Valuations stay high amid expected decline

by Scott Denne

There’s a consensus emerging that tech M&A valuations have peaked and are set for a decline. In the earnings call just ahead of his company’s acquisition of Carbonite this week, OpenText’s CEO said that M&A valuations appear to be coming down – a view that lines up with the results from a recent survey. Yet the deals getting done show little signs of pricing pressure.

Across the broader market, prices have only dropped fractionally from last year’s high. The median multiple for targets in OpenText’s traditional hunting ground – information management and application software – stands at 6.5x through 2019, from 6.6x last year, according to 451 Research’s M&A KnowledgeBase. In its $792m purchase of Carbonite, OpenText didn’t exactly pay a premium, although the target did fetch a higher multiple than other OpenText acquisitions.

The price landed somewhere between 2.8x and 3.2x trailing revenue, depending on how one accounts for the revenue from a recent substantial purchase by Carbonite (subscribers to 451 Research’s Market Insight can access our full report on that deal). But either way, the multiple sits on the high end of what Open Text historically pays. According to the M&A KnowledgeBase, OpenText typically pays 2.1x on acquisitions done this decade and we’ve never before recorded it paying above 2.9x.

Although it paid around the high end of its range for Carbonite, OpenText and its management aren’t the only ones expecting a decline in deal valuations. In the M&A Leaders survey from Morrison & Foerster and 451 Research, five times as many respondents said they expect private company M&A valuations to drop over the next 12 months as those who anticipate an increase – the largest gap between bears and bulls that we’ve recorded in any of the last 11 runs of the survey.

Figure 1: Tech M&A valuation outlook
Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster
Posted in M&A