Asian investors set to transform European tech industry

Asian ‘dragons’ are set to transform European technology companies with a spate of fresh investment, according to analysis by Magister Advisors.

Magister Advisors predicts that in 5 years up to 30% of European technology mergers and acquisitions (M&A) and investment will be driven by Asian buyers; translating into around US$100bn being invested annually into Europe. The UK remains the destination of choice; over 1/3 of European tech investments and M&A since 2014 have poured into the UK tech scene.

Magister said that Asian buyers will acquire US$2-3bn of sub-US$500m European tech companies this year, up nearly ten times on the levels seen in 2013.

It pointed that recent ‘blockbuster’ acquisitions of Supercell and ARM are platform deals that create new European business units for Asian buyers and the fresh influx of Asian cash will have a transformative effect on the European technology industry.

In recent months, Chinese consumer-tech giant Tencent acquired Finnish games developer Supercell for US$9B and Softbank paid US$32B for the UK’s world leading mobile chip company ARM; unprecedented investments in European tech.

The move is in direct contrast to traditional technology investing in companies in Asia, with cheaper deals available in Europe and the low Pound helping bring more business into the region.

‘Fastest growing sector’

Victor Basta, managing director of Magister Advisors, said: “Across Europe, technology stands out as the fastest growing sector in an under-performing continent. Asian interest may therefore seem to some like “selling out” the family jewels. However, there is no greater validation for how far European tech has come in the last 20 years, than how much interest it is now attracting from world class strategic investors 10,000 miles away. We predict that this investment will have a transformative effect. Asian dragons will put talk of unicorns in the shade.”

Basta points that Chinese technology giants are generating far more cash than they can profitably deploy in China. For example Alibaba’s annual cash generation has jumped 6x to nearly US$9B in just 4 years, while Baidu’s market value has soared from US$1B to US$64B since IPO just over a decade ago, all while at the same time China’s growth rate is slowing.

“This creates two reinforcing trends spurring international investment,” he said. “First, it naturally drives local tech giants to look further afield for growth. Second, with slower growth comes less requirement for local investment, yielding even more annual cash (albeit not forever).”

English trend

Magistor’s analysis also points that English is sweeping China – more people are learning English in China than in Europe. As a result,  over the next 20 years, English-speaking, internationally oriented Chinese students will take positions of power in cash-rich tech players, creating “a cadre of tech leaders confident in expanding beyond Asia”, it said.

In fin-tech, world-class European firms are seen as attractive tech weapons to shake up “stodgy Asian banks and insurers” and European tech companies are more capital-efficient than US counterparts, making them a safer bet for profit-oriented Asian investors.

Attractive valuations

“Valuations in European tech remain more attractive than top-tier US start-ups,” added Basta. “Many US start-ups still demand US$1B+ “unicorn” valuations despite being years away from making money. At last count, there were 100+ US tech unicorns across all tech sectors.

“This makes it hard for Chinese or Asian strategic investors to justify a major strategic stake, or full acquisition. In contrast, Europe has created only 15 unicorns, and many European tech companies are available for still-high, but at least justifiable, valuations,” he added.

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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