Interview: Meet our New Co-Leader for TMT
CDI Global is pleased to announce Dr. Nicholas Hanser is taking over as co-leader of CDI’s Telecommunications, Media, and Technology (TMT) industry group (IG). Nicholas succeeds Urs Huber, who has been appointed Chief Technology Officer for the firm. “TMT has been our largest and fastest-growing industry group in recent years”, says Jeff Schmidt, CEO of CDI Global, “and we are confident that Nicholas will help to guide extraordinary growth in TMT over the coming years. We thank Urs Huber for his outstanding service and welcome Nicholas Hanser to the TMT sector and leadership team at CDI Global.”
Recently, Jeff Schmidt had the opportunity to meet with Nicholas to discuss a wide range of topics and issues to get his insights and vision for the future.
Jeff Schmidt Question
What has been the recent trend in middle market transactions generally and the TMT sector in Europe? It seems to be a very, very strong market with a lot of transactions. In fact, we have had record years largely due to TMT type projects. Is that your perception as well? And what do you see this year into next year with respect to deal flow in the middle market?
TMT in a post pandemic world proves to be one of the thriving industry sectors. TMT probably benefited most from the pandemic and since then, other industries like automotive manufacturing are more and more reliant on technology. Also, when you look at artificial intelligence, cloud computing, cybersecurity solutions, and robotics, and basically VR and gaming, these are all fields the financial community as well as strategics are currently looking at for new investment.
From a cross-border perspective, here in Europe, we see growing interest coming from US funds. Many are focused on software companies. That’s because software is king, especially with the emphasis on automation and B2B business models. Another factor is that in Europe, from a global perspective the valuation levels are perceived to be a bit lower than in the U.S. That valuation difference will remain over the next couple of years.
That said, there are clouds on the horizon with respect to the economy. I noticed this morning that the U.S. hit the highest inflation rate in 40 years. There's war in Ukraine and the ripple effects of that haven’t been felt economically yet. There's increasing talk about a recession in 2023.
How do these factors impact the deal activity in TMT? Are these merely things to take note of, but not really dampen the level of activity currently? Or do you think there are reasons for sellers and buyers to be concerned at this point?
Here in Europe, it seems we are more affected than in the U.S. Obviously, the Ukraine crisis is very concerning. Another big threat we are also seeing is the resurgence of COVID 19 in China and especially the Shanghai region where we see a threat to the global supply chains. On the other hand, investors are sitting on $2 trillion of deployable funds. The markets are strong and there are acquisition opportunities, but psychologically, people see war and other concerns that cause them to hesitate. Sectors like automotive manufacturing and industrial IOT and industry 4.0, where we previously had many buyers now prefer to hold their search mandates while they assess where this is going.
Uncertainty is growing in Europe. It's not only concerns about oil which is suddenly scarce and people are also thinking about gas shortages and semiconductor shortages. People worry what will happen in the case that the conflict further escalates and the gas from Russia would stop coming into Europe. What would that mean for the manufacturing in the industrial base here, especially in continental Europe.
Owners of private companies have the dilemma of whether they should sell now or wait till next year and hope that the market is stronger next year. We saw this during the pandemic, depending on the industry, a lot of people didn't want to sell because it's difficult to justify the valuations that they thought the company would be worth, particularly their business, and then effective and buyers couldn't do onsite due diligence. And so, they were less willing to pursue transactions. Now with the sort of storm clouds on the horizon that we talked about a moment ago, some of the prospective sellers are kind of in a quandary about what to do. What advice would you give to a company that approached you and, and, uh, was looking for some guidance on whether they should sell now or wait till next year?
Currently, sellers are just a bit more skittish than last year but transactions keep on getting done. We tell our clients that right now is definitely a good time to get prepared to sell. We still find strong interest from financial buyers and also from strategics in our international network. Apart from a few industry sectors, which are affected severely by supply chain disruption and raw material shortages, there are many buyers for well-managed middle-market companies.
We tell clients and prospects no one knows how the deal market will be in a year. It could be better than now, or it could be much worse. Prepared sellers should go to the market and be encouraged to do so. In fact, there are ample funds available to make deals, especially from financial buyers in the mid-market segment. And for that matter, many strategic buyers have surplus cash on their balance sheets and should deploy these resources in growth and diversification. From our perspective, there's no reason to hold any transaction that makes strategic and economic sense.
Strategically managed companies understand that surplus cash should be turned into EBITDA by investing in the core business and by making the right acquisitions. Otherwise, that cash can present risks from activists as well as competitors.
We receive a lot of calls from private equity firms, particularly those that invest in the middle market, lower middle market, looking for deals. As you pointed out, there's a tremendous amount of “dry powder” with private equity firms in Europe, as well as other parts of world. Increasingly, these firms want to pursue proprietary transactions wherever possible. The direct and indirect costs of unsuccessful bidding in auctions can be significant. What advice do you have when a private equity firm approaches you about sourcing deals? Do you have guidance on what to look for and what valuations they should be prepared to pay, particularly if they are searching for a proprietary transaction?
