Why there is a huge valuation gap in M&A across US and Europe?

If one look at the M&A activities globally, the increased activity is not distributed equally.

The acquisition activity is very high at North America followed by Asia and Europe.

This is due to the difference in macroeconomic indicators across both these economies

• US economy is in high growth phase with low unemployment rate followed by robust equity markets.Low interest rates and high stock prices have fueled M&A activity in this region.More PE firms and strategic acquires are vying for assets particularly in technology as part of their growth strategy.Hence valuations are higher with acquirers paying median of 2.9x trailing sales for the target companies
• In contrary European economy is undergoing a slowdown.The unemployment rate is high and more companies are looking at consolidation to reduce costs and increase sales.Consolidation is happening primarily in the retail and automotive space due to the high cost structure, fixed assets and shrinking customer base.Many of these deals do not get closed due to the lack of regulatory approval from the European commission as they feel consolidation can lead to fewer competitors in market which can further impact the customers choice leading to high prices or poor quality.
• When looking at technology acquisitions European acquirers are paying far less money as buyers compared to their American counterparts. They are paying on an average 1.9x trailing sales for the target company.

Hence due to this valuations gap, the US acquirers have been able to acquire more companies compared to European buyers.

• In the case of VC backed startups that has a differentiated business model and with cutting edge technology capability there has been a huge competition from both US and European buyers for these assets.The US buyers are acquiring these startups at 5.3x trailing sales as against European buyers at 4x trailing sales.Most of these startups are niche firms with Machine Learning or AI platforms possessing a pool of high quality data scientists and developers.

These startups require funding to scale and grow revenues.Hence more and more of these startup are acquired by US based companies as in tech M&A the risk capital can be highly rewarding for the target firms.