FRA press
Reporter: Coralie Bach
Edition: November 2024
Media family: Professional media
Periodicity: Monthly
Audience: 90,000
Media subject: Banking & Finance
FOCUS Investment Banks
Tech is still the driving force behind M&A
Initially reserved for specialized shops, the tech sector has become one of the flagship activities of investment banks in recent years. Despite the slowdown in transactions, technology companies continue to drive the M&A market. While buyers, more experienced, are more demanding, advisory bankers are regaining a central place in the processes.
With 189 deals recorded in France by LSEG (ex-Refinitiv) over the first nine months of the year, out of a total of 950 transactions, tech remains the main driver of the M&A market. “We expect a pipeline of transactions that is still quite significant in tech because tech is one of the few sectors in which financial investors focus,” notes Marc Walbaum, head of M&A for France at BNP Paribas CIB..
The movement to digitalize the economy and the development of artificial intelligence encourage investors and manufacturers alike to continue their investments in this sector. However, their research has evolved. Fintechs and e-commerce companies have thus given way to B-to-B software. “In this market, some purchasers prefer vertical solutions, focused on the needs of a specific sector,” testifies Thibaut de Smedt, a partner at Bryan, Garnier & Co., who supported the third LBO of the business software publisher Orisha, valued at €1.8 billion by Francisco Partners and TA Associates. “The markets vertical solutions are certainly smaller, but less competitive, than that of the publishers of generic solutions who face the big players. Americans.”
All models, including generalists, can nevertheless be attractive provided they have certain advantages. “One of the points to be evaluated is the level of complexity in changing the solution for the user company”, explains the investment banker. This aspect is reflected in particular in the customer retention rate. The higher the latter, the better the company will be valued.
Other areas of expertise in the sights of buyers: cybersecurity and artificial intelligence. For example, the cybersecurity service provider Nomios acquired British company Dionach last October, forming a total of nearly €500 million in turnover.
“Manufacturers can very well value small companies that provide them with a new technological brick, especially in AI”, notes Clipperton co-founder Stéphane Valorge. The acquisition by Safran of Preligens, a publisher of an AI solution for defense and aerospace, which occurred this summer, illustrates this enthusiasm. The CAC 40 group valued the start-up €220m, a figure to be compared with the €35m in turnover targeted for 2024. “It is a fundamental technology that will impact all value chains,” adds the M&A council.
Disparate valuations
However, investors are no longer ready to acquire innovative companies at any price. “Previously, manufacturers accepted to buy an unprofitable company if it opened up a new market or customer segment for them. This was the case, for example, with banks that invested in fintechs”, illustrates Virginie Lazès, managing partner and co-head of the tech team at Rothschild & Co. It is less true today. Above all, large groups are looking for growing and profitable companies.
Moreover, the application of the “rule of forty” principle has evolved. According to this rule, the sum of growth and profitability rates must be equal to or greater than 40 for a startup to be considered a promising investment. “Two or three years ago, a start-up that made 30% losses but 70% growth fell into the investor spectrum,” explains Michael Azencot, partner at Cambon Partners. Today, they are looking for a balance between growth and profitability.
Companies that meet this equation can claim good valuations. “On average, valuations have fallen but they remain high for very good assets,” says Philippe Englebert, manager at Lazard. All M&A professionals thus highlight a polarization of the market between five-star assets, referring to profitable, growing companies with recurring revenues, and the rest of the companies, the majority, for which transactions are more complex.
Prices thus range from simple to double between the two categories, with valuations that can range between 20 and 25 times EBITDA for the best subscription-based software (known as SaaS), compared to 8 to 10 times EBITDA for less attractive assets. “Valuation averages make little sense because the standard deviations are very significant”, underlines Thibaut de Smedt. The challenge is to demonstrate that the characteristics of the company are closer to those of the nuggets than to those of the bulk of the market.
A strengthened role of the banker
A mission to which investment bankers are committed, whose profession is once again becoming useful. The good times when there were plenty of offers are over. Globally, the volume of transactions in technology companies actually fell by 35% between the first half of 2021 and the first half of 2024, while the decrease was 23% for EMEA (according to PwC's Global M&A Industry Trends 2024).
Investors, financial as well as strategic, are being more cautious, in fact reducing the number of candidates on each file. “The processes are longer and can stop at the slightest doubt,” notes Virginie Lazès. It is not specific to tech, but the effect is accentuated in this area. Now, when a company wants to sell itself, it must find the right advice in a position to seriously prepare the file beforehand and identify all potential buyers.
The place of the investment banker is thus put back at the center of the process with a necessarily stronger involvement than in the past. “Very broad sales processes are no longer appropriate. M&A advice must therefore know how to adapt and go into the details of each situation”, testifies Marc Walbaum. It is necessary to remain very close to buyers, to answer as soon as possible to the fundamental questions they may have and to highlight the management teams in the negotiations so that their decision-making can be made in the best conditions.
The particularities of innovative companies, especially the youngest among them, also add a layer of complexity. “Many sales, and more and more start-ups, are being raised from manufacturers,” explains Philippe Englebert. The role of the banker then consists in clearly explaining to the purchaser this model of companies whose capital structures and valuation models are specific.
Indeed, it is impossible for a start-up, which is not yet profitable, to be classically valued by an EBITDA multiple. “We generally rely either on discounted cash flow, which consists in setting the price according to estimated future cash flows, or on the induced valuation, based on the dilution that the entrepreneur is ready to grant”, continues the investment banker. “When the sector is not mature, we must go beyond financial reading. of the file”, adds Stéphane Valorge. You have to understand the potential for growth, because the value of the company exceeds its financial value at the moment.
It is this need to go beyond the analysis of figures to assess the quality of an innovation that has gradually led M&A professionals to acquire tech specialists.
More and more advice
Boutiques were the first to position themselves, in the early 2000s, like Cambon and Clipperton, which are particularly active on the market, or even Bryan, Garnier & Co and the British firm Arma Partners. But faced with the development of the sector, historical councils have in turn expressed interest in these transactions and the vast majority of investment banks now claim expertise in new technologies.
“All the councils wanted to take this turn because tech is, along with health, one of the key themes of M&A”, notes Michael Azencot.
However, the positions are a bit different. Stores mostly focus on small and mid-cap transactions. For their part, French general banks have a fairly broad spectrum, covering both small transactions and upper-mid and large cap transactions, while the big American players, such as Goldman Sachs or Morgan Stanley, focus on the top end of the market.
The organization of the teams also varies according to the actors. That of BNP Paribas CIB, for example, consists of around thirty general bankers in France who work jointly with sectoral experts: “These experts maintain a permanent sectoral dialogue with major manufacturers and investment funds”, specifies Marc Walbaum.
Lazard opted for a similar approach. “Tech is more a subject of disruption and innovation than a sector as such,” observes Philippe Englebert. The generalist bank has thus set up several sectoral and transversal “pools”, including a center dedicated to tech with around forty specialists in Paris and other places, and experts in specific sectors (fintech, cyber, health, software, etc.).
Rothschild & Co has chosen to set up a dedicated tech division, with an international dimension, comprising 75 professionals based in Paris, London, New York, San Francisco and Singapore. This team is positioned on all types of transactions (fundraising, M&A, IPO).
“Our strength lies in the quality and responsiveness of our specialized team, which knows its customers and their sector perfectly”, underlines Virginie Lazès. Cambon Partners, which has doubled its workforce in recent years to reach around forty employees, also relies on vertical specialists to better cover fintech, health, cybersecurity or even B2B software.
