Europe did not see the same steep drop in larger second-quarter information technology deals that the U.S. saw, but Europe's deal values were also much smaller in overall size.
In Europe, 25 deals closed with transactions values above $10 million in the second quarter, compared with 38 during the year-ago period. In the U.S., the number of deals over the $10 million mark fell more abruptly, from 32 to 15 year over year.
However, the aggregate value of U.S. info tech deals has been significantly higher in each of the past six quarters, owing to a few very large deals. In the U.S., six info tech deals with a price tag of more than $5 billion were inked in the second quarter, including the purchases of CDK Global and Zendesk Inc. by private equity firms, and the blockbuster acquisition of VMware Inc. by Broadcom Inc. with a reported transaction value of $69.00 billion.
The total value of $10 million-plus info tech deals in Europe in the second quarter was $5.11 billion, with the largest being the $1.31 billion acquisition of U.K.-based Ideagen PLC by private equity firm HgCapital LLP.
"Europe has not seen the 'mega deals' that have boosted the U.S.," said Samantha Tomaszczyk, senior M&A analyst at 451 Research. Tomaszczyk said this was because European and Asian buyers became more circumspect about large deals as opposed to their U.S. counterparts.
Historically, European technology companies have been valued at lower multiples than their U.S. peers, due largely to the U.S.'s more vibrant M&A market, higher expected growth rates and the larger total addressable market. However, in the third quarter of 2021, total enterprise value to trailing 12-month revenue valuations in Europe and the U.S. converged at about 3.6x, before diverging again in the following quarters.
Nick Jones, a partner at London-based technology corporate finance adviser Silverpeak, told Market Intelligence that rising U.S. investor interest for European technology companies has reduced the gap in valuations between the two regions, but it is unlikely to close completely in the near term.
The median deal valuation in the U.S. has been pushed up by software companies like SailPoint Technologies Inc., which sold for an enterprise value to revenue of 15.2x. Some of the weakest valuations were for companies in the IT consulting services segment, with the three deals in the sector valuing companies below 1x annual revenues. This is largely due to the sector's much weaker growth prospects and profit margins.
In Europe, software companies were also among the most highly valued, with Ideagen and Momentum Software Group AB (publ) fetching 14.1x revenue and 17.2x revenue, respectively.
Valuations of publicly listed technology companies in both Europe and the U.S. have compressed in recent quarters, partly due to accelerating inflation and interest rates — an environment that has been historically less favorable to high-growth tech companies.
The median valuation of publicly listed technology companies in the U.S. declined from 5.1x revenues in the first quarter of 2021 to just about 2.8x in the second quarter of 2022, according to data from S&P Global Market Intelligence. In Europe, valuations dropped from 3.1x to 2.1x at the end of the second quarter.
Markets appear to have found their bottom for now, but the risk they will fall further remains.
"Technology entrepreneurs are optimistic by nature and tend to believe that valuations cannot get too much worse," Jones said. "But we have to worry that capital markets will suffer further due to high inflation."
Buyout shops and well-heeled strategic players with dry powder could take advantage of these valuations. Private equity dry powder is at a record high of $2.38 trillion, although a difficult fundraising environment means private equity firms "will be spending wisely to make that dry powder last," Tomaszczyk said.
451 Research is part of S&P Global Market Intelligence.