2020 is expected to see a relatively lower number of M&A deals as compared to 2019, the future market is believed to be a convergence of emerging technologies including IoT, 5G, data analytics, and edge computing. The tech M&A market is expected to remain among the key areas of investment for corporate as well as financial buyers. Given that tech companies are all geared up to bring 5G, virtual reality, 3D printing among others into the mainstream. And, 5G is expected to produce new unicorns in these regions.
When it comes to the future of M&A market, it is believed that the same will be driven by strategic buyers and venture capitalists. Due to reasons such as higher risk profile and initial stages of tech adoption, the investments in the future could be categorised by relatively low deal value.
Colin Toh said: “The tech M&A market will remain one of the main areas of investment for both corporate and financial buyers. A reason for this is that a lot of new technologies, like IoT, VR and AR, are being developed by smaller companies that, after the technology has matured, will be scooped up by larger companies, private equity or financial sponsors. But it’s important to know that disruption by technology can create value for businesses but can also destroy value if the impact of new technology is not fully understood. Specialised advice is therefore essential.”
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