5 charts on the state of M&A in the global software industry

28 October 2020 Consultancy.uk 2 min. read

Global advisory firm Duff & Phelps has released the third quarter edition of its ‘M&A in the global software sector’ report. Five charts on the latest developments. 

The third quarter of 2020 has witnessed a sharp bounce-back in deal activity. Deal volumes for the quarter reached the highest level over the last three years, at 466 transactions recorded between July and September 2020. 

“As boardroom focus shifted away from bracing-for-impact, a combination of strong operating performance and more readily available financing resulted in a surge of activity,” said Rory O’Sullivan, a Managing Director at Pagemill Partners, a subsidiary of global consulting firm Duff & Phelps.

Quarterly Deal Volume

Deal value also spiked in the last quarter, with large-cap deals returning in full force over the last quarter, with aggregate deal values almost 90% higher than in Q3 2019. With deals above $1 billion valued in aggregate at $40 billion in the quarter, large-cap deal activity was the highest for the last six quarters. 

Quarterly Deal Value

The number of deals closed in 2020 so far will likely fall below the 2019 level, indicating a broader market participation. In other words, players from other industries are growing their interest in software companies as part of digital transformation strategies. 

Quarterly Deal Volume and Top Strategic Acquirers

Deal multiples for private equity deals (year to date) remain above the long-term level, however, multiples of deals closed by strategics are significantly lower, dragging the aggregate down. Despite uncertainty, valuations have remained high due to strong investor appetite and, for larger targets, a strong median increase in share price.

Annual Medan Deal Multiple

Multiples vary per sub-segment of the software industry, ranging from 16.3x (communications and collaboration) to 4.2x (vertical software) for current year revenues, with a median of 9.4x.

CY20 EV Revenue Multiples

Rory O’Sullivan: “In contrast to a tentative economic recovery, and relative to a tepid Q2 2020, software deal activity experienced a record quarter in Q3 2020 with both deal volume and spending returning to historic highs.” 

“Given the strong uptick in M&A activity in Q3 2020, we remain cautiously optimistic and believe momentum in the tech M&A market will continue into the end of the year and remain strong heading into 2021. However, we note that near-term political and macro risks are likely to continue to fuel periods of increased volatility, especially in the public markets.”

About the research scope

Among the software companies tracked by Duff & Phelps and Pagemill Partners are:

Pagemill Partners Tracked Software Universe