‘Dark clouds on the horizon’ as Europe Channel mergers and acquisitions continue

The channel is consolidating at a rapid pace, but the M&A landscape may soon change drastically.

Economic trends in Europe indicate that private equity firms will likely offer lower multiples to potential sellers.

So says John Holland, Managing Director of Corporate Finance Associates. Holland, whose investment bank advises midsize companies on mergers and acquisitions, said macroeconomic factors are depressing stock prices even among the hottest tech companies. So companies looking to sell their business shouldn’t be surprised if they receive lower valuations than their peers said they got last year.

Holland will participate in a session titled “Channel M&A: Everything Today’s Executives Need to Know,” alongside Steve Dunmall of Total IT Technology Solutions and Mehul Patel of August Equity. The session will take place at Channel Partners Europe, June 14-15, in London.

In this preview, Holland shares insights with Channel Futures on trends impacting consolidation and private equity in Europe.

Channel Futures: How would you sum up the state of channel mergers and acquisitions in Europe? What trends are you seeing among suppliers and partners?

CFA’s John Holland

John Holland: The volume and overall value of M&A deals in Europe in 2021 has been extraordinary. According to Pitchbook, the trend continued in [the first quarter of] 2022 with record volume and overall value. Strong demand for technology companies with recurring revenues has lifted valuations to high levels, with some sectors experiencing rapid consolidation. However, there are dark clouds on the horizon.

Join over 500 MSPs, resellers and sellers at Channel Partners Europe, June 14-15, London. As part of London Tech Week, the event will feature over 50 leaders, innovators and experts. We expect 1,500 attendees with whom you can discuss channel best practices and next-gen technology. Register now!

CF: Private equity is one of the most notable forces currently engaging in channel consolidation. What is the important thing that potential sellers should know about these private equity firms?

JH: Debt is the fuel that propels acquisitions. The low interest rates of the past decade have led to a record volume of mergers and acquisitions. Private equity firms use leverage to acquire companies. Leverage increases return on investment in ordinary macroeconomic scenarios. However, as the global economy faces extraordinarily high inflation, interest rates are rising dramatically around the world, increasing the cost of capital for private equity firms. Meanwhile, the risk of recession appears to be increasing as rising fuel prices dampen economic activity. In this macroeconomic environment with higher risk of recession and higher interest rates, private equity firms are likely to adopt financial models with lower valuations. Business owners considering selling their business should understand that the high EBITDA (earnings before interest, taxes, depreciation and amortization) multiples of the past are likely to decline.

The public equity market for tech stocks could be a harbinger of valuations for private tech services companies. Even the most prominent cybersecurity and cloud technology companies like Crowdstrike, Zscaler, and Microsoft have now driven down stock prices. In the European IT services space, major players like SoftwareOne, Computacenter and Softcat are well below their 52-week highs.

CF: What is the key question a potential seller should ask a potential buyer, and vice versa?

JH: Business sellers spend an inordinate amount of time providing potential buyers with financial documents and other confidential details about the sellers’ activities. Before providing information to any potential buyer, a confidentiality agreement must be signed. Potential sellers of businesses must ask potential acquirers to demonstrate the financial capacity necessary for the acquisition. In addition, it is important for the seller of a business to understand the acquirer’s objectives, the potential synergy with the acquirer, the acquirer’s expectations of the seller’s role (if any) in the acquired business and the acquirer’s plan (if any) to integrate the seller’s business into a larger entity. Sometimes acquisitions involve the seller transferring equity to the acquirer’s business. Equity rollover requires thorough due diligence of the acquirer’s business, as with any other investment.

CF: Is there anything else you would like to add?

JH: The best way for a business owner to maximize the value of their business when selling the business is to have an investment banker orchestrate a confidential auction-like process that pits potential buyers against each other. each other. Negotiations between a business owner and a private equity firm are asymmetrical. This is because private equity firms have teams of legal and financial advisers with years of experience in mergers and acquisitions. Business sellers should level the playing field by seeking legal and financial advice from experts.

Mary I. Bruner