by Scott Denne
The coordinated efforts of strategic and financial acquirers took purchases of application software vendors to a new height last year. Now, it’s the efforts of the latter alone that are pushing software deals back toward a record as sponsors place hefty valuations on such companies.
According to 451 Research’s M&A KnowledgeBase, $23bn of software assets have traded hands through the first quarter of the year, putting 2019 on pace to match 2018’s record haul ($93bn). As we discussed in 451 Research’s Tech M&A Outlook 2019, the reentry of strategic buyers played an equal role in driving last year’s total. This year, private equity (PE) buyers have contributed the lion’s share of investment through the first quarter, having spent more than $17bn on such transactions, our data shows.
PE shops are acquiring application software providers at a slightly higher clip, having bought 117 of them in the first quarter, compared with 108 in the same period of 2018. More importantly, those firms are paying an unprecedented premium through the start of the year. According to the M&A KnowledgeBase, software vendors selling to buyout shops are trading hands at a median 5.5x trailing revenue, a full turn higher than last year and extending a streak of soaring prices for software companies in sponsor-led deals.
That rise in software valuations largely follows the rise in public stocks (which usually corresponds with an increase in tech M&A valuations, as my colleague Brenon Daly pointed out last week). Looking at the three largest sponsor acquisitions of application software providers this year, two of the targets – Ultimate Software and Solium – sold above their all-time-high share price. The third, Ellie Mae, was a few percentage points below its peak, but still sold at roughly 50% higher than where it finished 2018. With the S&P 500 up 15% this year, prices for software deals don’t look ready to settle.