The companies Notion and VCs around the world invest in share the ambition to build global, category leading companies. Ultimately, each of these companies aspires to an outcome that will allow them to realise value and secure the long term future of their business. Deciding on whether to pursue an acquisition or IPO is not the most important decision from day one, but understanding the implications is important.The likelihood for most European tech companies is that they will be acquired, whether by another tech company, a more traditional corporate or private equity. The chance of them being acquired is far higher than a public listing, however we’d hope that for a few companies that will be possible.
In this article, based on a recent interview with Richard Goold, we explore the dynamics and implications of these different possible outcomes, and look at how companies can prepare themselves for success. Richard is a partner at EY, heads up Tech Law for EY globally and leads their fast growth practice in the UK. You can listen to the interview with Richard in full here.
- Why we expect that, over the next five years, the M&A market for European tech will be very healthy
- Why public markets need to evolve to meet the needs of tech businesses
- What trips people up on the path to a successful acquisition
The European Tech M&A market is evolving and founders should consider the impact of different types of acquirors
Looking at it empirically, we have seen something of a slow down in M&A over the last 12 months, notwithstanding the fact that the quality of founders and leadership teams is getting stronger and stronger, as the European tech ecosystem matures.
But looking forward, you can see that, over the next 5-10 years, the M&A markets in Europe will become increasingly healthy and not just because there will be the traditional “software companies buying software companies”. A few years ago we saw a big shift towards parity of European software companies being acquired by 1) other software companies, 2) non-software companies acquiring software companies, as part of their digital transformation and 3) private equity.
The amount of money on balance sheets looking to buy digital assets is at an all time high, as is pricing. On price, there is a debate about if this is a new normal or if we are at the end of a cycle, but in either case it looks like there will be a healthy appetite for European tech assets. Even if we are getting towards the end of an economic cycle, we haven’t yet seen maturity in the IPO markets.
The public markets around the world are not yet attuned to the new breed of fast growth tech companies
You could argue that, around the world, the public markets are just not well attuned to these fast growth digital companies. The amount of regulation increases and so the cost of going onto and remaining on a stock market also increases, on any of the exchange markets around the world, which causes tech companies in Europe to hesitate. Up until now, we haven’t had the scale of investment rounds to allow founders to take life changing amounts of money off the table and then double down and go again. Comparatively it feels like a less risky route to sell to a strategic. That’s not to say I’m entirely bearish on public markets or global companies listing out of Europe, there will be some great companies that do that. However, I do feel that for the vast majority of European companies, M&A looks a far more likely route.
What trips people up in M&A?
There is a lot of boring stuff involved in selling a company that can trip people up. The broad themes are amazingly consistent and able to be addressed early on. But simply not being organised can cause a lot of trip ups:
- Tax issues, often to do with shares. For example not putting the share incentives in place correctly
- Not handling share buy backs or ex employees in the right way
- Tax is often considered a big issue, more so by US companies, but always goes to value
- Thinking about the numbers, and getting proper due diligence on the financials
- IP issues trip a lot of companies up, not getting employees to sign up to the right employment contracts.
These are all pretty basic really, but do repeatedly catch European companies out. When we look at US companies they will often have experienced CFOs, COOs, and Legal Counsel much earlier. A CEO that has been through an exit beforehand will appreciate the administrative burden and will get experienced people in place to manage it.
The last thing that trips people up is working with advisors who simply don’t have the repeat experience of handling these types of transactions.
Any of these things slow momentum and momentum is the most important thing in a sales process. You don’t want to give an acquirer reasons to slow down too much.
The differences between the process and burden of M&A and IPOs
The number of M&A transactions is so much higher, that there are few founders with IPO experience to act as role models, so this becomes a self fulfilling prophecy.
LSE has done a great job with their elite programme, which helps founders understand what’s involved in going down the IPO route and also provides role models. But the regulatory burden on companies that want to go public is very high. We have seen many founders who go on to the market and realise afterwards that their role as a Founder / CEO is not suited to a public company. Often they may change their role, leave the company, or take it private again.
For the cream of the crop, European companies can run dual track processes (preparing for IPO, whilst also pursuing M&A) but this is rare. Those companies that do want to build global, large scale tech companies on the IPO market or on a direct listing are often drawn to the US. This takes up a considerable amount of time and effort. Planning for this outcome may start 2-3 years out, so it’s a big undertaking.
One thing we do not see changing in the near future is the regulatory burden. We are hearing murmurs of stock markets becoming more aligned to long term value and tech companies. So, there is a huge amount of sense in reducing the regulatory burden and the associated costs. There are so many reasons why having healthy capital markets are good for the technical industry.
A few priorities for a successful outcome
Firstly, having people on or around the board, who have exit experience, is invaluable.
For a CEO to have people around them – a CFO, COO or Chair for example – with prior and extensive M&A or IPO experience, is priceless. It hugely derisks any process and allows the CEO to keep their ‘pedal to the metal’, building the business and not being distracted.
Secondly, founders should take advice from a wider circle of people who have been through similar processes.
There are many European founders with extensive experience that new founders can call upon. EY works on more IPO’s globally than any other firm, and with M&A lawyers on the ground in more than 80 countries, we can be an invaluable resource for founders, from the earliest days of their business.
If you would like to learn more, you can find Rich on linkedin at https://www.linkedin.com/in/richardgoold/ or on twitter @gooldrichard.