June 21 (Bloomberg) -- The fourth Friday of every month at a pub in San Francisco's Ghirardelli Square, British expatriates living in the technology capital of the world meet to eat, drink, and reminisce about home. The group includes staffers at West Coast tech giants Google Inc., Apple Inc. and Amazon.com Inc. and lists more than 1,000 registered members on its Meetup page. That number is about to get larger.
As growth in the global technology industry slows, European companies have been hobbled by weak valuations. As a result, cash-rich U.S. acquirers are swallowing up their European counterparts, outspending European acquirers by almost two-to- one in the region. That means more of Europe's tech whizzes are moving to Silicon Valley, even as the continent's recession- wracked governments push attempts to spur innovation.
Overseas buyers, especially from the U.S.,"are doing the math and valuing European public companies more highly than the European markets," said Simon Pearson, an M&A partner at Ernst & Young LLP in London. "The number of substantial European tech companies is going to continue to dwindle."
U.S. buyers have spent $42 billion on acquisitions of Europe's technology companies since 2009, led by Hewlett-Packard Co.'s $10.3 billion takeover of U.K. data-analysis firm Autonomy Corp. last year, compared with $27 billion in deals by European buyers.
No Ecosystem
The gulf may grow even wider as two one-time European technology giants that have struggled against U.S. and Asian competition, smartphone maker Nokia Oyj and phone-equipment vendor Alcatel-Lucent, are expected to shed assets. Bankers are also predicting consolidation in the computer-services space, in which European leaders Cap Gemini SA and Atos SA trail U.S.- and India-based competitors in a market that's barely growing.
Unlike the technology giants in the U.S., large European companies lack "an ecosystem of mid-sized businesses around them," which in turn drives even more innovation, said Errol Damelin, the founder of Wonga, the London-based online loan provider. Europe does have a new wave of startups, though it may take until 2020 before they reach maturity, he said.
Bargain prices for European companies are luring buyers. Listed European technology firms valued at more than $100 million are on average 32 percent cheaper than their North American peers, trading at an average ratio of 15 times earnings compared with 22 times earnings in the U.S. and Canada, according to Bloomberg data.
Nokia's Plunge
The result is a dearth of mid-sized to large technology companies in Europe. In the U.S., 234 technology companies have a market capitalization of more than $500 million, while in Western Europe just 65 companies meet that criteria, with only six exceeding $10 billion in value. Silicon Valley's dominance has only become more complete over time: in 2007, there were 100 European companies valued above $500 million, compared with 267 in the U.S.
Nokia's decline has been the region's most dramatic. Its market value slumped below $10 billion last week, down from more than $100 billion in 2007. The company this month said it would cut an additional 10,000 jobs as its profitability erodes. The handset maker has been hammered by competition from phones running software from Apple and Google -- two companies that weren't even in the mobile business six years ago.
Moving Staff
The Finnish company is looking to exit from its Nokia Siemens Networks network-gear unit, according to people familiar with its plans, and attracts frequent speculation about an outright takeover by Microsoft Corp., with which it has an alliance. Among the top 10 global technology companies by market value, none is European. German business-software maker SAP AG is 11th with a market capitalization of about $74 billion.
Acquirers routinely promise to preserve jobs and research activities when buying technology businesses. Hewlett-Packard, for example, pledged to maintain Autonomy as an independent unit and avoid any job cuts when it bought the Cambridge, England- based business last year. Yet CEO Mike Lynch transferred to the U.S. following the takeover, before he was ousted last month.
Lynch, who founded Autonomy as a spinoff from the University of Cambridge in 1996, said European companies are losing out due to a lack of early-stage financing, with entrepreneurs selling out earlier than their U.S. counterparts.
Autonomy was different because it sought a public listing early to gain access to additional funds without the need for venture capital, Lynch said.
"If Autonomy had got to a $300 to $400 million valuation and it had still been private, I think you'd have had a hard time" convincing venture-capital backers to say no to an offer from a strategic buyer, he said.
'Angry Birds'
Today's startups are the bright spot for the European technology scene. Drawn by the success of young companies including Finland's Rovio Entertainment Oy, the maker of "Angry Birds" mobile games, and London-based online jukebox Spotify Ltd., venture-capital firms are raising their exposure to Europe, betting that nascent innovation hubs in London and Berlin can deliver the next big thing.
Even the hottest startups, however, face challenges particular to Europe and its topsy-turvy stock markets, which have hosted just 14 initial public offerings of technology companies in the past two years, while U.S. markets have welcomed 21. And Europe's venture-capital scene remains small compared to that in the U.S.
Europe's Crisis
"When the private and public capital markets are dislocated, access to equity for earlier-stage companies is more difficult, leaving selling as the only real option to staying the course," said George Patterson, the head of technology investment banking for Europe, Middle East and Africa at Barclays Capital in London.
Difficulty turning small startups into large, independent engines of employment and growth comes at an inopportune time for European governments slammed by the region's debt and economic crises. In the U.K., Prime Minister David Cameron has backed plans to build in London a high-tech answer to Northern California. In France, a country with zero economic growth, the government has supported an academy for aspiring entrepreneurs.
That strategy, though, isn't about to challenge Silicon Valley. Marten Mickos would know. The founder of Swedish database-software maker MySQL AB, which was bought for $1 billion by Sun Microsystems Inc. in 2008, moved to California nine years ago after promising U.S.-based venture-capital investors he would relocate as part of a financing round. He hasn't looked back.
"It's such a unique place even for Americans," Mickos said. "I don't think it's a damning indictment especially of Europe. There are many companies in the U.S. that feel they need to move here. Everybody has lost against Silicon Valley, not just Europe."
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