Global Software Sector Update – Summer 2022

In the face of continued turmoil in the public equity markets, Q2 2022 recorded robust M&A deal activity as measured both by total disclosed value ($130 billion) and number of deals (628). The strength in deal activity underscores the demand from both PE and strategic acquirers for software assets playing to pervasive themes such as digitalization of business processes. However, if the data are adjusted to exclude the three largest deals, including the record-breaking $61 billion (bn) acquisition of VMware by Broadcom, we can see deal volume being skewed toward smaller transactions, including platform bolt-ons and strategic tuck-ins. We also observed a meaningful drop in June M&A activity, which, alongside a complete absence of SPAC transactions for the quarter, may signal a quieter summer. 

The macro headwinds, including persistent inflation, remain and have added to the sell-off following a surprise US CPI print followed by a 75bps hike in June—the largest monthly increase for almost 20 years. This precipitated a major sell-off wave for key indices, bringing median SaaS public multiples below their March 2020 pandemic lows, with top quartile performers trading below 10x NTM revenue for the first time since 2018.

In the midst of every crisis lies opportunity. Although the bar may be higher and liquidity is decreasing, disciplined buyers and investors are rejoicing at the pullback in public valuations, as many of them found themselves consistently priced out of opportunities in 2021. It remains to be seen to what extent divergence in valuation expectations between sellers and buyers will prove a hurdle to getting deals agreed to. Where public meets private, the pipeline for PE-backed take-private transactions has already ballooned and is likely to be a key driver for activity going forward.

Once again, software spending has the opportunity to shine as a resilient strategic imperative, which could underpin deal activity through the remainder of 2022 and beyond.