I wanted to follow up on Bruce's discussion of the current market situation from last week with a view from here on the other side of the Atlantic.
The M&A market in Europe has been especially healthy in 2014. A shift in investor sentiment has also led to the resurgence of the IPO market across Europe. In the past weeks we've seen two of Europe's biggest ever tech IPO's from Berlin based Rocket Internet and Zalando. Exuberance early in the year was driven by funds flush with cash, pushing up valuations in IPOs and PE buyouts. As an example, PE valuations are still at 6x to 8x, but now that is to EBITDA, not EBIT, and now we are working with forward 12-months earnings, not TTM. In markets such as the Nordics, PE valuations are highest across Europe at levels of 9x EBITDA on average over the past quarter.
Credit is still tight in Europe even though interest rates are at rock bottom. Debt financing PE deals in Europe remains conservative, especially in DACH, at levels of 3x to 4x EBITDA; levels in the US are as high as 5x to 6x.
Interestingly, while this is the best year for M&A since '99, volume of technology M&A deals in Europe is basically flat when compared to last year. The reason is that technology deals tend to be driven primarily on strategic rationale as well as the maturity of the selling companies, and these factors tend to not follow the general economy as closely as traditional industry M&A. Since tech deals are not rising in Europe proportional to the economic cycle, then that tells me they will not fall significantly in a downturn either, assuming no "black swan" events.
Let's assume markets "adjust" next year in a normal manner. PE and Industrial buyers will still be flush with cash. Obviously, companies will need to consider protecting their own cash flows if heading into a downturn, which could weed out some poor performing buyers (they tend to not be our buyers in the first place), but the rationale for investing in innovation and market access in Europe will still hold next year and the coming years.