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M&A in EMEA channels

by Stuart Wilson, Thursday 29 January 2015

Pradip Somaia, partner at mergers and acquisition (M&A) specialists Regent Partners, reviews some of the drivers, valuations and trends that shaped 2014 channel M&A activity across Europe.

Drivers, Valuations & Trends

"European merger and acquisition (M&A) activity in the Technology, Media and Telecoms (TMT) sector was strong throughout 2014 and increased by 8.7% from 2013 to reach an all-time annual record of 3,469 deals in 2014. The total value of deals surged ahead in the year, up 56% from 2013, to reach US$345 billion. This was only slightly below the all-time record of US$349 billion in 2007. Despite high volatility and mixed performance for the major technology indices, the number of IPOs of European TMT companies increased by 85% from 48 in 2013 to 85 in 2014. However, the increase was not uniform through the year as the markets reacted to a number of macroeconomic and geopolitical threats.

The ICT channel continues to adapt to the changing technological and economic challenges as it has done for decades. Across the EMEA region, the challenges depend to a large extent on the size and maturity of the local market. In large, mature markets, there has already been a lot of consolidation as distributors and resellers acquired competitors to gain market share or technical skills and services and benefit from economies of scale.

In general, a clear distinction has evolved between distributors and resellers. In the larger markets, the M&A focus is now on acquisition of technology skills and the provision of value added services. In smaller, less developed markets, there are still some hybrid distribution companies that also offer resale services in addition to pure-play distributors and resellers. In these less developed markets, consolidation will be a driving consideration both within the local market and into neighbouring regions. The acquisition of technology skills and services will also be a feature here.

The overriding consideration for channel players across EMEA is to either grow to benefit from economies of scale and maintain or improve profit margins, or to build specialist technology or sector expertise and services, or, if neither of these two options are possible, sell the business before it becomes too small to be of interest to anyone.

The valuation of any business depends on many factors but the primary one is usually the underlying profit of the business. In particular the earnings before interest, tax, depreciation and amortisation (EBITDA) is a frequently used measure. Most businesses are valued in the region of 5 to 8 times EBITDA although the spread can be wider. The actual multiple within this range depends on other factors such as size, growth and reputation or brand awareness.

A secondary valuation measure is the multiple of price to sales (PS) which can act as a guide to what would be a reasonable earnings multiple. For example, a 5% EBITDA margin implies a PS in the range of 0.25 to 0.4 which is typical of a low margin distributor. However, for EBITDA margins of 20%, the implied PS range would be between 1 and 1.6 which is more typical of value added resellers or system integrators. Selective M&A provides a means to increase the underlying profitability and also improve the profit margin by acquiring scale and higher margin business such as value added services.

Regent Partners, founded 27 years ago, specialises in TMT M&A and has completed many deals in this space. Pradip Somaia will host an M&A workshop on 25th February at DISTREE EMEA 2015 in Monaco and will available to meet delegates throughout the event.

Channel EMEA is an official Media Partner for all DISTREE events in 2015, including DISTREE EMEA. Readers requiring more information about DISTREE events in 2015 should contact events@channelemea.com.

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