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Sponsored Article rory O’Sullivan, head of European M&A at BVCA Year of Venture campaign sponsor Canaccord Genuity, reflects on the technology M&A environment and drivers for the future As we enter the final quarter of 2011, we can find some solace in these uncertain economic times in the healthy M&A environment surrounding the European technology sector. Deal drivers continue to support activity across a variety of segments. Some of these drivers include robust corporate cash balance sheets and tax considerations around repatriation of this cash for US acquirers in particular. More important in supporting deal activity, in our view, are the twin drivers of entrepreneurial activity and the accelerating pace of product and business model innovation. European entrepreneurship and innovation continues to generate considerable value for their venture and other investors on both these counts. Having reined in their research and development, cut costs and restructured, ICT companies are coming out of the recession with more cash on their balance sheets and are seeking acquisitions for growth. As at Q2 2011, the sector’s top 25 companies grew their cash pile to US$591bn representing an 18% year-on-year increase from US$499bn at the end of Q2 2010. Transformations of technology companies are fuelling multibilliondollar mergers and acquisitions and divestitures, as the industry consolidates and develops new businesses to compete for corporate IT budgets. Google’s US$12.5bn purchase of Motorola Mobility, and Hewlett-Packard’s decision to acquire UK software maker Autonomy for US$10.3bn, and considering to divest their PC business, are the latest examples of the change in products and services that are reshaping the industry. Additionally, major private equity funds that raised capital before the recession still have substantial resources for acquisition, made evident by the large number of PE-backed deals in Q2. While value creation and business model disruption continue apace online, and an ever growing and increasingly engaged online audience drives advertising and commerce revenues for many leaders, it may be instructive to refresh some of the other trends which give us at Canaccord Genuity confidence in continued secular activity in European technology M&A. The emergence of cloud computing, together with the growing adoption of SaaS/on demand services, virtualisation and open 20 Autumn 2011 BVCA Briefing Checking the scorecard for technology M&A in 2011 source software continue to disrupt the previous, established ecosystem. Mobility is a tremendous driver which is having a profound impact on the technology landscape and food chain, while the increasing degree of vertical integration in the mobile sector, amongst others, is another recent trend still having an impact on consolidation in the sector. The broad reach of these trends in terms of deal drivers is evidenced by the breadth of some of our M&A activity in 2011 to date. Canaccord Genuity has announced or completed in the last three quarters transactions in sectors spanning enterprise software, IP licensing, local advertising, mobile marketing, online video, price comparison, security software, power electronics, semiconductors, and solar power. While economic uncertainty and stock market volatility is clearly impacting boardroom confidence in bold, transformational deals, we do see continued and robust activity at the growth-driven, incremental/bolt-on acquisition level that represents the bread and butter of technology M&A. While any pretense at crystal ball gazing in the current volatile economic environment should be treated with caution, the broad and deep roots of these technology M&A drivers do fill us with optimism in our outlook for 2012. n
Sponsored Article Operational improvement remains key driver of value creation, writes Sachin Date, EMEIA Private Equity Leader at Ernst & Young Our latest annual study, How do private equity investors create value?, is an exploration of 2010 exits showing that private equity (PE) exit activity returned in 2010. PE proved itself far better able to weather the storm than anyone had anticipated back in 2008 and, for the last five years of our analysis, has outperformed public company benchmarks. However, despite the robustness of the PE model, the absence of corporates from the M&A market presents a formidable challenge to the PE market recovery. Given the importance of trade sales as an exit route, the market will not completely recover until corporates return in full force. Even though exit activity has improved, the uncertainty in the economy — with threats of a double-dip recession and volatility in the public markets — challenges whether this increase in activity can continue. The recovery in exits was evident in 2010. There were 57 exits in Europe, a sharp rise from the lows of 2008 and 2009, when just over 30 exits were completed each year. UK exit activity, representing 32% of the overall European portfolio, continued to improve as PE buyers returned with confidence to the market. The UK has continued to deliver returns level with the European average, despite the downturn and greater maturity of the PE market. The return of initial public offerings (IPOs) was one of the most notable drivers of exit activity, as a total of 11 portfolio companies exited via IPO across Europe – the highest number since 2006. Exits via IPO also accounted for some of the largest companies in PE portfolios by entry enterprise value (EV): 19% of exits by number were by IPO, while 56% by entry EV were by IPO. Contrary to the rest of Europe, there were no UK IPOs of PE-backed businesses of any size. The average entry EV for exits by IPO in 2010, at over €2.5b in Europe, is almost double the previous high of 2007. This demonstrates that the public markets have been a key route to realizing large portfolio companies, with 2010 a particularly strong year for this. Exits and returns up in 2010 However, despite the improvement in 2010, the difficult conditions over the past three years have resulted in a further aging of portfolios (4.2 years in December 2010). For European exits, 2010 returns were positive, with EBITDA (earnings before interest, taxes, depreciation and amortization) growth through operational improvement remaining the most important driver of PE’s value creation, rather than multiple expansion and leverage. The most striking finding is that, within operational improvement, organic revenue growth is proportionally the largest contributor. This accounts for 46% of profit growth across the period. Cost reduction also drove a significant amount of the value created in PE portfolios over the long and short term. PE houses have proven their capabilities by working more closely with their portfolio companies and management for the best returns. Based on exits achieved during the study period, the report found that replacing management during the investment adds up to 1.6 years to the average holding period, and reduces returns by 40%. Failing to have the right team at the beginning of a deal can prove costly to businesses, especially during these difficult economic times. Our research also found that PE has increased the use of operating partners to work with management teams to drive additional business improvement. Even though exit activity has improved, the uncertainty in the economy challenges whether this increase in activity can continue. Corporates have not staged a major comeback on the M&A market, despite having built up significant cash reserves and, until confidence in the market reappears, a return to normalized conditions will be difficult. The PE model remains robust and will continue to evolve despite the current challenging conditions. While a return to the boom years is on hold for now, there is no doubt that PE will continue to thrive. n PE houses have proven their capabilities by working more closely with their portfolio companies and management for the best returns. Autumn 2011 BVCA Briefing 21
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