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Tech Giants' European Acquisitions Show No Sign Of Slowing

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The early efforts of America’s largest technology companies to either reach an accommodation with or align themselves against the new presidential administration have offered little clear insight into how Silicon Valley will respond to the protectionist political climate of 2017. A likely outcome, however, is that US tech giants, driven by economic and strategic fundamentals that predate Donald Trump’s inauguration, will continue to prioritize acquiring companies abroad, and particularly in Europe.

The latter half of 2016 witnessed a conspicuous increase in the appetite of America’s biggest tech players for buying foreign businesses, prompted by an alignment of several macroeconomic factors. Under pressure from activist investors to deliver growth in comparatively untapped international markets, and earning minimal yield on their cash in a low-interest-rate environment, the big US-listed tech players used their record overseas holdings (the foreign reserves of Apple, Microsoft, Alphabet, Cisco and Oracle alone were valued at over half a trillion dollars by Moody’s) to fund acquisitive growth.

A number of recent transatlantic deals are testament to this trend. These include the acquisitions of Irish GPS vehicle-tracking company Fleetmatics by Verizon, for $2.4bn; of UK FinTech software businesses Vermilion Software and CYMBA Technologies by financial data and software company FactSet; of Austrian business automation software provider Automic by CA Technologies; and of Swedish 3D data-optimization specialist Simplygon by Microsoft.

From this confluence of investment drivers, the one that the Trump administration could most feasibly nullify is the size of the overseas cash stockpiles, having pledged to slash the corporation tax rate that currently disincentivizes American tech companies from repatriating their capital reserves. There are, however, three reasons to believe that this would not reverse the tide of strategic investment into foreign, and notably European, tech companies.

Firstly, and most simply, the other macroeconomic drivers encouraging deal activity in late 2016 would most likely remain in play. Secondly, with Trump’s election having helped propel US equities to record highs, publicly traded companies’ own stocks are an even more attractive currency with which to part-fund acquisitions, potentially offsetting the prospective decrease in overseas cash reserves. Thirdly, and most fundamentally, these highly amenable market conditions are underpinned by a changing landscape in which the large US-based incumbents have no choice but to invest overseas in order to stay relevant.

The world of technology is undergoing a gradual decentralization away from its undisputed center of gravity in Silicon Valley. With the rise of cloud-enabled and online-based business models, supported by the proliferation of venture capital investors hoping to back the next big success story, tech businesses can be set up and run from anywhere in the world – so they are. Xero, the New Zealand-based accounting software developer, is one such example of a company spawning in a non-mainstream geography and achieving rapid growth through a SaaS-based business model which mitigates the need for a local presence in the big technology hubs.

Therefore, when the big US-based incumbents look to defend their market-leading position in an industry distinguished by its relentless pace of change, an increasing proportion of the nimbler, mid-market businesses they need to buy in order to acquire the requisite technical capabilities are based elsewhere in the world. The array of conducive macroeconomic conditions explains the pace and timing of investment abroad, but not the underlying rationale.

If this combination of strategic imperative and favorable market dynamics accounts for US tech giants’ flurry of overseas acquisitions more generally, it is doubly applicable on both counts for the European market specifically. Europe is home to a particularly strong constellation of innovative tech companies, which have developed unique technical capabilities courtesy of the depth of native engineering talent and ready availability of growth financing. US-based corporates’ appetite for acquiring these businesses is compounded by the effective discount that the near-unprecedented strength of the dollar against both the pound and the euro provides.

In fact, the interest in European tech companies from their larger US peers has been so pronounced as to bring to an end the peculiar period in which Europe’s financial buyers consistently outbid strategic acquirers. Corporate finance conventions dictate that a trade buyer can typically afford to pay a higher price, since they will benefit from the top-line synergies and bottom-line cost-savings that a financial sponsor won’t. In recent years, however, European private equity firms’ own enormous stockpiles of unspent capital had turned this orthodoxy on its head. That a degree of ‘normality’ returned in late 2016 is compelling evidence of the resurgence in strategic buyers’ interest in European technology assets.

Moreover, the pool of prospective US strategic buyers who stand to benefit from such synergies is only widening, as technology transforms from a standalone sector into one that cuts across major verticals like financial services, retail, life sciences, and oil & gas. With technology becoming increasingly central to the core offering of the leading companies within these sectors, they too need to acquire the specific technical expertise that they can’t develop organically. The acquisition of the UK-headquartered software business Thomsons Online Benefits by the NYSE-listed HR consultancy Mercer last December is an example of how this trend is adding further momentum to the wave of major American public companies targeting fast-growing European tech businesses.

As far-reaching as the impacts of a radical change in the US political establishment can be, therefore, there’s little reason for European tech companies to believe that America’s biggest businesses are going to stop knocking on the door any time soon.