While 2020 was an unprecedented and unsettling year in many respects, the technology sector and, in particular, the global software market remained resilient and thrived, establishing a further divide between the prospects facing the software-enabled, digital-first economy and the physical economy.
In the early days of the COVID-19 pandemic, the global software market witnessed a decade-low performance, with large-cap deal activity being significantly impacted in Q2 2020. However, buyer confidence and deal making soared to record highs by Q4 2020, resulting in some of the largest software deals to date. This renewed confidence came from accelerating digital transformation trends driving a broad-based recovery in technology spend. The activity was further fueled by public markets supporting a surging IPO market and a record number of special purpose acquisition companies (SPACs), in addition to the ongoing robust private capital appetite for software assets.
The exceptional return to activity was most evident at the high end of the market. Application software targets worth > $1 billion (bn) represented 76% of disclosed deal value and traded at an all-time high median of 8.6x revenue. Sponsor backed deals also reached record volume through Q4 2020, while exhibiting more caution on valuations that reached prior year highs, as the prospect of dwindling returns elsewhere drove even more dry powder into the sector. While we observed heightened activity across all sectors tracked, activity was particularly strong in collaboration, infrastructure, analytics, engineering, fintech and cyber security software.
Notwithstanding these record levels of activity in Q4 2020, market participants broadly expect acquisition activity to continue at pace into 2021. Based on our activity and ongoing engagements, we share this view, as the key drivers that propelled software M&A following the pandemic are expected to endure; positive tailwinds from successful vaccination programs and economic recovery could add more fuel to the fire.
Source: 451 Research as of December 31, 2020
