The COVID-19 quarter has shown that no particular sector is immune to the disruptive impact of lockdown restrictions, although software has fared better than almost all others. M&A deal activity in software continued in the small and mid-cap sectors at a c. 20% slower pace vs. the last two years, while large-cap deal activity ground to a complete halt during the quarter.1

Global Software Sector Update - Summer 2020

Strategic buyers have remained most active during the quarter, including Microsoft announcing three deals and Cisco completing its acquisition of Pagemill Partners’ client Fluidmesh. These and other strategically-led deals have resulted in top strategic buyers taking market share from (temporarily) retrenching PE buyers as the debt markets tightened during the quarter. However, based on market observation and our deal activity, we anticipate a rebalancing with increased PE activity in H2 2020.

Unsurprisingly, the depressed level of M&A activity impacted median deal multiples, which dropped 10% below the 10-year historic average.1 However, those PE deals with disclosed values which got over the line in H1 2020 were actually signed at a premium (4.9x revenues) vs. multiples in 2018 and 2019 (4.2x and 4.0x revenues, respectively).Meanwhile, the public equity markets have shown a strong recovery led by investor appetite for the resilient software business models. Software-as-a-Service (SaaS) business models continue to trade at a premium, and median SaaS multiples closed the quarter at a record high of 11.6x revenues.1 Heading into H2 2020, we anticipate continued demand and appetite for well-positioned, high growth SaaS businesses across multiple vertical and horizontal markets, and anticipate a recovery in software M&A activity.

1 451 Research and Capital IQ as of June 30, 2020

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