Where are we in the Software M&A market cycle?

When Covid-19 hit North America in earnest in mid-March, its no secret that the M&A market saw a dramatic slow-down in activity.  At Sampford, we had 15 deals on the go pre-Covid and all but one of them was put on hold.  Three months on, and the M&A market has shifted dramatically again, this time for the better.  In this blog post we look at where we are in the M&A cycle and what we expect for the rest of the year.

Pre-Covid and Early Covid (Up until the end of March 2020)

Unfortunately, deal count had already been declining, even pre-Covid.  If you look at 2018, the average monthly software M&A deal count was 145.  By 2019, this had fallen to 115 and the first two months of 2020 was less than 100 on average.  With overall dollar volume continuing to rise over this same period (2019 was a record with nearly $180bn in software M&A), it was clear that the smaller deals (<$250M) were the most significantly impacted and accounting for a big chunk of this precipitous decline.

Figure 1 – Monthly Deal Counts (2018 – Present)

Source: Pitchbook.

While March was a higher deal count than either April or May, this is more of as a result deal volume in the earlier part of the month – about 65% of deals were completed by mid-March.  Also, the deals that did close in the last two weeks of March had likely been in deal execution for quite some time and therefore, the deal momentum carried them over the finish line. By the time the overall stock market hit its low on March 23, most of the M&A conversations we were having had been put on pause and the sentiment in late March among all the Private Equity and Strategic buyers we were chatting with was pretty dire.

April 15 – May 15: Cautious Re-Opening

As the middle of April approached, we noticed the tone of our conversations with buyers beginning to shift again, but this time for the positive.  Private Equity folks that had shut down activity in the middle of March were starting to call us again and ask about transactions.  Many were beginning to remind us that they were “still in business” and “interested in looking at deals”, which was encouraging. 

At this point however, most of the strategic buyers were still very quiet.  As we chatted with them, it was clear they were very inwardly focused and there was still some disruption in their businesses, especially in the last two weeks of April. But we were starting to see a bit of a bifurcation between those businesses that were largely unaffected or even positively effected by Covid (Healthtech, tech around remote working, cyber-security, networking, etc) and those that were really feeling the effects of Covid (travel and hospitality tech, event technologies, etc).  There was also a large “middle group” that was largely unaffected except for new business sign-ups that were taking longer.

It’s also during this time-period that we closed our first post-Covid M&A deal, Martello’s acquisition of GSX.

May 15 – Present: Feeling good!

It’s amazing what some nice weather can do for the spirits!  By the middle of May we saw a continued turn-around in how most buyers were approaching M&A.  About 90% of the deals we put on hold are now back in the market and most are in advanced stages with various potential acquirers.

While announced deal volumes are still much lower, the level of deal activity and discussion has rebounded to pre-Covid levels and if this continues, we expect to see a bounce back in the announced transactions in June and July.  Even August, which is traditionally a slower month because of summer vacations, could surprise us given not many folks are really travelling this summer.

So, we are cautiously optimistic as we look at the months ahead. Our only concern is that any pressure on the equity markets could make some buyers put acquisitions on pause again, but we’re hopeful this won’t be the case and if it is, that the lasting impact on tech and software companies will be relatively short-lived.

About Sampford Advisors

Sampford Advisors is a boutique investment bank exclusively focused on mid-market mergers and acquisitions (M&A) for technology, media and telecom (TMT) companies. We have offices in Toronto, Ottawa and Austin, TX and have done more Canadian mid-market tech M&A transactions than any other adviser.