Over the last year, Europe’s total technology M&A deals have remained steady in volume but significantly dropped in value. The total value of all deals made in the European tech industry in June 2022 comes in at $2bn, holding a 13.2% share globally. The UK leads the pack on the continent with an 8.67% share of total value and $1.32bn worth of deals. The value of these deals has significantly plummeted noting a total decrease of 76.5% from the previous month and an average drop of 74.03% over the last year. The volume of deals in the tech industry has remained steady throughout 2022, ranging from per month to 247, indicating that there is still significant activity, yet investors are likely picking up companies with reduced valuations. Chris Biggs, CEO and Founder at consultancy and accounting advisory, Theta Global Advisors, explains how to navigate a volatile business environment and how plummeting company valuations could provide a wealth of opportunities for deep-pocketed private investors.
An analysis from PwC has even highlighted that deals done during times of economic downturn often provide buyers with better returns, meaning that there could be a strong flurry of activity in the second half of the year, even if the growth in the economy progresses to a plateau or slight fall. After Brexit, the UK has even implemented strategies to attract deals to the country, including allowing founders to retain control of their business even after it goes public. The UK government has also lobbied tech companies such as Klarna and Softbank Group Corp. to list in London. Ultimately, during times of high inflation, investors do not want to be sitting on their cash. This means that despite current market uncertainty, there will continue to be activity from VC houses and institutional investors – whether that is through acquisitions or funding.
There has also been a notable shift in the market away from late-stage startups with high cash burn, as a much greater emphasis is now being placed on sustainability. Therefore, it is the early-stage startups with this ethos in mind that stand in better stead amidst this challenging environment, and most likely have a lower valuation amidst the current climate. In order for a deal or fundraising round to go smoothly, financial advisors are key in helping to facilitate the process and gain the best terms for the company involved.
According to data from Deloitte, nearly two-thirds (63%) of businesses report that the success of their M&A was moderately or highly dependent on a successful transformation – often led by a senior level and external advisor. In order for start-ups to take advantage of the exit opportunities, Chris Biggs outlines the importance of bringing an experienced CFO or COO -on an interim basis- to implement transformational changes to working capital, reorganisation, increasing cost reduction, and legal entity restructuring to secure the best deal possible.
Chris Biggs, CEO & Founder of Theta Global Advisors, explained how companies need to be agile in order to complete an M&A in the current market:
“Though the UK tech industry is remaining steady in terms of deal volume, valuations have taken a steep decline. This could encourage investors to take advantage of this hoping that valuations will return to the lofty heights seen in previous years.
“However, it’s vital that companies prepare ahead of time in the best possible way for an M&A, because if you have that little opportunity that comes up in six months’ time, you must take it and not push it out to 12 months. In an uncertain market you need to be ready to take the chance when it arises, as there may not be many more on the horizon – especially if the cash flow runway is limited.
“A key part of that is enlisting the help of experienced advisors that can help you get your business’ shop window in order, so to speak. This early and expert preparation gives companies the greatest chance of getting a deal, IPO or fundraise over the line.
“I think the private equity houses are looking for opportunities to invest in new companies, because it’s that first phase where you can start to invest and grow it – that’s where you can add the most value and see your overall investment grow. So, the problem is, if it’s a company they have already invested in for three, four or even five years they have already gone through that cycle. So, if they invest more in it, they are going to get smaller returns for what they invest in.
“I think we are possibly moving into the environment where funding from private equity vehicles is going to become more common than funding through classic banks. Because these private equity houses need to get the cash out.”
