2017

The munchies for software M&As

A lot of Software Mergers and Acquisitions (M&A) took place last year confirming our dependence on software in every aspect of our personal and business lives. A recent report by Westmonroe shows that there’s a much higher focus on software entities today that help differentiates clients in their markets or provide them a competitive advantage.

The report shows that buying momentum will continue with 57% of Westmonroe’s respondents planning to fish for 3-4 software deals over the next 24 months. Private equity firms are reported to have the strongest munchies with over 78% expecting 2-4 deals over 2 years and 13% expect 5 deals or more. Most PE firms are more broadly interested in targets at later stages of development citing reduced risk and higher value as a more mature company has better-developed products making it easier to invest.

Corporations and private equity firms have piled up loads of cash. Less than half of the 1.7 trn. USD American Companies held on their books in early 2017 belonged to Microsoft and Apple while Japan’s Softbank a tech fund that could eventually pass 100Bn USD. And so the question becomes, where will this capital be spent? Investors are looking closely at firms with specialized, industry-specific software more so in Fintech, healthcare, business intelligence and cloud computing. The targets have to be firms with management teams that are tech, business and financially savvy and the products there are looking for need to be scaled up quickly and effectively with tight speed to market capabilities.

The munchies mean that deals are moving faster and therefore reducing time buyers spend on due diligence. However with limited timelines to conduct due diligence, cyber security remains the 2nd biggest reason software M&A deals don’t close as well as the 2nd most common reason buyers regretted a deal. Westmonroe cite that a majority of investors have had to walk away from a software deal in the past upon discovering a cybersecurity problem after a deal closed, with most corporates (23%) citing cyber security concerns as the biggest deal-breaker and almost a quarter of PE firms (22%) citing compliance issues.

 

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