M&A Frenzy in Software: Competition, Diligence & Risk

Last year set a record for the highest number of software M&A transactions since Mergermarket began recording data in 1999. According to Software M&A Frenzy: Searching For The Competitive Edge, a new report by West Monroe in conjunction with Mergermarket, the momentum behind software firm acquisitions is far from over. Survey data presented in the report shows that corporations and private equity (PE) firms have accumulated vast amounts of cash and are planning to target firms specializing in industry-specific software, business intelligence, and cloud computing. These buyers are looking more closely at firms with an emphasis on finding the right target instead of price. This translates to deals moving faster than ever, with limited time for buyers to conduct due diligence and detect potential post-deal issues involving cybersecurity.

As Matt Sondag, Managing Director of Mergers and Acquisitions for West Monroe Partners, says, “You have more funds in existence today and some of the larger funds are coming down market, especially for software assets. You also have strategic buyers, who are typically slower to innovate, buying software assets to buy that innovation. The number of companies that are differentiating themselves in a sale process based on speed is at an all-time high, which is scary and shows you how competitive the market has become.”

The strongest appetite for software acquisitions comes from private equity firms, with 78% of those surveyed planning on three to four acquisitions over the next two years. Meanwhile, 25% of corporations indicate they will be conducting three to four software acquisitions in the same period.

While price isn’t a driving factor, technology, operations, and, in particular, cybersecurity weigh heavily on the minds of both PE and strategic investors. When evaluating a software target, those surveyed say they want their acquisitions to be operationally ready for launch with strong development procedures and tight speed-to-market capabilities.

This emphasis on time has led to worries about post-deal issues relating to cybersecurity. More than half of executives surveyed say they have uncovered an issue after a deal closed – an even higher number than in West Monroe’s “Testing the Defenses: Cybersecurity Due Diligence in M&A” survey last year (40%) – making cybersecurity the second most common reason buyers regretted a deal.

Regardless of cybersecurity fears, data shows that deal volume for software-related M&A rose in the first quarter of 2017 when compared to the same quarter in 2016, and judging by responses from the dealmakers themselves, this is only the beginning. 

Key findings of this report include:

Please click here to read the full report.

Mergermarket