Increase of Creative M&A
In times where the macro and funding environment have been more challenging, we are noticing an increase of creative M&A. This LinkedIn post from Martin Mignot talks about various forms of creative M&A, with an example of a recent transaction. We believe that the information he presents is very valuable, because due to the previous, high valuations, and previously low and now still relatively high interest rates, traditional forms of M&A are rather difficult, and that calls for more creative ways. We want to highlight two forms of creative M&A that Martin talks about in his LinkedIn post:
A Private Reverse Merger occurs when a smaller, fast-growing but loss-making tech company acquires a larger, slower-growing, yet profitable private incumbent. This approach offers several advantages, including a faster path to liquidity at a premium valuation, reduced future dilution, and improved terms for raising future debt. But challenges come with this kind of M&A as well, such as a narrow alignment window between the two companies, the need to balance downside protection with upside potential for the incumbent, and potential difficulties in integration.
A Merger of Equals involves combining two competitive scale-ups to create a stronger, unified entity. The advantages include rapid scaling and significant cost savings through a shared general and administrative expense base. However, challenges can arise, such as managing the combined cash burn if both companies are unprofitable and ensuring that the extensive integration process does not become a major distraction from core business operations.
Private Equity bringing Professionalism to the Tech Market
Another trend we are noticing is that more and more PE firms are stepping into the tech market and making big acquisitions. PE activity had been subdued in previous quarters, primarily due to high interest rates and inflated valuations. However, with borrowing costs declining and valuations normalizing, PE activity is rebounding. Notably, these PE buyers are introducing a level of professionalism and long-term strategic focus to the European tech market that has been largely unprecedented in this region.
European Outlook for the Rest of 2024
We anticipate that the challenging economic climate in Europe, which is likely to intensify following the U.S. elections, will drive policymakers to take more decisive action. As a result, we expect the technology sector to advance out of necessity. This progression represents one of Europe’s most critical levers for maintaining long-term competitiveness on the global stage. The precise form this technological evolution will take remains uncertain, but it is a development we are keenly monitoring.
Tech M&A Deal Count Holding Steady
Tech M&A activity has shown relative stability since the beginning of 2024, with regional variations.
While deal volume in Europe and North America has seen a slight decline, Asia has experienced an uptick in tech transactions during this period. However, the M&A landscape remains turbulent due to several challenges. Although central banks, including the U.S. Federal Reserve, the Bank of England, and the European Central Bank, have reduced interest rates, borrowing costs remain elevated compared to pre-inflationary levels, suppressing M&A momentum. A persistent valuation gap between buyers and sellers, influenced by strong public equity markets, further complicates deal-making. Geopolitical instability, particularly in the Middle East and Ukraine, along with uncertainties surrounding U.S. trade and antitrust policies after the election, continues to dampen market confidence.
Volatility in Tech M&A Deal Value
The trajectory of aggregate deal value has been volatile since the start of 2024.
In Q1’24, the U.S. and Europe experienced a notable decline, likely driven by reduced deal activity as transactions from Q4 were closing, leaving a temporary gap in the pipeline. By Q2’24, both the U.S. and Europe rebounded, surpassing the aggregate deal values recorded in Q4’23. However, Q3 brought another temporary dip in deal value for these regions. In contrast, Asia demonstrated remarkable resilience and growth, with aggregate deal value achieving substantial gains throughout the year.
Shift from Revenue to EBITDA Multiples
In the past two years, revenue multiples have often been used to mask the absence of clear profitability metrics in tech startups with significant sunk costs.
This strategy allowed many tech companies to secure higher valuations during periods of elevated M&A activity. However, in 2024, buyers have become more discerning, requiring a clear path to profitability before pursuing acquisitions. As a result, EBITDA is expected to regain its rightful prominence, as investors shift away from the overreliance on revenue multiples, which fail to reflect a company’s true profitability.
Selected Tech M&A Transaction Highlights
