* M&A to remain front and centre for EU Tech
M&A has been, and we expect it to remain, a key strategic focus across the
technology sector globally. With companies continuing to generate good
growth, strong underlying cash flow and sitting on large cash balances, we
expect all vendors to continue to pursue M&A as their primary use of cash.
Further, we expect companies to use M&A to drive improvements in
industry positioning – either through expanding addressable markets,
accelerating route-to-market by acquiring technology rather than building,
adding adjacent high-growth segments, acquiring scale, offsetting
disruptive threats, or driving cost synergies.
* Strategic buyers dominate financial buyers
Based on our analysis of historical M&A transactions in the global
technology sub-sectors in our coverage, we found that the majority of
transactions (93% median) have been driven by strategic buyers. However,
we also found that 67% of the transactions in mid-market ERP applications
space were private equity deals relative to a median of 7% of the overall
global tech transactions we analysed by sector.
* Updating our M&A framework
Our revised framework first eliminates companies with blocking
shareholders, and then assesses potential candidates based on qualitative
and quantitative factors such as: (1) unique/disruptive technology offerings;
(2) significant customer base/market positions; (3) opportunity for cost
synergies; and (4) market cap. Based on these scores, we assign M&A
weightings in our valuations to potential targets in our EU Technology
coverage. Stocks screening with the highest scores include Mobileye,
Technicolor, Pace, Aveva, Opera, Sage, Temenos and Wirecard. These
updated weightings and modest changes to strategic valuations from our
revised framework drive changes to our price targets.
* Key stock recommendations
In the backdrop of our updated M&A framework, we reiterate our CL Buy
on Wirecard and Alcatel. We believe that Wirecard offers strategic appeal,
with a best-in-class technology platform and differentiation in fraud and
risk management as well as a rapidly expanding presence in Asia, while
ALU can benefit from value-creating M&A through a disposal of Wireless.