Pradip Somaia, Regent Partners
by Stuart Wilson, Friday 17 February 2017
Pradip Somaia, partner at Regent Partners, outlines the current European ICT channel merger and acquisition (M&A) trends ahead of his workshop session at DISTREE EMEA 2017 in Monaco.
M&A in EMEA channels: drivers, valuations and trends
"European TMT merger and acquisition (M&A) activity has been remarkably consistent over the last three years in terms of the total number of deals announced. There were 3,524 deals announced in 2016 compared with 3,528 in 2015 and 3,469 in 2014. The total value of deals has also been steady over the last two years – the 2014 figure included an unusually large US$42 billion medical technology deal. The 2016 total of US$271 billion was just 1.9% higher than the US$266 billion recorded in 2015.
The number of European TMT companies making an IPO was affected by continuing political and economic uncertainties and fell for the second successive year from 80 in 2015 to 61 in 2016.
The ICT channel is increasingly adapting to the growing demand from consumers for new technology. This started with the move from desktop to laptop computers, progressed further with the move from basic mobile phones to smart phones and the introduction of tablets. The latest trend has been the surge in consumer demand for wearable technology in the form of smart watches and health monitors. While these new and evolving markets create huge opportunities, they are not without risk.
The withdrawal of Pebble from the smart watch market is a recent example of the pitfalls that can beset distributors who need to be able to provide the latest technology but run the risk of losing a significant revenue stream and potentially being left with unwanted stock if a manufacturer withdraws or is acquired.
The emergence of new technologies emphasises the need for value added services and technology skills in the channel to enable the distributors to help the manufactures enter the market and to help the retailers or resellers to maximise the sales potential. The demand for value added services and new product lines is therefore becoming an important driver in mergers and acquisitions in the channel to increase the economies of scale, improve profit margins and rapidly build expertise.
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 in the region of 1 to 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 30 years ago, specialises in TMT M&A and has completed many deals in this space. The company will present its latest views and analysis on M&A deals at DISTREE EMEA.