More Bankers Needed. Software IPOs in Europe. SoftWhere Europe Trends and Moves

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Jesse Cooper
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1 SoftWhere Europe 2013 Software IPOs in Europe More Bankers Needed There are many strong software businesses based in Europe, often operating on an international basis. Of these there are a significant number considering an IPO in order to enable their growth. However, the vast majority of those businesses plan to IPO on a US market, rather than on the LSE TechMARK or other European Exchange. This paper examines the reasons and implications of this, and suggests that more focus on Technology within Financial Services could encourage more businesses to IPO in Europe. We are grateful for the significant input of numerous European software Chairmen, CEOs and CFOs and of two of the leading Technology Bankers in Europe. While the title is More Bankers Needed deliberately to catch attention, many of the comments apply to other areas such as Fund and Asset Management. A tale of two Continents There are significantly fewer sizeable European-quoted software businesses than there were. This is caused partly by acquisitions of European-based companies such as Misys, Autonomy, Logica, Kewill, Alterian, who leave the LSE TechMark but mostly by the lack of new public company creation via IPOs. There have Technology Company IPOs on London Market Deal Value ($M) Source: Financial Times been no recent IPOs of sizeable businesses on European markets as illustrated by the graph. Conversely the IPO window remains open on NASDAQ/NYSE for companies like Demandware, ExactTarget, Guidewire, jive, ServiceNow, Splunk and workday from 2011/12. If just one of these IPOs had been in Europe it would have been a major story, workday would be a FTSE100 member if UKquoted, ServiceNow and Splunk would be close to the top of the FTSE250. 1

2 Excellent article... the issue has nothing to do with listing rules and everything to do with skills and experience in the City. Venture Capital Investor the issue is the lack of technology focussed investors the fund managers are too general and therefore don t have the knowledge it needs an initiative by the fund management community to focus their efforts to break the cycle. FTSE 250 TechMARK CFO Around 2000 there was little knowledge of technology in the fund managers, there isn t much more now. FTSE 250 TechMARK Chairman the changes required in the UK to provide a good home for technology companies are significant and will probably require at least a decade to change and that assumes government is supportive and invests. The issues start from investment culture in the UK, driven by government policy Tabloid Press and cultural attitude are not helpful for dynamic businesses. FTSE 250 TechMARK Chairman In addition, sizeable European HQ d businesses considering IPOs are primarily looking at NASDAQ/NYSE. As an example, Czech HQ d AVG, Irish HQ d Fleetmatics and Sweden HQ d Qliktech are now NYSE/NASDAQ-listed. There are 20+ strong European technology businesses considering an IPO, with a potential total enterprise value of over $30bn! That s a lot of very strong businesses from many European countries. However, according to Bank of America Merrill Lynch, ALL of those businesses are looking at NASDAQ/NYSE for an IPO rather than a European exchange. European growth is being constrained But does this matter? Who cares what exchange a company is listed on? After all before the creation of TechMark in 1999 and other segments NASDAQ was the primary IPO market for European software businesses. A 1995 quote from the US based CFO at Business Objects explains their rationale for the 1994 NASDAQ IPO Investor knowledge resides in the US, as do the analysts. The company s visibility was enhanced by presenting itself to the US community. That quote could have been made now. We believe the exchange does matter and has major European implications: If there is no local option to continue to grow and raise capital, it is more likely that an early trade sale will happen, preventing companies from becoming really large and staying in Europe. In 2012, the average valuation for a software business going public in the US was over $800 million compared to the average M&A exit valuation in Europe of just over $100 million, according to research conducted by Arma Partners. In other words, European HQ d companies sell out much earlier without really giving themselves a real shot at an IPO. If the company becomes US listed then over time more and more board roles are likely to be based there and not in Europe, both executive and non-executive. This has major implications for Europe, as fewer of the most senior roles will be here. We won t even get into corporate tax..! This becomes self-perpetuating: fewer European public software companies means lower priority from bankers, investment funds and research analysts on the sector, which in turn makes Europe a far less attractive/credible place to find financial backers for those companies thinking about a listing, which means they turn to the US... 2

