By David Smith

Recently, I joined the M&A 20:20 Outlook panel for IgniteX as part of the Dublin Tech Summit, where 150 global investors and others gathered to discuss technology and investment. Here are a few of the findings on recent developments in technology M&A discussed by the panel:

Digitisation is a key factor driving growth in M&A

Software continues to eat everything: it seems every company is becoming a tech company. In the USA and Europe, traditional (non-tech) companies continue to look at M&A as a strategy to accelerate their response to the digitisation of their core industries; non-tech acquirers currently represent 33% of all tech M&A in the USA, up from 15% in 2002.

A look at M&A valuations 

It’s hard to get a full picture for valuation, as many transactions do not report the data, particularly in Europe. However, one of the main drivers of valuation is the target company growth rate, as well as the scale of the acquired company. As a guide, for a growth stage company to achieve high valuations, you ideally would be demonstrating 50% to 100%+ revenue growth rates, with €20m+ revenues.

Looking specifically at fintech, which was a key focus for this panel, the Mind the Bridge Fintech report suggests that the typical acquired fintech company has 105 employees, which is larger than the average size for other verticals (50-100 headcount). Fintechs also tend to be  younger at an average of 7.7 years of age versus 9 years of age for other tech companies. Returns for fintech companies are strong – the average fintech exit is $161mn on $14.9m capital raised – making the average multiple an attractive 10x on capital invested.

Fintech continues to be strong

Fintech remains a key strength in Europe. According to the latest TechEU report, fintech is the largest vertical for funding in Europe in 2018, attracting €3.6bn in funding over 367 transactions. The European challenger banks (Revolut, Atom Bank, Monzo and Starling Bank, all in the UK, and German challenger N26) picked up the lion’s share of investment. This trend has continued over the last few years, leading to a pool of substantial and proven fintech companies as acquisition targets, and in 2018 although the total number of transactions was down compared to 2017, the value was considerably higher.

Irish Fintech

We were in Ireland for the conference, so it’s worth mentioning the Irish fintech scene. As mentioned by my colleague Sheana in a recent blog post, Irish fintech continues to shine. Irish fintech companies, attracted €446mn in 43 deals last year. A lot of support has been provided by Enterprise Ireland, the Irish government’s funding and support arm, which has invested in more than 80 Irish fintech companies through its venture capital activities since 2016. For a full picture, the Fintech Ireland Map shows the depth of Irish fintech innovation.

Some of the more notable Irish fintech funding transactions in 2018 include Hg Capital investing £15m in BrightPay, Global Shares raising $25m from Motive Partners and TransferMate raising €21m from ING Group. On the M&A side, recently EVO Payments acquired Way2Pay and Barracuda FX has been acquired by New York-headquartered Broadway Technology.

What the future holds

The outlook for tech is bright in Europe with a strong pool of talent. Atomico’s excellent State of European Tech report shows that there are 5.7m professional developers in Europe versus the 4.4m in the US, and the European figure is growing fast.

Europe is also demonstrating its ability to grow unicorns at an ever-increasing rate. 61 European billion-dollar companies have been founded since 2013 and a record 17 new unicorns were announced in 2018.

We are seeing PE firms acting more and more like strategic buyers – buying add-ons for their platforms and paying strategic multiples not PE multiples.

Traditional banks will continue to feel the pressure from Challenger Banks with more M&A expected in this space.

There will be a continued US focus on EU companies, with corporates still having cash in Europe to spend.

Machine Learning and AI will continue to be a top ranked theme in M&A with continued interest from Google, Apple and Facebook. Worldwide, close to 40% of all acquisitions in this space have involved European companies including Apple buying both VocalIQ and Shazam, Twitter acquiring Magic Pony, as well as the Facebook/Bloomsbury.ai deal.

Industry 4.0, the fourth industrial revolution, will truly transform the manufacturing industry, and this is an area where Europe, with its strong manufacturing heritage, particularly in Germany, shines. The intersection of IoT joined with ML/AI will see autonomous decisions made by sensors and machines. KPMG estimates that the implications of all this innovation are gigantic and Industry 4.0’s component markets “may amount to more than $4 trillion by 2020”.

Role of advisors

The panel highlighted that there is always some conflict in an M&A process and that investment bankers have a key role to play in managing this. Additionally, they level the playing field in negotiations by helping to put the acquired company on a similar professional business footing as the acquiree. It was noted that in some large corporates, there are as many people in the M&A group as there is in the whole of the company being acquired. So, having advisers on your side, with the experience to triage and respond appropriately to the multiple requests that may come from the buyer, can make an enormous difference to the end result.