Global Software Sector Update

In contrast to a tentative economic recovery, and relative to a tepid Q2 2020, software deal activity experienced a record quarter in Q3 2020 with both deal volume and spending returning to historic highs.¹ As boardroom focus shifted away from bracing-for-impact, pent-up demand combined with more readily available financing resulted in a surge of activity. The continued backdrop of roaring public markets and strong investor appetite for software assets also created a booming IPO market, including a resurgence of direct listings. Additionally, a record number of special purpose acquisition companies (SPACs) have been raised this year, with over $70 billion (bn) of capital raised year-to-date (YTD) by these blank-check companies, with the goal of tapping into the tech M&A frenzy.²

The acceleration in activity was most evident across financial sponsors who made the most of the reopening of the leveraged-loan market as sponsor-backed deals hit an all-time high in September 2020. Disclosed PE valuations remained comfortably above long-term average levels indicating both investor comfort in enterprise software businesses’ capacity to manage pandemic uncertainty and a continued focus on higher quality assets. Activity among strategic acquirers continued to be driven by large-cap vendors who maintained deal flow through the downturn as well as the return of the $1 bn+ deals. We also observed buyer participation broadening as less seasoned strategic acquirers stepped up their inorganic efforts, targeting larger deals and/or benefiting from the current climate to acquire companies on more favorable valuation levels.

Given the strong uptick in M&A activity in Q3 2020, we remain cautiously optimistic and believe momentum in the tech M&A market will continue into the end of the year and remain strong heading into 2021. However, we note that near-term political and macro risks are likely to continue to fuel periods of increased volatility, especially in the public markets.

Sources
¹ 451 Research as of September 30, 2020
² https://spactrack.net/, last accessed September 30, 2020