3 The investors in Europe are not as sophisticated as those in the US. There are some great companies which are starting to be built in Europe, others will follow on, but there is no short cut. Might Europe die while waiting? It is possible, obviously I sincerely hope not. FTSE 250 TechMARK CEO Not many fund managers know about technology and there aren t enough successful ex-executives for technology companies in investing fund management. TechMARK Chairman This is a distinct failure of the markets TechMARK Chairman U.S. still the first choice for IPOs For many technology companies, there are still few better ways to gain status than listing in the US. Historically, Nasdaq home of technology pioneers Apple, Amazon and Google has been the destination of choice. Philip Stafford Financial Times In 2012 a record 455m was invested in 95 privately-held European software businesses. Source: Go4Venture Europe has all the building blocks for building great companies: Entrepreneurs and vibrant entrepreneurial hubs, Technical Engineering skills, investment funds (mainly!) and many great companies. Growth funds, many of whom are US based, are deploying a very large proportion of their funds into Europe to build some very large companies, according to high investment levels recorded by Go4Venture. There is also the political will to make technology a bigger part of the European economy. Yet, while there is much talk of growing the next Oracle, Google, Amazon or Salesforce in Europe, there is currently only one European software/ services company which is a member of the FT Global 500: SAP. Other European software companies are literally an order of magnitude smaller. How to build a European market What will make more IPOs take place in Europe? Investors and boards tell us that a large part of this is the financial community and ecosystem needed, rather than changing listing rules to make them more flexible. Currently there are far fewer bankers, research analysts and fund managers that get tech and get growth, and conversations in Europe can be frustrating due to having to repeatedly explain company fundamentals and comparables that would be readily understood in the US. Companies are pushed to focus purely on short term earnings, dividends and profits rather than on growth. Workday has last quarter revenue of $82m, an operating loss and a market value of $10bn+, would that happen now in Europe? Most of the strongest tech bankers in Europe are now working for M&A-focused boutiques rather than bulge-bracket firms with Capital Markets capabilities, who would lead major IPOs. There are also very few tech focussed research analysts, investment funds and fund managers. This is also an issue for currently listed technology firms, for example one FTSE250 reports that of 16 fund managers involved only two have technology analysts. Building the Financial Services Infrastructure in Europe should be entirely possible. London is still ranked #1 globally in the Global Financial Centres Index ahead of New York (Long Finance, 2012), making it a natural international home for this community. There is already a very strong and broad ecosystem of Asset Managers, Investors and Analysts. Within this large ecosystem and community, a stronger investment and focus on technology is needed. 3

4 I agree with everything in the article. This issue is front and centre of my mind. When we talk to UK investors, even those with 2-3% of the company, we go through the presentation and then there are no questions. In the US they don t want to hear the presentation, they want to ask questions about our competitors, business models, industry diagnosis. It s a totally different conversation and they are a much better audience... if the business listed again there is zero chance it would be in the UK. We have increased our US investors from 15% to 23% of the company in 6 months as a result of this. FTSE 250 TechMark CEO The attitude and mentality of small businesses in Europe needs to change... they are only interested in a 3-4x return to investors, not in building a great business over the long term FTSE 250 TechMark CEO Banking on European Technology Just one or two major IPOs could start to turn the tide away from NASDAQ. This requires some brave thinking by company boards and their advisors to think differently. Building an IPO market here would involve many more people in the banks and Financial Services with a deep understanding, enthusiasm and focus on tech. This would help the European technology sector to become larger, more active and hence more profitable to the Financial Services sector. Banker bashing might be fun for cheap laughs and politicians, but it won t help here. A stronger and more tech savvy Financial Services infrastructure in Europe is critical to having more listed businesses here and growing larger European based global businesses. Adam Hale: Head of European Software Russell Reynolds Associates With significant input from: Paul Guely: Managing Partner at Arma Partners Paul Harvey: Head of European technology, Bank of America Merrill Lynch Many Chairmen, CEOs, CFOs of European Businesses Go4Venture SoftWhere Europe is a list of the major appointments across the Software industry in Europe, compiled by Russell Reynolds Associates. Some of the appointments are the result of our searches with clients. Many of the appointments listed were not externally announced. Efforts have been made to ensure the information is accurate, however we apologise for any errors, inaccuracies or omissions. As always we are grateful for feedback and support. Please pass any comments or requests to be on the distribution list to Adam Hale at adam.hale@russellreynolds.com. All previous publications of SoftWhere are available under Our Perspectives on 4

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