Tech valuations bounce back
625 European deals completed in the third quarter commanded an average valuation of 16 times earnings, according to Regent Associates
Back in the money: Average price-to-earnings multiples reached as low as 11.7 last year but have now risen back up to 16.3
Valuations in the UK and European IT sector have bounced back to pre-recession levels, sparking a spike in private equity exits from the sector.
According to data from Regent Associates, tech merger and acquisition (M&A) activity in the third quarter fell slightly on Q2 in line with seasonality. The channel was the only sub-sector to buck this trend, with deals involving resellers and distributors rising from 39 to 44 quarter on quarter.
However, the total number of deals completed across the region rose from 574 to 625 on an annual comparison, with the number of deals over $1m trebling to 12.
According to Peter Rowell, executive director of Regent, the recent rise in valuations across the IT, telecoms and media sector has sparked a flurry of private equity activity in the sector. Average price-to-earnings multiples after tax dropped to as low as 11.66 in Q3 last year, but have now risen to 16.3 – close to pre-recession levels. The average price-to-sales ratio also rose from 1.01 to 1.36 year on year.
Rowell said this led to more private equity or venture capital exits than he had seen in a “long, long time” – 73 compared with 49 a year earlier.
“This tells me that the investor community considers that valuations are at a level where they are prepared to do deals,” he said. “A lot had planned exits two years ago but decided to suspend them as the economy headed south.”
Third-quarter channel M&A activity was dominated by the merger of giant continental European distributors ALSO and Actebis, and Société Générale selling VAR arm ECS to rival Econocom.
However, Rowell said a lot of channel deals were driven by consolidation in the cloud space.
“In the UK, we are seeing strong interest in the whole managed services and hosting sector, whether that be telecoms or IT managed services,” he said. “There are a lot of buyers out there looking to consolidate that space.”
Simon Aron, joint managing director of managed services provider Eurodata, said: “Regent knows what it is talking about. Yes, valuations have bounced back, but not completely. And the cash value is now dependent on forecasts for the
end of 2010 and 2011, which no one can really forecast at the moment.”
Symantec distributor Codework sold up to France-based distributor Altimate Group in September. Managing director Divyesh Lakhani said more boutique VADs would be tempted to become part of larger groups.
“Distribution is becoming quite sophisticated and requires a lot of investment,” he said. “There is also a danger that the products boutique VADs represent are acquired by a larger vendor, which only wants to talk to pan-European players.”