Europe and South East Asia technology M&A outlook optimistic despite global headwinds

  • U.S.-China trade wars impacting large scale technology M&A in South East Asia
  • Increased data demand makes data center operators attractive for technology investors
  • The need to digitalize businesses is pushing strategic buyers to make acquisitions

According to Deal Dynamics data, globally US$144.997 billion was invested in Telecommunications, Media and Technology (TMT) assets at the end of Q3 2019, which accounted for 19% of global M&A activity. This direction of travel is set to continue as technology sub-sectors, such as digital payment services, continue to consolidate, while the acquisition of technology companies is enabling traditional businesses to become more efficient and increase their output.

Though global headwinds in Europe and South East Asia are impacting overall deal volumes, there is increasing pressure from shareholders and boardrooms for companies to accelerate digital transformation within their organizations.

Many businesses now face competition from large technology conglomerates, such as Alibaba and Tencent, who continue to expand into new areas and chip away at the business models of industry incumbents.

Traditional non-technology entities in sectors like logistics and manufacturing are undoubtedly feeling the pressure from larger technology giants, and are looking to reposition themselves as digital companies. One way of achieving this is by acquiring and incorporating technology expertise.

Such deals enable buyers to increase their productivity and output in order to compete in a more globalized marketplace.

Data centers are in demand

Continued consumer and business demand for data and digital services remains a core theme within the broader technology infrastructure trend. Many companies are moving their data to cloud providers or using co-location facilities to house their IT infrastructure. This means that data center operations have become some of the most coveted technology assets available in the global M&A market, with new entrants coming into the market and smaller players being consolidated into regional plays.

Data centers that can offer low-latency services and high connectivity in key locations are being valued at a premium, particularly as certain jurisdictions have limited availability for new facilities, despite data capacity being at a breaking point.

Modern spending solutions powering South East Asian Fintech boom

Globally we have seen several sizeable payments company consolidation plays, with the biggest industry players making the headlines with US$20bn+ mega-deals. However, the payment sector remains vibrant in the South East Asian region, particularly in Vietnam and Thailand.

Both countries have young and tech-savvy populations, who are active users of social media. Given that the infrastructure in these countries isn’t as advanced as other nearby countries, social media sites like Facebook offer a useful platform for mobile payment and e-wallet solutions.

Furthermore, consumers in these markets have demonstrated interest and eagerness to use mobile as a device to pay, and these countries possess a broad merchant network for e-wallets.

Over the past few years we have seen a vibrant FinTech scene in both countries, which has caught the eye of private equity and venture capital.

While these transactions don’t significantly move the needle in terms of value, they’ve had a positive impact on overall volumes in the region.

Foreign funds continue to be active in the South East Asian market, acquiring local FinTech assets with a view to picking businesses that will become the dominant digital payment company in their respective markets.

Software remains a key sector for European technology M&A

Like all other investors, private equity is navigating a landscape of high valuations and increased competition, while having lots of dry powder to invest.

This has resulted in several major private equity players launching technology focused funds to capitalize on the mature technology scene in Europe. The software as a service (SaaS) model remains attractive to these funds, primarily as these businesses have a very loyal base, which ensures steady revenue streams.

That said, the high valuations of software businesses mean that private equity needs to work hard to increase the scope and scale of the SaaS model in order to make it attractive to larger software companies and to achieve their expected returns.

If they can do this successfully, the rewards at the point of exit will be significant.  However, in order to make SaaS providers more appealing we have seen roll-ups of various software businesses in order to cross-sell products and look for operational synergies. The software sector shows no slowing down in the near term.

The medium-to-long term outlook for tech dealmaking remains positive

We have seen continued global uncertainty due to the turbulent political landscape, which is being seen to slow down corporate activity. In Asia the U.S-China trade war has meant that many larger businesses in China aren’t as appealing to U.S. corporates and private investors until there is further clarity on the ongoing dispute.

This could be eased depending on the outcome of the U.S. 2020 Presidential elections, however, in the short-term it has resulted in investors moving away from Chinese companies and looking further afield towards neighboring economies, such as India, Singapore and Malaysia, for technology investment opportunities.

In the UK, continued Brexit turbulence has meant that Sterling remains relatively weak, making UK technology companies attractive to investors that are willing to stomach the on-going uncertainty, whilst others are keeping their powder dry on UK opportunities until there is greater certainty.

Despite short-term political flux, the medium to long-term outlook for technology M&A in Asia and Europe remains optimistic.

While companies continue to transform and embrace the Fourth Industrial Revolution, there is a need from a corporate level for accelerated investment in transformational technology, with both corporates and private sources of capital seeing the value in capitalizing on the consumer and corporate demand for technology solutions and the increased appetite for data usage. In the medium to long-term this will mean that the TMT sector will continue to be one of the most buoyant growth areas for M&A activity regardless of the macroeconomic climate.

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