Preparing to Catch the Software M&A Wave

Market figures for software mergers and acquisitions fluctuate over time due to various economic and market factors. Nevertheless, recent market activities emphasize the need for leaders of software compaies to maintain a constant state of preparedness for M&A opportunities.

The enterprise-software sector recorded 1,837 deals in 2022, according to Hampleton Partners, an M&A advisory and corporate-finance consulting firm in the tech sector. The firm cites a total disclosed deal value of $62 billion during the second half of the year alone.

A few deals in particular stand out during that period. 

OpenText acquisition of Micro Focus—In August 2022, OpenText announced an agreement on the terms of a recommended all-cash offer to acquire Micro Focus for approximately $6 billion. The deal closed by the end of January 2023.

RegScale acquisition of GovReady—In November 2022, governance, risk, and compliance (GRC) software firm RegScale announced its acquisition of GovReady—an open-source compliance-as-code platform—in a deal estimated at $20 million.

Thoma Bravo acquisition of Coupa Software—Coupa Software announced in December 2022 that it had entered into a definitive agreement to be acquired by software investment firm Thoma Bravo in an all-cash transaction worth about $8 billion. The deal closed in February 2023.

Driving the Deals

A few key trends actively drive the current wave of software-vendor M&A deals. The software industry is becoming increasingly consolidated, with larger companies acquiring smaller ones to expand their offerings and customer base. This is particularly evident in the enterprise-software market, where large players such as Microsoft, Oracle, and Salesforce have long been acquiring smaller companies to bolster their product portfolios.

Now, the tech itself is spurring even greater consolidation. The emergence of technologies such as artificial intelligence (AI), machine learning (ML), and the Internet of Things (IoT) seems to be driving M&A activity as companies look to acquire the necessary expertise and technology to stay competitive. Likewise, the shift to cloud computing also appears to be driving M&A activity—as companies look to acquire cloud-based software vendors to expand their cloud offerings and provide more comprehensive solutions to customers.

"It is no surprise that most successful technology suppliers have built and acquired robust cloud and AI divisions and provide solutions with those technologies woven into their DNA," said Derek Britton, marketing director at OpenText.

Take Action Now

With the current wave of consolidation, it is imperative to develop contingency plans for all possible scenarios—whether to acquire a target company, respond to an offer to acquire your company, or negotiate a merger. Software-vendor leaders can take several actions to best position their companies to take advantage of this trend—whether as the acquirer or the acquiree.

Develop a Strong M&A Strategy

Leaders should develop a clear M&A strategy that should, at minimum, include the following:

• The company's long- and short-term goals
• Criteria for both selecting acquisition targets
• Criteria for responding to acquisition offers
• Contingency plans for integrating with an acquired or acquiring company

Defining and codifying these elements will give leaders greater speed and agility to respond to opportunities as soon as they arise.

Identify Potential M&A Targets

The next step is to identify potential M&A targets that align with the company's strategic goals and vision, using the criteria developed. Leaders should conduct market research to identify companies that have complementary technologies, products, or services.

Evaluate the Financial Health of Potential Targets

Once potential targets are identified, leaders should conduct a thorough financial analysis to evaluate those firms' financial health. This should include an assessment of their revenues, profitability, and growth potential.

Build Strong Relationships with Investment Banks

Leaders should also build partnerships with investment banks that can provide advice and support during the M&A process. This includes assistance with deal sourcing, due diligence, and financing.

Maintain a Strong Balance Sheet

To position the company for M&A deals, leaders should maintain a strong balance sheet. This typically includes:

• Adequate cash reserves—Sufficient to support the acquisition and integration of a targeted company
• Low debt levels—So as to minimize the risk of default, allow flexibility to take on debt to support the acquisition, and help the company to weather unanticipated market downturns
• Positive cash flow—Enough to demonstrate the ability to both cover company expenses and invest in growth opportunities
• Strong profit margins—Evidence of business-model sustainability and a solid foundation for future growth
• Diversified revenue streams—For minimizing vulnerability to market fluctuations and economic downturns

All of these things provide the financial flexibility needed to pursue strategic acquisitions.

Focus on Innovation

Finally, leaders should focus on innovation and product development to stay ahead of the competition and attract potential acquirers. This includes investing in R&D, building a strong intellectual-property portfolio, and staying abreast of emerging technologies and trends.

By taking these actions, software-vendor leaders can position their companies to take advantage of the current wave of M&A deals and drive growth and profitability in the long term.