NEW YORK — July 5, 2017 — Berkery Noyes, an independent mid-market investment bank, today released its half year 2017 mergers and acquisitions trend report for the Software Industry. The report analyzes M&A activity during the first half of 2017 and compares it with the four previous six-month periods from 2015 to 2016.
M&A volume increased 12 percent on a half year basis. The number of acquisitions completed by strategic acquirers improved eight percent whereas private equity backed deal flow rose 25 percent. Aggregate transaction value declined 18 percent, from $93.02 billion to $76.63 billion. This followed a 41 percent gain in second half 2016.
The median revenue multiple moved slightly from 2.5x in second half 2016 to 2.3x in first half 2017, while the median EBITDA multiple stayed the same at 13.3x. Over the last two-and-a-half years, deals in the $10-$20 million range received a median enterprise value multiple of 2.2x revenue, compared to 2.6x revenue for those in the $20-$80 million range and 3.9x revenue for those in the $80-$160 million range and above.
Transaction volume in the Infrastructure Software segment increased 21 percent in first half 2017, making it the segment with the largest half year rise in volume. M&A activity in the segment remained almost constant throughout the four preceding half year periods. The largest Infrastructure deal year-to-date was Cisco Systems’ acquisition of AppDynamics, an application performance management and IT analytics company, for $3.9 billion. Cisco completed several other high profile Infrastructure transactions during first half 2017 with the announced acquisition of Viptela, a software-defined wide area network (SD-WAN) company, for $610 million; and MindMeld, an artificial intelligence (AI) startup that helps business build conversational interfaces, for $125 million.
Additional notable Infrastructure deals thus far in 2017 included HGGC’s announced acquisition of IDERA, a provider of database lifecycle management solutions and application development tools, for $1.13 billion; HP Enterprise’s announced acquisition of SimpliVity, a data management platform focused on hyper-converged infrastructure technology, for $650 million; and CA Technologies’ acquisition of Veracode, a provider of cloud-based application intelligence and security verification services, for $614 million.
In terms of software used within specific vertical industries or “Niche Software,” transaction volume experienced a 15 percent improvement. Of note, deal flow in the Finance vertical increased 18 percent. The segment’s largest Finance related transaction thus far in 2017 was Vista Equity Partners’ announced acquisition of DH Corporation, a provider of technology solutions to financial institutions, for $3.49 billion, which Vista plans to combine with its portfolio company Misys (note that Misys and DH will operate under the new brand name Finastra).
One ongoing trend in the segment involved non-tech companies making sizeable software acquisitions, such as UAE-based industrial contractor EriSat with the announced acquisition of Aerial Source, which specializes in artificial intelligence (AI) software where it relates to autonomous unmanned aerial systems, for $724 million; and automobile manufacturer Porsche SE with the acquisition of PTV Group, a provider of software for transportation logistics as well as for traffic planning and traffic management, for $337 million.
After remaining nearly constant in second half 2016, deal volume in the Consumer Software segment declined 14 percent. M&A activity in the Business Software segment, which consists of software designed for general business practices and not specific industry markets, saw a 13 percent rise relative to second half 2016. The largest Business Software deal in first half 2017 was Blackstone Group’s announced acquisition of Aon’s technology-enabled and human resources platform for $4.3 billion.
“Companies in the human capital management (HCM) sector, which is a rapidly growing component of the business software space, are seeing robust interest from both strategic and financial acquirers,” said Sameer Pal, Managing Director at Berkery Noyes. “Employers are recognizing that the traditional employee lifecycle is not necessarily in discrete stages anymore, but an integrated system, e.g. employee engagement is not just a post-hire concept, but starts from talent acquisition. Managing that will require more comprehensive technology systems and data (some of which can be extrapolated from many sources such as social networking platforms).”
Pal continued, “Related is the changing workforce composition which is playing a major role in the use of technology and predictive workforce analytics. For example, millennials will make up the largest portion of the workforce within the next 10-15 years, changing the way feedback is provided (real-time vs. annual), the way workers connect (remote/virtual vs. on-site), expected turnover (short vs. long-term tenure) and many other aspects that HCM businesses can take advantage of to continue succeeding in the market.”
Upon further examination of the Business segment, high profile transactions completed by financial sponsors during first half 2017 included Vista Equity Partners’ announced acquisition of Xactly Corporation, a provider of cloud-based incentive compensation solutions for employee and sales performance management, for $533 million; Marlin Equity Partners’ announced acquisition of Tangoe, a provider of telecom expense management software, for $242 million, which will be combined with Marlin’s existing portfolio company Asentinel; and K1 Investment Management’s acquisition of Certify LLC, a cloud-based expense management software company, for $100 million.
“There are many motivated acquirers competing for good properties in the software space,” added James Berkery, Managing Partner at Berkery Noyes. “Buyers are usually attracted to companies that can demonstrate a high growth rate, strong margins, good free cash flow, and a diversified customer base, among other factors. Although careful not to overpay, they are sometimes willing to stretch to a premium price when they have a valid, compelling and strategic reason to do so.”
A copy of the SOFTWARE INDUSTRY M&A REPORT FOR HALF YEAR 2017 is available at the Berkery Noyes website.