Roll up, Roll up – European tech companies undervalued

By May 24, 2013Exits

Ben Rooney has an article up today on the Wall Street Journal reporting that European tech companies are valued on lower multiples than US businesses in M&A transactions:

The amount paid for a company as a multiple of earnings before interest, taxes, depreciation and amortization, or Ebitda, for U.S.-based companies rose from 11 times in 2011 to 11.3 times in 2012. Over the same period, European multiples fell from 10.6 to 9.9,  according to the report by American Appraisal, a global valuation consultancy.

In other words there’s a buying opportunity in European for global tech companies. And we should tell the world about it so that everyone comes shopping and rights this market imbalance. I might blog this data again on Monday!

As Ben points out This buying opportunity counts double for companies like Apple, Oracle, Microsoft and Cisco because they have substantial overseas cash reserves which will get taxed if they bring them back to America.

  • An alternate way to look at this would be that US tech companies are over valued and a selling opportunity

  • 🙂 too true. Doesn’t help us as much though…

  • Though the total sizes of both ‘markets’ are more in balance, the reality is that breaking out as a company in the US an cover the whole region is way more easy than in Europe. In Europe the market is fragmented way more with all country specific things to cover. Which takes up much more management time and resources to manage. I think this reflects in the lower ‘value’ (cost to get there)…

  • It’s still harder to get to scale in Europe, but once you are there the difficulty of the journey shouldn’t affect multiples, or arguably it should make them higher because it is harder for competitors to do the same. I don’t recall the size of most of these deals, but I imagine a good number of them will have achieved scale.

  • Rather than promoting this discrepancy Nic, we should be decrying it. The reason for lower valuations, which European Entrepreneurs have been complaining of, is largely due to the lack of a healthy active VC-PE market. Simply put, competition for the deals and deal promotion among European VCs just does not measure up to US VC performance in regards to selling & marketing their protfolio companies.

    Another point of concern is the time it takes for M&A transcations to complete. Once again, the lower level of competitive activity and deal promotion means M&A transactions in the EEA take a hell of lot longer than they do in the US.

    Where does the problem lie? Underperforming European VCs I’m afraid.

  • European VCs are under a lot of pressure, believe me (not that we’re perfect, by any means).
    I think the main reason for the discrepancy is that most of the buyers are based in the US and it is easier and less risky for them to buy local. Some level of discount is to be expected then, but when it gets too big the buyers will start shopping abroad again. Especially if everyone is talking about the value difference…

  • True indeed Nic, European TMT companies are ripe for buying up- is that a good thing? Well that’s another debate.

    However I think US funds pouring into EEA companies is a good thing, what frustrates me though is the US buyers will place a US Inc. above these companies and if they have any plans to float them, will do so on a US exchange and not in London or Frankfurt which doesn’t help our ecosystem and our public markets for homegrown TMT exits.

    It’s a mixed bag. But more US funds coming in will eventually help bridge that valuation gap.

  • that’s interesting, as this would mean there is no such thing as a Global VC market? Is that a right conclusion?

  • Yes. The VC market is definitely more local than global.

  • Totally agree. The long term health of our ecosystem requires large indigenous tech companies, and that means local listings.
    However, in the short term we need the exits via M&A to keep the investment dollars flowing in. Hence we need to balance the short term against the medium to long. Not an easy thing to do.

  • Why don’t you think that there are any powerful Europe HQ global tech companies?

  • William Reeve

    I cynically wonder whether a different perspective in order. The market is telling us that US tech firms are better than European tech firms. Is that wrong?

  • Interesting question Will. My first reaction is that I see differences but they don’t amount to a quality deficit. I will put some thought into how to answer the question properly.

  • There are lots of contributing factors, but I think the most important is that our startup and venture ecosystem started too late.