Tech firms commanding 'ludicrous' premiums
The average valuation of SaaS firms in 2014 stood at over 30 times EBITDA, research claims
Buyers are prepared to pay "ludicrious" premiums for tech firms that show themselves to be a reliable investment in an erratic economy, according to M&A advisor Altium.
The figures find that there were 210 acquisitions or flotations of software and IT services companies in the fourth quarter of 2014, including 91 European targets. In what was a comparatively quiet quarter for the market overall, total deal values came in a fairly muted €4.8bn, with no blockbuster deals going through. Across 2014 as a whole 932 acquisitions or IPOs were completed at a total worth of €36bn.
But in 2014 targets were selling for big multiples of as high as 30 times EBITDA in and upwards, in a variety of sectors across the enterprise software space. And, according to Sascha Pfeiffer, head of European technology at Altium, more big price tags will be seen over the coming year as investors take a risk-averse approach.
"Guys like GE, Siemens, and ABB are all looking at upgrading their product portfolios in terms of technology"
"I think what people are after is super-stable investments, and they are willing to pay quite a ludicrous premium for that," he explained. "From a macro-economic point of view, the world can only be characterised as incredibly volatile at the moment. People are scouring the market for super-stable investments that are not affected too much by the overall economy - such as areas like healthcare technology."
Pfeiffer believes that, across the European tech space "deal volumes may grow or decrease slightly" in 2015, but there will not be a major movement either up or down. One trend to look out for will be a potential increase in industrial giants buying their way into the tech sphere.
"On the trade side, there are the classic software consolidators, but there are also industrial companies - guys like GE, Siemens, and ABB are all looking at upgrading their product portfolios in terms of technology," said Pfeiffer. "They are typically looking at software that they can sell through their existing sales organisation - such as a software business that helps with fuel efficiency."
The Altium European tech chief claims there has been a marked rise in valuations over the last couple of years, and they are set to remain high in 2015.
"Multiples have already gone up quite significantly. If we look at certain sectors - like business software - two years ago multiples were typically 10-15 times EBITDA, now it is more like 15-20 times," explained Pfeiffer.
30.7x EBITDA - average valuation of SaaS firms in 2014
210 - number of software M&A and IPOs in Q4 2014
€36bn - total annual worth of IPO and M&A in 2014
Source: Altium
Among the most profitable areas for sellers last year was the supply-chain management segment, where average valuations stood at 20.8 times EBITDA, with that figure forecast to drop only slightly to 18.1x this year, according to the Altium data.
Similarly big prices were seen in the CRM space, which saw 30.3x EBITDA multiples last year, with a 27.7x figure predicted for 2015. In the human capital management sector the mean EBITDA multiple was 20.2x in 2014, with a 2015 projection of 19.5x.
Firms in the firewall market were being sold for 24.4x their profits last year, with the forecast for this year dropping somewhat to 19.6. Enjoying the biggest multiples of all in 2014 were SaaS outfits, which were selling for 30.7x EBITDA last year. Altium's projection for this sector in 2015 is a 26x EBITDA average valuation.
The IPO space "has been very quiet for years already" when it comes to the technology market in Europe, said Pfeiffer. There were just two flotations across the continent in Q4 2014, and the Altium man claims he is "pretty sure that it will not be a significant exit channel this year".