Avast float is no sign City is ready to em­brace tech

While the an­tivirus soft­ware firm’s Lon­don list­ing is wel­come, it does not mean the UK will en­tice the next Face­book, Google or Spo­tify

The Daily Telegraph - Business - - Business Comment - James Tit­comb

It is of­ten lamented that for all of the vi­brancy of Lon­don’s fi­nan­cial mar­kets, it does a pretty poor job of bring­ing tech­nol­ogy com­pa­nies to the ta­ble. So, last week’s news that the cy­ber­se­cu­rity soft­ware com­pany Avast had cho­sen to float in Lon­don, rather than New York, was greeted with some cheer. Avast, based in the Czech Repub­lic, an­nounced that it plans to sell some $1bn (£700m) of shares when it goes pub­lic in May. A free float of 25pc sug­gests a val­u­a­tion of $4bn, or £2.8bn, mak­ing it the big­gest-ever flota­tion of a tech­nol­ogy com­pany in Lon­don.

Bil­lion dol­lar tech­nol­ogy list­ings are not, it would seem, just for Wall Street. Some an­a­lysts sug­gested the ru­moured val­u­a­tion was un­der­play­ing things and that the com­pany could be worth enough to tip it into the FTSE 100, some­thing that would in­crease the num­ber of tech groups in the blue-chip in­dex by 50pc.

And while those fel­low FTSE soft­ware groups Sage and Mi­cro Fo­cus are a lit­tle, well, dull (the for­mer makes ac­count­ing soft­ware, the lat­ter spe­cialises in a pro­gram­ming lan­guage de­signed in the Fifties), Avast is grow­ing strongly and in a boom­ing in­dus­try.

Its an­tivirus soft­ware has 435m users, mak­ing the com­pany eas­ily the big­gest of its kind and a recog­nis­able con­sumer name. It op­er­ates a “freemium” busi­ness model in which it gives away its main prod­uct for free, and hopes to charge the most de­mand­ing cus­tomers for a su­per­charged paid ver­sion, and then more again for fur­ther fea­tures. It is a strat­egy that has paid off for LinkedIn, Drop­box and count­less smart­phone apps, and the same ap­pears to be true for Avast, whose rev­enues in­creased by 6pc last year.

The op­por­tu­nity for cy­ber­se­cu­rity com­pa­nies is ex­pand­ing rapidly, too. Busi­nesses are be­lat­edly in­vest­ing af­ter the cas­cade of de­bil­i­tat­ing at­tacks that hit so many com­pa­nies last year. The grow­ing threat of at­tacks from rogue states and large penal­ties for fail­ing to pro­tect data are also forc­ing com­pa­nies to take their on­line de­fences se­ri­ously. In­di­vid­u­als, too, are wis­ing up: the con­sumer cy­ber­se­cu­rity mar­ket is fore­cast to grow 10pc a year and hit $21bn in 2021.

Avast’s pri­vate eq­uity backer CVC, which owns 29pc of the busi­ness, and its founders Ed­uard Kučera and Pavel Baudiš, with 46pc, were no doubt en­cour­aged by the ex­pe­ri­ence of Sophos, a com­peti­tor whose shares have dou­bled since the com­pany’s 2015 list­ing.

How­ever, it would be foolish to in­ter­pret Avast pick­ing Lon­don as ev­i­dence of a broader warm­ing of the mar­ket to­wards tech com­pa­nies.

For one thing, Avast al­ready has a rocky re­la­tion­ship with New York, the ma­jor al­ter­na­tive. It pulled plans for a Nas­daq float back in 2012, just days be­fore it was due to be priced, cit­ing “bad mar­ket con­di­tions”.

Its chief ex­ec­u­tive, Vin­cent Steck­ler, also has an eye­brow-rais­ing back­ground with the Se­cu­ri­ties and Ex­change Com­mis­sion, the main US mar­ket reg­u­la­tor. In 2005, while work­ing for a sep­a­rate com­pany, he was found to have helped the soft­ware firm Logi­con over­state its fi­nan­cial re­sults. Steck­ler was per­son­ally fined $35,000 by the SEC. The is­sue may have re­ceived more play had Avast planned to go pub­lic in the US.

That does not mean we should not wel­come the com­pany’s de­ci­sion. But even if Lon­don is a bet­ter home for Avast than New York that does not mean it will be for the fu­ture Face­books and Googles of this world – the tech com­pa­nies we are des­per­ate to at­tract.

Avast is no bur­geon­ing start-up, it is three decades old. It is also proven to be prof­itable, and its growth is healthy, rather than spec­tac­u­lar. This is noth­ing to be scoffed at, of course, it is only to say that the com­pany is hardly a test of Lon­don in­vestors’ ap­petites for riskier ven­tures.

Even if Avast looks a lot like a tech­nol­ogy com­pany in many re­spects, fi­nan­cially it is much more or­di­nary.

For proof of this, it needs only to be com­pared to an­other Euro­pean tech­nol­ogy com­pany new to the pub­lic mar­kets. Avast makes a lot more money than Spo­tify – cash flow from op­er­a­tions last year was $306.5m, com­pared to $221m for the mu­sic stream­ing firm – but Spo­tify gen­er­ated a val­u­a­tion of nearly $30bn in New York ear­lier this month, well above what Avast ex­pects to fetch.

A £3bn val­u­a­tion for the cy­ber se­cu­rity com­pany sug­gests an earn­ings mul­ti­ple in the sin­gle dig­its, a far cry from the enor­mous mul­ti­ples gen­er­ated by many of the most fash­ion­able US tech stocks.

Many de­ride the out­sized val­u­a­tions that some tech­nol­ogy com­pa­nies re­ceive be­fore they have gen­er­ated prof­its, or even any sign of prof­its, but it can­not be de­nied that they have been an en­gine of growth for many in­vestors.

The UK has a healthy clutch of loss-mak­ing, fast-grow­ing and ven­ture cap­i­tal-backed tech­nol­ogy start-ups. To date, they have avoided the pub­lic mar­kets, opt­ing for ever-higher pri­vate val­u­a­tions or an in­vest­ment from the mega SoftBank Vi­sion Fund, which is rapidly be­ing seen as an al­ter­na­tive to the stock ex­change.

When one of these beasts chooses to go pub­lic here, we will be able to say that Lon­don’s fi­nan­cial mar­kets have em­braced tech com­pa­nies. Un­til then, the ques­tion re­mains, and Avast’s flota­tion, wel­come as it is, does not an­swer it.

‘Avast is no start-up, it is three decades old; and has a rocky re­la­tion­ship with Nas­daq’

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