Pinsent Mason’s new survey Ahead of the Curve finds that valuations are expected to increase in 2015.

Over the next 12 to 24 months, nearly two thirds of executives in Pinsent Mason’s new European tech M&A survey Ahead of the Curve, anticipate that technology valuations will rise. In addition, respondents believe that high-value ‘outlier’ deals have an impact on future valuations in the overall sector.

Much of this widening valuation gap is down to market perception, according to Pinsent Masons’ Andrew Hornigold. “Private seller expectations can be driven partly by what they see happening, particularly with US-based IPOs of tech stocks,” says Hornigold. “So, you see companies like Alibaba with big IPO valuations, and that influences their view of the value of their own business.”

Bridging the expectations gap between buyer and seller is always a challenge, but finding common ground is particularly tough in a hot market where sellers are able to call the shots. Earn-outs – which tie valuation to future performance – are one way of bridging a mismatch in valuation between buyer and seller.

“Earn-outs can work with tech,” says Hornigold. “But you get a tension between the seller retaining control of the business in order to drive the earn-out target and the buyer’s need to integrate the business. Those two things are not necessarily compatible – you wouldn’t necessarily be driving a business just for profit to hit an earn-out target if you were trying to integrate it and exploit it in other channels.”

Valuation drivers

Cash-rich bidders (28%) and the desire to acquire new IP (21%) are seen by respondents as the key drivers of the anticipated uplift in valuations.

“I’m not surprised to see cash-rich bidders at the top of the list – that is undoubtedly a factor in driving valuation,” says Hornigold. “There are three legs to the stool in terms of value creation. One is the development of new IP or disruptive technologies. The second driver is generally the quality of the people who create the IP. That’s usually a key issue. The third area is around investors pursuing growth.”

Regional differences

Almost a third of respondents believe that bidders from some regions are more likely to pay higher premiums for targets than others. Emerging Asia (30%) and North America (26%) are judged as being the most willing to pay premiums. For Emerging Asia bidders, access to new markets is seen as the driver to pay premiums.

“Asia leads in terms of its interest in the acquisition of European technology assets and companies, and this will only increase as we move towards the second half of the decade,” says Paul Haswell, Partner at Pinsent Masons in Hong Kong. “Cash-rich China is keen to grow its own technology brands outside of its borders, and to increase its appeal to international consumers and organisations. The acquisition and incorporation of European tech is viewed as making Chinese technology brands more attractive and more competitive on the world stage. As China leads in tech M&A, the rest of Asia will no doubt follow.”