Global Software Sector Update – Summer 2021

The summer of 2021 has proven to be one of the most active periods on record for software M&A. Following a strong start of the year, the record high level of M&A deal values in Q1 has been surpassed in Q2. Also, public equity markets have rebounded following a slump toward the end of Q1, which had left many high-growth software public companies in the red in March.

Despite regulatory changes, and a reduction in their overall contribution to quarterly deal value, SPACs continued to drive record spending and multiples. This is raising the bar for “traditional” software acquirers who needed to stretch to double-digit revenue multiples to close some deals, particularly in the $1B+ range where median multiples reached 9.9x. PE firms, which have established themselves as the dominant force in software M&A, benefited from a broader universe of exit options at meaningful premiums driven by both listed vendors capitalizing on rich valuations and blank-check acquirers. This helped keep median disclosed PE multiples above those paid by strategics (ex-SPACs) creating the most competitive landscape for software M&A on record.

Meanwhile, the impacts of COVID-19 continue to accelerate key digital transformation trends as IT budgets adjust to accommodate hybrid operating models. Unsurprisingly, 55% of organizations will increase spending in 2021 to support remote/work-from-home staff and 53% indicate an increase in security spending. Digital customer engagement and analytics is also high on the priority list with 42% of organizations indicating planned increases. 

Based on our activity and ongoing engagements, we continue to observe a record pace of deal-making and a growing pipeline of opportunities coming to market. With a significant number of top quartile targets based on financial KPIs we note a crowding out effect driving further bifurcation of the market as investors have become more disciplined in choosing where to focus their resources. We anticipate a natural slow down in activity towards the end of the summer as the market pauses for a short break before resuming at pace again through the fall.

Source: 451 Research as of June 30, 2021