May 2020 Update

It’s not all doom and gloom in the M&A market, despite what you may have heard. The rapid shift to remote workforce, distance learning and managing dispersed teams has heightened the need for collaboration tools, video conferencing and enhanced cybersecurity.  

Smart logistics and AI for efficient supply chain management is even more critical in the post COVID-19 environment. This is all good news fueling software M&A activity.  Larger tech companies are seeking to add capabilities in these important areas by way of acquisitions, and private equity buyers continue to shop selectively to bolster existing portfolio companies.  Software deal volumes are generally up, and valuations have held steady or increased significantly in certain sectors.

First some background on overall M&A trends for 2020 YTD

While global M&A in aggregate has declined notably, both in number of deals and valuations, the US mid-market (defined as deals under $1 billion value) where most companies play, has shown strength.  

The number of US mid-market deals actually increased 8.4% in Q1 totaling 814.  And mid-market valuation multiples, measured by Enterprise Value/EBITDA, have held steady at 10.1X, identical to 2019 valuation multiples.  EV/Revenues tell a similar story, averaging just over 1X throughout 2019 and 2020 YTD.  

Turning to the software sector, where deal news is the brightest

In Q1 2020, the number of software deals increased 9% from Q4 2019 (281 vs. 258) and software deal values and multiples have done even better.

EV / EBITDA has increased from 17.7X to 22.7X Q4 2019 to Q1 2020, and EV/Revenues has held steady at 3.4X in the same time period. Notable software deals for the quarter include, in April: Verizon’s $500m announced acquisition of video-conferencing platform Blue Jeans; Cisco’s  acquisition of Fluidmesh Networks which connects sensor data from trains and vehicles, to boost Cisco’s IOT offerings; and Accenture buying cybersecurity consultancy, Revolutionary Security.

In March, Microsoft announced it would acquire Affirmed Networks (value undisclosed), for its virtualization and cloud-based mobile network technology; and Docusign acquired Seal Software ($188m) a pioneer in machine-learning enabled analytics software, which searches legal documents by concept rather than keywords.  In February, network security company Forescout was acquired by private equity firms Advent International and Crosspoint Capital Partners.  Apple was active in January, acquiring machine-learning and algorithms firm for $200m.

Given all the news about the COVID-19 virus and its impact
on the economy, why might the software industry be continuing to shine?  Aside from behavior changes such as increased
use of collaboration and remote management tools, AI, and data analytics for all
aspects of the enterprise, a key factor is the very nature of the software
business.  Software does not have
the same supply chain implications or restrictions that many other industries
rely on.  Additionally, software
once embedded, is often difficult to disengage from an enterprise whether
on-premise or delivered through the cloud.  With vendors moving to subscription-based revenue models, their
cash flow remains more resilient.

To drive growth, software companies continually need access
to new markets and new innovations.   While growth and
innovation can come from within an organization, it is also common to source
new technologies and teams via acquisition.  The term “outsourced R&D” is familiar to most people in
the industry.  Similarly, access to
new market segments, new geographies, and new industries can be obtained more
quickly through buying one’s way into a market rather than attempting to grow
organically. All of this fuels corporate software M&A.

Private equity firms remain a driver of software M&A as
well.  PE firms have money to
invest and their focus at present is to bolster existing portfolio companies
with selective add-on investments.  Corporate buyers looking for diversification plays as fallout
from the virus then compete with PE firms for good deals.

All things considered, is this a good time to jump into the
M&A waters?  For certain, it is
a good time to start getting ready, getting your business house in order.  Many pundits claim that when the economy
does open up, it will do so with a vengeance.  M&A activity can’t be turned on like a light switch; some
time is needed to prepare.  Prepare
now and be ready.

For further details on how you can be preparing, you may
contact us:

 Jan Robertson,
Managing Partner:

Geoff Roach, Managing Partner:

SiVal Advisors specializes in advising software
companies on M&A matters, and regularly tracks software M&A deal
statistics, providing periodic updates to its clients and interested business
owners.  Deal statistics and other
data are derived from a range of sources, including: PitchBook, Dealogic,
S&P Cap IQ and DealStats.

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