As you pointed out, financial investors, but also strategics, prefer to source proprietary deals. I encourage them to look for smaller transactions with companies that have proven business models, and $10 to $20 million of recurring revenue in the software space. The larger companies that everybody is looking for will attract many bidders and have valuations that can get very, very high. We encourage, especially smaller private equity firms, to search for smaller companies below the radar of international players. We encourage them to buy several related companies and then integrate them to capture synergies and strengthen the competitiveness of the combination. This creates a software roll-up and can be a way for smaller private equity funds to create a scalable asset at discount to prices paid in an auction.
Making a series of smart deals at reasonable pricing multiples is like “stringing pearls” into a valuable integrated asset. The combined business can achieve scale regionally. It can also become a platform for accelerated growth though additional acquisitions.
I think it's also important for PEs to have a good relationship with many advisors because it's very hard to know all deals which are coming to the market in every region. To have access to an extensive network of advisors, like CDI Global provides, enables these funds to respond quickly to emerging opportunities.
In the last 12 to 18 months, we’ve had increasing interest from private equity firms in retention agreements. These form ongoing relationships through which we become very knowledgeable about a firm’s investment theses, their criteria, how they evaluate potential deals. That way, we can be very focused on trying to find the right opportunities for them. Have you experienced a similar trend in Europe?
That's a trend coming from the U.S. However, this is now happening in Europe. These kinds of relationships definitely help advisors keep private equity buyers in mind and as an advisor, we know about many transactions in our own pipeline. We know other advisors and are often collaborators and friends with other advisors, which provides even more intelligence about what's going on in the market and where trends a headed. Retention agreements help private equity firms to stay current on market trends and acquisition opportunities. These agreements will become more prevalent in Europe as there are too many buyers chasing after too few opportunities.
You've achieved many closings in Europe over the last few years. How do you bridge the gap on valuation between the seller and the buyer, especially when the seller wants the buyer to pay for an exponential growth curve? Even when the deal structure includes earnout payments, the seller typically wants more in the base payment at closing and less in the earnout. Whereas the buyer wants less in the base and more in the earnout. How do you navigate between the buyer and seller to get them to agree on a framework for the structure?
That's a very complicated challenge. An earnout motivates the seller’s management to stay on after closing to achieve the performance targets that trigger future earnout payments. On the other hand, a purchase offer including an earn out is less attractive to the seller than an offer without an earn out. Sellers only realize what they get paid immediately and the balance is at risk. Regardless of whether you are advising the buyer or the seller, earnouts increase the complexity of any transaction.
The advisory business is very competitive in Europe as it is elsewhere in the world. When we're talking to a prospect about providing either buy or sell-side services, and it's a competitive situation, how do you pitch the distinctive strengths or advantages of CDI over other advisors?
It's super important that the CDI brand itself has a strong visibility and market perception. We have been a leader in cross-border and middle market deals for 50 years. Our network of 50 offices in 30 countries is unmatched for middle market cross-border transactions. Very experienced country partners across the world work together in industry sector teams like TMT and Healthcare.
Cross-border advisory capabilities are super important for TMT. For example, our presence in the U.S., especially the West Coast, is a must. European buyers and sellers often choose an advisor for their capabilities in Silicon Valley. And then at the end, I mean, it comes down to personal relationships. You have to prove that you have a strong network of international, as well as national, partners and with the financial, as well as the strategic, investor community.
Dr. Nicholas Hanser is Partner and Head of Technology Investment Banking at Saxenhammer (Member of CDI Global B.V.). Dr. Hanser joined Saxenhammer as Partner and Head of Technology Investment Banking in 2019. His team focuses on Software, Digital Healthcare, Tech-enabled services, FinTech and the broader Technology sector.
Nicholas brings over 17 years of international Corporate Finance and Investment Banking experience with organizations such as Credit Suisse First Boston, Jefferies, BNP Paribas, and Bryan Garnier based in Zurich, London, Frankfurt, and Munich.
During his career he was involved in more than 60 transactions and closed more than € 35 billion of deal volume across different industry verticals with a focus on the Technology and Healthcare space. He has a global network in the investor and acquirer community and closed successful deals with companies such as Hellman & Friedman, Blackstone, Scout24, Deutsche Post DHL, Elis, Manz, Zealand Pharma, Nordex, Aixtron, Refresco Gerber, Seplat Petroleum, Sixt Leasing, Telefonica, tado, HABYT, NexWafe, Cognitec Systems and MorphoSys. He is also a private start-up investor as well as board member of various companies in the Technology sector.
As a Partner and Head of Technology Investment Banking, he leads CDI Germany’s Global TMT Investment Banking team and is a senior leader of the CDI Global industry sector teams for both Technology and Healthcare. Nicholas holds a PhD in Economics and Management and a Masters in Management from ESCP Business School, as well as a Master of Science from Bayes Business School (formerly known as Cass Business School) in London.