Global Software Sector Update - 2021 Year-End Review

The software industry continued to fire on all cylinders through 2021, shattering records for M&A activity. Four consecutive quarters of accelerating deal volume drove nearly $500 bn of reported M&A value, a jaw-dropping 260% increase on what was already a frothy 2020.

Underlying the software industry’s continued strong performance is that the pandemic pushed businesses to prioritize spend on digital transformation, use and protection of data, and operating flexibility and agility. Gartner projects that the global software market will continue to grow by approximately 10% each year through 2024. Intense competition for quality assets of scale and abundance of capital precipitated into average deal multiple inflation of 60% year on year. Nontechnology companies, financial sponsors and Special Purpose Acquisition Companies (SPACs) helped fuel the hot market, printing some of the largest deals on record in pursuing software targets.

It may be a while before peak valuations reached in 2021 return as the market digests a changing U.S. monetary policy in the face of persisting inflation and a global supply shock. Aside from macroeconomic risks and deal economics, a key concern is the trend toward increased regulatory scrutiny and protectionism of technology assets in major markets. Optimism remains strong according to a 451 Research Survey, with respondents projecting that deals this year would match or even top 2021. Two-thirds of dealmakers said the still-ongoing pandemic will have “no impact” on tech M&A, which could be a contrarian sign that we are in for a surprise.