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Past the peak of the plateau
Regent’s Quarterly Analysis of Acquisitions of European Technology Companies

31st July 2007, Acquisition activity for the second quarter 2007 within the European technology sector was down on the previous quarter and is now some five per cent of the all time high of 846 transactions reached in Q2 2006, according to the latest findings from Regent Associates’ ‘European Technology Acquisition Review’.

The European Technology Acquisition Review, published by Regent Associates, an investment bank specialising in the technology industry, is a quarterly tracker of M&A activity across 10 European technology industries and provides the only up-to-date and comprehensive indicator of deal flow.

In the first half of 2007, 1642 deals were announced, which maintained relatively even activity levels over the last two years. However, the decline in Q2 on Q1 2007 suggests that whilst activity has reached a plateau, we might be nearer to the end rather than the beginning.

Peter Rowell, chairman of Regent Associates, commented, “Whilst we have no concerns that acquisition activity in the technology sector is about to grind to a halt, the indications are that after two years of stability, we starting to see the beginnings of a gradual slow-down. We are probably just past the peak of the plateau.”

Other indicators that support this shift in market direction include, firstly, the percentage of acquisitions be made by the private equity community reached 16 per cent of all deals (an all time high) – meaning a greater decline in trade acquisitions. Second, the percentage of transactions that are divestments from larger groups is edging up from the all time low of 27 per cent last year – demonstrating a level of cautious house cleaning. Third, the percentage of deals undertaken by American buyers was just 12 per cent, suggesting a slight slowdown in their global ambitions.

The acquisition activity seen in Q2 broadly fits into the three main themes, consolidation

Consolidation – The areas of the industry that are clearly going through a level of consolidation include product distribution, resellers, systems integrators, system-level software, broadcast and print media as well as the fixed line and ISP hosting activities mentioned above. The business model is simply one of achieving scale and the ability to drive out cost.

Transformation – This includes consulting and IT services, information content, enterprise software, vertical industry software and services. The focus here is about buyers extending the range of products and services, often transforming the offering at the same time, e.g. moving licensed software to on-demand software, or extending outsourcing to a full BPO activity.

Market Expansion – This process can involve geographic and sector development. A good example is the current demand for consulting organisations that can provide a means of unlocking prospective clients for full service IT suppliers.

Rowell added, “None of these factors, when taken in isolation are significant. However, when taken together, they suggest there is possibly a window of 12 to 18 months before we can expect an overall slowdown in activity and consequent decline in valuations.”

***H1 2007 Trends Overview***

· Total deal value up from ‘06 – Deal value in H1 2007 has totalled $184 billion. This was well up on $117 billion deal value announced in H2 2006 but behind the $221 billion for the same period last year

· $1bn + deals re-emerging – H1 2007 saw 29 deals of a $1 billion or more, a level that has not been seen in years. The whole of 2006 saw 48 such deals

· Post-bubble valuation highs – High industry profit levels have caused a new post-bubble high in price/sales ratio at 1.49. The median price/earnings ratio has held steady over recent quarters but has now edged up to 19.8

· Modest numbers of public company acquisitions – Five per cent of all transactions relate to the acquisition of public compani

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