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US software and IT services

The technology media and telecommunications (TMT) sector has been one of the most active sectors for dealmaking prior to the COVID-19 outbreak. Within TMT, software and IT services is a historically strong segment that has remained resilient even during the COVID-19 downturn.

“Deals are continuing to move in the market, it is important to recognize that we are not in a ‘falling off a cliff’ scenario,” said Jamie Leigh, partner and co-chair of Cooley’s M&A practice group. “There is a lot of scaling upside potential in this market (not just downside) but getting heads around how to model those factors has been quite a challenge,” she added.

From January to mid-May, there have been 269 deals worth USD 30bn in the US software and IT services space, compared to 395 deals worth USD 41bn last year same period. That 27% decline in deal value favorably compares to overall M&A deal value activity, which slumped nearly 68%, falling to USD 231bn with 1,613 deals, compared to the same period last year (USD 722bn with 2,377 deals).

“Values for top performance, especially for companies that have enough cash on-hand to outlast the pandemic disruption, will continue to be strong,” Leigh said, “There will be a lot of valuation volatility for companies outside of the very top tier – but everything is relative in our current market, so we need to keep that in mind as we label ‘up’ or ‘down’.”

Although the sector has seen steep declines in both deal count and deal value, changes expected as a result of COVID-19 are seen as positive indicators for future dealmaking for some sub-segments of software and IT services.

“Application software will continue to be strong, this is a huge opportunity as customers race to implement these tools is a safe and secure manner and the large enterprise software companies will want to be there to capture it by offering more of these services under one roof,” said Greg Roussel, a partner at Latham & Watkins.

Till mid-May, the application software segment, which includes most business and consumer software companies, attracted 55% of the total deal counts (148 deals, USD 17.9bn), followed by internet services & infrastructure, which secured 56 deals worth USD 5.2bn.

From a perspective of bidder type, despite the shrinking of overall market pie, institutional investments (including both buyout and bolt-ons) achieved a slight increase of deal count relative share as last year, accounting for 45.3% of total deal count, compared to 42.2% of the total deal counts same period last year. Bolt-on deals took up 14.9% of total deal counts, contrasted with 9% of total deal counts last year.

Among all the deals with disclosed deal value this year, the median deal value of institutional investors (USD 125m) is 2.9x of the median deal value paid by strategic investors (USD 43.5m). The top five deals by deal value this year are all from PE or PE-backed investors.

That rising trend could be tempered, however, “the current environment can be really challenging for PE/VC investors that base their decisions on predicable cash flows or potential market opportunity in a very uncertain business environment, compared to strategic buyers,” said Roussel.

Here are the top five Software and Services deals announced from 01 January to 15 May 2020:


Announced DateTargetBidderSellerSubsectorDeal Value USD(m)
10-Mar-2020DXC Technology (U.S. State and Local Health and Human Services)Veritas Capital Fund ManagementDXC TechnologyApplication Software5,000
15-Jan-2020MRI SoftwareHarvest PartnersTA Associates Management; GI PartnersApplication Software3,000
18-Feb-2020RSA SecurityAlpInvest Partners BV; Ontario Teachers' Pension Plan; STG PartnersDell TechnologiesSystem Software2,075
02-Mar-2020CompuwareBMC SoftwareThoma BravoSystem Software1,500
06-Feb-2020ForeScout TechnologiesAdvent International CorporationAmadeus Capital Partners System Software1,488

Data correct as of 15 May 2020

by Melody Ren in Chicago

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