During the first quarter of 2017, West Monroe and Mergermarket surveyed 100 senior private equity and corporate executives, all with organizations that have acquired at least one software firm over the past three years. Results suggest the voracious appetite for software investments will continue. Here we dig deeper into what that deal activity may look like.
Last year was a blockbuster one for software mergers and acquisitions, with the most transactions (1,434) since Mergermarket records began in 1999 and overall deal value that was close to record levels. It’s hard to believe that pace can continue, but that is exactly what we are seeing. Software deal volume rose in the first quarter of 2017 compared to the same quarter a year before – and both corporations and private equity firms are flush with capital and are looking for every way possible to win the race.
How and where will they deploy this capital?
Many expect three to four acquisitions in the next two years
More than half (57 percent) of survey respondents said they plan to execute three to four software acquisitions over the next 24 months. Private equity firms report an especially strong appetite: 78 percent said they expect three to four acquisitions in that period, and 13 percent expect five deals or more.
Investors want to buy mature companies
There are many young organizations with great leadership, vision, and strong baseline solutions that need capital infusions to enhance their products. These companies are attractive to buyers who can help them scale to achieve even higher valuations. Yet, investors appear to favor more mature targets. Most survey respondents (82 percent) said they would consider buying companies at later stages of development, with at least four years of operating experience. Just over half said they intend to focus primarily on this segment.
One partner of a Netherlands-based private equity firm believes mature companies have better developed products and are less risky: “That makes it easier to invest and helps us get the returns we need in the long run. Investing in a mature company also gives us access to a strong management team.”
Buyers remain focused on their own backyards
Investors primarily look for deals close to home. For example, 78 percent of North American respondents primarily shop for deals in their region. A managing director at a Canadian private equity firm notes that “North American software businesses are in the leading position across the globe. The level of innovation, technical skills, and talents in this market are significant as most of the world’s best technology universities are (in North America).”
Industry-specific software tops the priority list
The survey results suggest investors are looking closely at firms with specialized, industry-specific software – especially in areas like fintech or digital healthcare – as well as at firms active in business intelligence and cloud computing. Investors say they expect growth in these areas, and corporations say investing in companies making specialized products helps them innovate and stay ahead of competitors.
The right target is more important than the price tag
While private equity and corporate investors may have some differing priorities, the one thing they all want is quality. They seek management teams with technical savvy, as well as business and financial acumen. They also want firms with products that can be scaled up quickly and effectively with tight speed-to-market capabilities and strong software development procedures.
When asked to choose the single most important factor for the success of a deal, more respondents cited operational (37 percent) and technical (38 percent) factors than price (25 percent) – evidence that competition for most attractive targets will remain fierce. The CFO of a US network security company perhaps said it best: “We are willing to pay large amounts for technologies that will help us improve efficiency, reduce costs, and develop a secure system.”
See more insights from Software M&A Frenzy: Searching for the Competitive Edge here.