http://www.digitaljournal.com/business/q-a-mergers-and-acquisitions-dominating-the-software-sector/article/541422

Q&A: Mergers and acquisitions dominating the software sector Special

Posted Jan 21, 2019 by Tim Sandle
Industry trends suggest that with increased competition, buyers are going to have to get a lot more creative if they want to win major deals. This means investing in appropriate software, according to Chris Stafford from West Monroe Partners.
The Dutch government is phasing out the use of anti-virus software made by Russian firm Kaspersky La...
The Dutch government is phasing out the use of anti-virus software made by Russian firm Kaspersky Lab
Kirill KUDRYAVTSEV, AFP
In 2018 the software buying market saw major disruption with deals like SAP and Qualtrics plus IBM and RedHat. Both deals allowed these firms to increase market share, enable cross-selling across products and improve the extensibility of product portfolio capabilities.
Signs are that 2019 could see further mergers and acquisitions (M&A) upheaval, according to Chris Stafford, a senior manager in the M&A practice at consulting firm West Monroe Partners.
Digital Journal: How big is the software M&A market?
Chris Stafford: According to Pitchbook, tech M&A within the U.S. comprised 20 percent of private equity deals in 2018 and represented $160 billion in deal value. It’s well known that tech has increasingly been one of the hottest sectors over the past seven to eight years. The middle market, where West Monroe primarily focuses, makes up the highest proportion of deal flow this decade, and we don’t see that slowing down anytime soon.
DJ: What was the significance of deals like SAP/Qualtrics and IBM/RedHat in 2018?
Stafford: SAP’s acquisition of Qualtrics aligns with the overall trend toward consolidation in the tech space and investors’ interest in creating value through complementary add-on acquisitions. We see our clients doing the same to increase market share, enable cross-selling across of products and services and improve the extensibility of their product portfolio. M&A is essential these days for software companies that are looking to rapidly expand their market share. We would expect to see SAP gradually find strategic opportunities to integrate the Qualtrics platform into other SAP products and offerings.
These large-scale, top-market acquisitions are also no surprise in the software space, considering many buyers are still flush with cash. And the nature of that acquisition – right before a Qualtrics IPO – shows the numerous attractive options that sellers have had recently. For example, we also saw software company Apptio acquired by private equity firm Vista Equity Partners for $1.94 billion in cash just two years after going public. It’s just the state of the market.
DJ: What are the major M&A trends for 2019? Starting with buyers
Stafford: Buyers are placing an emphasis on the quality of a company’s technology leadership and their associated vision and roadmap to seek increased assurance of the near-term future of the platform. This goes hand-in-hand with seeking operational efficiency as products and platforms are being consolidated and integrated more effectively. Additionally, mid-market investors in particular are going after more machine learning, artificial intelligence and advanced analytics platform acquisitions than ever before.
DJ: How about sellers?
Stafford: Right now, many sellers are seeking to complete sales processes ahead of a potential market downturn, so we expect activity to remain high throughout the first half of 2019. Operationally, we’re also seeing more thorough and deliberate attention being paid to sell-side readiness in order to tell a more compelling technology story that supports a high valuation. Also, given the continued maturation of the software space, sellers are now becoming more savvy in how they present their business to potential buyers; thus, buyers will need to continue keeping a rigorous approach to due diligence in order to uncover risks and potential issues of the asset.
DJ: Will we see bigger competitors in the M&A space this year?
Stafford: I think we’ll continue to see M&A-heavy activity everywhere from the big strategic players and PE investors down to the lower-middle market. As 2018 showed us, top strategics are willing to make significant investments through M&A deals to stay at the top of a given market.
DJ: What else can we expect in 2019?
Stafford: We’ll continue to see high valuations and multiples for software investments in 2019, but it may become more of a buyer’s market by the end of the year. Sellers are more incentivized to move quickly right now in order to complete a transaction before a potential downturn, which could ultimately create more of a buyers’ market, due to the overall sense of urgency.