2021 Tech M&A Outlook: Application software


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Introduction

COVID-19 looked set to shut down the market for application software acquisitions in early 2020. Instead, the side effects of the disease spurred this corner of tech M&A to new heights. The attempt to quash the pandemic forced classrooms into bedrooms and offices into kitchens. Retailers that had been prodded online for the past two decades were propelled to get there overnight. The changes accelerated both the addressable market and stock prices of many application vendors – giving them the motive and the money to go shopping.

According to 451 Research’s M&A KnowledgeBase, acquirers smashed the previous annual record, spending $142bn purchasing vendors that develop software for business users and consumers. That’s a 49% bump from the 2018 record – a phenomenal outcome considering that nearly all of the spending came in the back half of the year. Less than $20bn went toward application software targets in the first two quarters of 2020. The momentum in the second half, along with the improving picture for company IT budgets, sets up 2021 for a significant start.

A Soaring Software Market

Source: 451 Research’s M&A KnowledgeBase

Just a handful of big deals accounts for the difference between 2020’s total and the previous record. Our data indicates that just seven application software providers have been bought for over $10bn and three of them were announced in 2020: Slack ($28.4bn), Ellie Mae ($11bn) and RealPage ($10.2bn). It wasn’t just the high end of the market that fared well. The M&A KnowledgeBase shows that 1,414 companies in that market were acquired, also a record.

Still, the upper echelon fetched the heartiest valuations. Application software targets nabbed a median 9.6x trailing revenue in transactions worth $1bn or more last year, more than two turns higher than last year. In all other application software deals, however, the median fell more than half a turn to 3x, the lowest in three years.

Haves and Have-Nots in Software Acquisitions

Source: 451 Research’s M&A KnowledgeBase

Rising equity prices underpinned 2020’s rush of application software M&A. The S&P 500-Information Technology index surged 42% during the year, according to S&P Global Market Intelligence. As it did, valuations of both buyers and sellers ticked up. Salesforce, for example, was valued a bit above 9x trailing revenue at the start of 2020. The CRM giant was trading at 11.5-12x trailing revenue in the days leading up to its acquisition of Slack. No doubt that helped it justify paying 36x for the communications software maker.

Salesforce’s Valuation in 12 Months Leading to Slack Buy

Source: S&P Global’s Market Intelligence

The growing value of its own stock provided the currency and justification for the move. But it was the expansion of remote work that provided the rationale. Salesforce is betting that, even when coronavirus is history, there’s a big future for software vendors that can help businesses communicate and collaborate. The acceleration of digital living sparked several other notable software deals:

Ahead of Salesforce’s bet that remote work would make communications software more important, Adobe made a similar wager on project management software. With its $1.5bn pickup of Workfront, Adobe foresees a rise in the use of software to manage work.

SAP printed its first acquisition in two years, landing Emarsys. The target’s marketing automation software could be bundled with hybris, SAP’s e-commerce play, as demand for such software increases in line with the surge in online shopping.

Plummeting interest rates and a flight to the suburbs propelled the housing market, motivating Intercontinental Exchange to pay $11bn for mortgage software specialist Ellie Mae in its largest-ever software purchase.

The stock market wasn’t the only reason why buyers felt more confident about printing software transactions in the second half of 2020. The environment for selling software improved once people absorbed the initial shock of the lockdown. According to 451 Research’s Macroeconomic Outlook, Corporate IT Spending, just 20% of businesses in November said they’d decrease their quarter-over-quarter IT spending, down from 35% in March. As the spread between increasing and decreasing budgets continues to narrow, buyers could gain further confidence to print deals.

Corporate IT Budget Outlook

Source: 451 Research’s Voice of the Customer: Macroeconomic Outlook, Corporate IT Spending, Digital Transformation 2020

Signature Deals from 2020

Acquirer

Target

Deal value

Comment

Salesforce

Slack Technologies

$28.4bn

In Slack, Salesforce lands a software company that resembles its younger self. The communications software business will shortly pass $1bn in annual revenue, with scorching growth. The difference: Salesforce was valued at 6x sales when it hit that milestone in 2008 – 30 turns lower than the price it paid for Slack.

Intercontinental Exchange

Ellie Mae

$11bn

Just 18 months after acquiring the mortgage software vendor, Thoma bravo flipped Ellie Mae at almost 3x its purchase price. The deal marks the largest-ever cash acquisition of a private equity (PE)-held tech provider.

Microsoft

ZeniMax Media

$7.5bn

Microsoft’s pickup of console-game developer ZeniMax provides the latest – and clearest – evidence that it’s turning toward growing its consumer business, after spending several years transitioning the enterprise software side of the house to the cloud.

Twilio

Segment

$3.2bn

After its stock price tripled through the first three quarters of the year, Twilio puts those gains to work with the all-stock acquisition of Segment. The deal brings the buyer into direct competition with marketing software heavyweights Adobe, Salesforce and Oracle.

Adobe

Workfront

$1.5bn

In Workfront, Adobe scored a workflow application specialist that connects marketers using Adobe’s Creative Cloud and those pushing content to customers with Experience Cloud. Offering software to both groups was the rationale for the purchase of Omniture, the move that launched Adobe’s marketing software business 11 years ago.

Cornerstone OnDemand

Saba Software

$1.4bn

Both companies offer similar corporate learning management systems (LMS), although Saba has more AI and analytics that could help extend Cornerstone’s reach beyond customers seeking traditional LMS support for compliance, regulatory and management training.

Salesforce

Vlocity

$1.3bn

Vlocity, a maker of CRM software for vertical markets, could expand the buyer’s growth in large, enterprise deployments that require specialty expertise but promise to embed Salesforce deep into those enterprises. The pairing could also help Salesforce nab midmarket customers with lightweight process automation.

SAP

Emarsys

$940m*

With Emarsys, SAP obtains a marketing automation product powered by machine learning. Many other acquirers are moving toward mature assets like Emarsys for machine learning capabilities and inking fewer ‘acq-hires’ to fill those gaps.

TIBCO Software

Information Builders

$550m*

This deal reinforces TIBCO’s reporting capabilities, which it gained by snagging Jaspersoft back in 2014. In addition, it cements TIBCO’s data management portfolio in support of data science and analytic use cases.

Acquirer

Target

Deal value

Comment

Salesforce

Slack Technologies

$28.4bn

In Slack, Salesforce lands a software company that resembles its younger self. The communications software business will shortly pass $1bn in annual revenue, with scorching growth. The difference: Salesforce was valued at 6x sales when it hit that milestone in 2008 – 30 turns lower than the price it paid for Slack.

Intercontinental Exchange

Ellie Mae

$11bn

Just 18 months after acquiring the mortgage software vendor, Thoma bravo…



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