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
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’