Tech Stocks Rebound as M&A Targets in Europe

Technology stocks that are sensitive to interest rates have become much cheaper following the selloff over the past year, making the sector one to watch for dealmaking in 2023.

Atos SE, Darktrace Plc, Temenos AG and Deliveroo Plc were all mentioned as potential takeover targets in a recent Bloomberg survey of event-driven desks, fund managers and analysts. The survey, conducted last month, received 21 responses.

A common theme among the companies mentioned above is that all saw their share prices plummet last year, with Atos seeing the biggest drop of 76%. Lower valuations are making the sector more attractive to potential bidders at a time when mergers & acquisition activity has been falling in Europe and could use a boost.

"European growth valuations are moving back to pre-Covid levels, making companies more attractive," said Mirabaud Securities analyst William Mileham.

Technology M&A activity declined last year, with the value of deals involving tech companies in Europe falling 40% to $245 billion, according to Bloomberg data. This was a slightly steeper decline than total dealmaking in the region, which remained above historical averages.

Rising interest rates, a selloff in growth assets, a grim economic picture and runaway inflation have deterred buyers, while tight debt markets have restricted public to private transactions, with deals worth tens of billions of dollars falling apart.

Goodbody analyst George O’Connor believes that the increasing economic uncertainty will cause trade and private equity buyers to be more cautious with their money and re-invest in their existing portfolios. However, he believes that this may actually create more opportunities for deals to be done, as there will be more sellers willing to accept lower prices.

The companies with the most mentions in the survey are a mix of old and new. Perennial favorites such as luxury-goods firm Burberry Group Plc, gambling operator Entain Plc, and banking-software specialist Temenos remain near the top of the list, while Atos and media company Vivendi SE are among those featuring higher than they did in the past.

The same companies that have been dominating the M&A market for the past few years are still at the top of the list, as macroeconomic conditions continue to weigh on deal activity.

Vivendi's recent success has led to speculation that Vincent Bollore, the billionaire owner of 29% of the company, will try to buy more shares. This would take him past the 30% threshold, at which point he would be required to make a public offer for the company. Bollore's increased interest in Vivendi comes after the sale of his group's African ports business to MSC, a container line that is second in size to only one other in the world.

"It appears that Bollore plans to reinvest his war chest in the media and entertainment industry," said Geoffroy Le Guyader, risk arbitrage analyst at Kepler Cheuvreux. If a bid for Vivendi materializes, "we could see a 20% to 25% upside in the stock price," he said in written comments.

Atos has been the subject of speculation recently, after a disagreement between executives over how to revive the company led to the departure of CEO Rodolphe Belmer. The stock soared by about 25% in the first three trading days of 2023, after a report in the French press said that the company was in preliminary talks with Airbus SE about the sale of a minority stake in its Evidian cybersecurity business.

Citigroup Inc. analyst Amit Harchandani believes that both Atos and Temenos are potential M&A targets due to the operational and execution challenges that have caused their share prices to drop by more than half over the past year.

The six companies with the most mentions in the survey either declined to comment or didn't respond to requests for comment.