Software M&A Remains Strong – 1Q18 Update

With the first quarter of 2018 now firmly behind us, we thought it was about time we revisited how strong the Software M&A markets are in North America. Needless to say, there is still a lot to be happy about and we still expect 2018 to be an extremely strong year for Software/SaaS M&A!

Based on its current trajectory, software M&A is on track to equal last year in terms of the number of transactions and to grow quite considerably in terms of the dollar volume being spent. This can be seen clearly from the chart below.

Figure 1: Software / SaaS M&A – 2013 – 2018 YTD

Source: Capital IQ.

Driving this trend is clearly some of the larger transactions like Salesforce’s $6.6bn deal to buy MuleSoft. But for us at Sampford there continues to be the strong macro drivers we have been talking about for a while including lots of cash, low interest rates and strong valuations of buyers. However, something that has been added in 2018 is the recent tax changes in the US, that we believe will have a significant impact on M&A. Namely, the lower corporate taxes in the US and the repatriation of overseas cash at significantly lower tax rates has put even more cash into the corporate buyers’ pockets. For example, Apple on its own repatriated over $250bn of cash - and with yields so long, tech companies have to deploy this cash to get adequate returns!

In terms of valuation, after dropping slightly in 2017, valuations have rebounded in 2018 to a median of 2.9x LTM revenue. This has been driven by some of the larger transactions like Mulesoft (22.3x) and Kensho (28.2x).

Figure 2 – Software / SaaS Valuations as a Multiple of LTM Revenue

Source: Capital IQ.

So where do we see the market headed in 2018? Well with all the money we saw injected into the system combined with slowing organic growth, we believe many buyers are going to turn to M&A as the primary way to deploy their surplus capital. And that is very good for software businesses looking to sell.

About Sampford Advisors

Sampford Advisors is the #1 middle-market M&A adviser for Canadian technology transactions having completed more deals than anyone else since the beginning of 2017. With offices in Toronto and Ottawa we advise on all types of M&A transactions in tech, media and telecom (TMT).