Why Software-Related M&A is Booming
In 2020, we saw more than one software deal delayed, but not because COVID-19 had cooled the market for technology-related M&A. On the contrary, the sellers in these cases were performing so well that buyers had to step back and readjust their valuations.
This sort of activity is rare during an economic downturn like the one caused by COVID-19, but it goes to show just how appealing the software industry is for private equity firms and other buyers.
As we head into 2021, the market shows no signs of slowing as many software companies continue to see record sales, month after month.
Why Software is Hot
After a brief slowdown in all sectors of M&A at the onset of the pandemic, everyone came to realize just how important technology and software would be to living our lives.
We’re all staying connected with clients, customers, friends, and family through Zoom and Slack (which is being acquired by Salesforce in a $27.7 billion deal, further proving the attractiveness of the space). And as education is taking place remotely, we’re seeing the embrace of edtech companies like never before. Certain segments of software, including edtech, govtech, and adtech, have seen a significant boost in appeal for investors, and we believe these technologies are here to stay.
Recognizing the industry’s resiliency through COVID-19 and the performance of publicly traded companies listed on the NASDAQ, new buyers are entering the market in search of opportunities they had historically shied away from.
Furthermore, since the uptick in deals and deal values in June, sell-side companies have realized there’s no “bottom-feeding” going on through the shaky economy, and that it’s actually an appealing time to sell.
Software companies generally command higher acquisition prices than comparable companies in other sectors. While the typical publicly traded company sells for an average multiple of revenue of 3.0x to 3.6x, according to Deloitte, the average among publicly traded software companies is 4.2x to 5.0x, which is about what we’re seeing in the private middle-market clients we serve. We’re finding that cash flow positive, bootstrapped companies (Friends and Family or Seed Stage) are commanding the most interest.
Software has long been a high-growth segment, and COVID-19 has only accelerated the need for technology-related solutions in our lives.
While software valuations are likely to remain strong into 2021, we don’t see any signs of overheating like we did leading into the Dot-Com crash more than 20 years ago.
Dry powder is still available and historically low interest rates are also helping to spur activity.
Furthermore, we’re watching to see whether buyers and sellers have a greater sense of urgency to get deals done in 2021 before a potential increase in the rates at which capital gains are taxed in January 2022.
If you or a client are exploring the sale or purchase of a software company, we would be happy to discuss the topic further and share insights from our deep expertise in the area.
Tim Brady is a Vice President at Copper Run. He specializes in serving middle market technology companies.