2018 is already looking to be a blockbuster year for the software M&A market. One recent deal, KKR’s acquisition of BMC Software for a whopping USD 8.5 billion, was the private equity firm’s largest acquisition since the 2008 financial crisis. It…
2018 is already looking to be a blockbuster year for the software M&A market. One recent deal, KKR’s acquisition of BMC Software for a whopping USD 8.5 billion, was the private equity firm’s largest acquisition since the 2008 financial crisis. It was also one of the largest PE-backed transactions for a software business in the last decade, highlighting the general trend of private equity firms turning to bigger leveraged buyouts, even as the pool of investable capital sitting with private equity funds climbs to over USD 1 trillion.
PitchBook has reported that the IT sector at present makes up 19 percent of the overall US private equity deal volume, with investors focused on buyouts as well as portfolio add-ons. In addition, technology convergence (a process whereby a non-tech company acquires a technology firm) continues to remain a contributing factor in software M&A transactions. Traditional industry incumbents across almost every sector, from manufacturing to retail, are integrating technology into their businesses to keep up with tech behemoths such as Amazon, thus creating even more deal flow potential.
A recent study by the Boston Consulting Group reported that returns from software acquisitions outperformed the market, with profitable software targets continuing to remain the focus of private equity interest. Seeking attractive revenue models that permit scalability, and a product or service that enables relatively quicker entry into new markets, private equity buyers are queuing up to locate the next software bet. In June this year, life sciences platform, Anju Software acquired Antwerp-based MDCPartners, a provider of data solutions for clinical trial optimization. Anju Software is backed by Providence Equity Partners. In the same week, Riverwood Capital-backed Nubox, a provider of software accounting and electronic invoice services, announced its acquisition of cloud-based financial management solutions provider, Colppy. And earlier this year, The Riverside Company acquired 360° Stay Safe, a provider of personal safety information, as an add-on for its portfolio company Omnigo Software. More and more PE-owned software companies are racing to bolster their bottom line with new products and revenue streams. US software add-on deals saw an increase of 11 percent in the last year. Add-ons have in fact been the leading type of software deal during the past decade, increasing from 47 percent in 2007 to 61 percent in 2016, according to the Boston Consulting Group.
Private equity firms are being drawn to add-on deals in particular due to the ease of integrating technology platforms, and with fewer physical assets, buy-and-build strategies can work very well to make a significant difference in ROI in a relatively shorter period of time. It is no wonder then that private equity firms are eating up software businesses that are showing returns and have potential for synergies with existing portfolio companies.
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