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VCs Sniff Value in Europe

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LR Mobile News Analysis
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3/25/2003
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2003 will see venture capitalists come out of their shells and place more funds in new European wireless investments, according to sector analysts at Ernst & Young (see E&Y: VCs Eye Wireless).

The technology team at the professional services company believes that, although there is unlikely to be an increase in the volume of venture capital and private equity funds invested this year, VCs will expand their portfolios by pumping a greater proportion of their investments in new companies. Those VCs with funds big enough to take a long-term view (five to seven years) are already taking advantage of low valuations, according to conclusions made in the E&Y team's latest quarterly Wireless Deal Tracker report.

The analysts specifically note the emergence in the European wireless sector of "business angels -- investors who were successful during the technology boom years and are now looking for investment opportunities as the market turns." These angels are taking very active roles in the management of the companies they are supporting financially, notes E&Y.

Such activity could lead to early shoots of market recovery, and the E&Y team would be "surprised if the capital markets remain completely closed for much longer." But while "initial signs in 2003 point to recovery, it is likely that Europe will follow the U.S. in this area," and current global affairs make it hard to predict market movements from week to week.

If 2003 investment activity were to match that of 2002, then the European wireless sector would benefit to the tune of $630 million, a marked reduction of 63 percent on the 2000 total of just over $1.6 billion (figures from VentureOne).

One key area of investment potential is in the OSS (operational support systems) sector, where 15 companies, including Openet Telecom Inc. and Am-Beo, raised funds during 2002. "We believe that companies that offer improved network efficiency and reductions in rollout costs will continue to be purchased by network operators -- despite capex restrictions -- as they produce positive short-term return on investment," concludes the E&Y team.

This year could also see VCs exit some companies, as large industry players seek to redress drastic cuts in their research and development (R&D) by acquiring niche startups for their technology and/or customers. The E&Y analysts expect large vendors such as Cisco Systems Inc. (Nasdaq: CSCO), Nokia Corp. (NYSE: NOK), and Siemens AG (NYSE: SI; Frankfurt: SIE) to make the most of their scale and resources -- something that Cisco has already done in the 802.11 sector recently, though the acquisition was of a North American firm rather than a European player (see Cisco Buying Linksys for $500M).

The team seems unsure, though, whether the emergence of commercial 3G operations in Europe this year will spark frenzied consolidation among network operators, or whether the market will remain cautious. One major operator acquisition would probably be enough to see the value of the European wireless mergers and acquisitions (M&A) sector increase year-on-year. In 2002 it was worth $21 billion (figure from Thompson Financial SDC), and about half of that was accounted for in one transaction -- when France Telecom SA (NYSE: FTE) repurchased $10.7 billion of its own shares from Vodafone Group plc (NYSE: VOD).

M&As have some way to go, though, before reaching the giddy heights of 2000, when Vodafone's acquisition of its German interests fueled the European wireless M&A sector to a commission-enhancing $307 billion. How long ago does that feel now?

— Ray Le Maistre, European Editor, Unstrung

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