Software M&A Deal Volume and Spending

The following excerpt is from Software Equity Group’s 2010 Software Industry Equity Report.

Software M&A transactions accounted for 11.7% of all U.S. M&A activity in 2010, down from 13.3% in 2009. There were 1,586 mergers and acquisitions worth $51.9 billion in the U.S. Software sector in 2010, compared to 1,329 transactions aggregating $27.4 billion in 2009 (Figures 37 and 38).

1Q10 began on a positive note with 431 transactions, the fourth consecutive quarter of increased software M&A deal volume. Unfortunately, that level of activity was not reached again in 2010, as software M&A deal volume declined 12% to 385 transactions in the second quarter, rebounded a bit in Q3, then fell off again in the final quarter (Figure 39). Year-over-year, each quarter in 2010 posted an increase over 2009, assuming 4Q10’s 368 software transactions (vs. 372 in 4Q09) will increase by 10-15 deals in our final tally.

Overall, 2010’s software deal total was healthy in comparison to transaction volumes over the past decade. Note to our readers: The deal and dollar volumes in Figures 37 and 38 have been updated from our previously published quarterly reports due to transactions newly reported or deleted (i.e., scrapped deals) after our publication dates.

Based upon our 2011 buyer survey results and our conversations with a broad array of public software company corporate development heads and private equity firm managing directors, we anticipate a modest increase in software M&A transaction volume in 2011. Asked how many software companies they anticipate acquiring in 2011, 20% said six or more; 31% said three to five, and 41% stated they plan to buy one to two this year (please see Survey results). Overall, responses to our 2011 Survey indicate software M&A deal volume will rise approximately 12% to 1,775 this year, driven primarily by buyers seeking product enhancements, extensions and competitive differentiation. =

2010’s total software M&A spend was 90% greater than 2009’s, although deal volume increased only 16%. It would be erroneous to conclude, however, that the average deal size increased dramatically in 2010 because valuations were markedly higher or many larger companies were acquired. Major fluctuations in software M&A spending each quarter are typically the consequence of a relatively small number of software industry mega-deals (transactions with enterprise values greater than $500 million). Of 2010’s $51.9 billion total software M&A outlay, $26.3 billion was spent on 17 mega-deals. By comparison, 2009’s $27.4 billion total software M&A outlay included $9.6 billion spent on seven mega-deals, while 2008’s $56.2 billion total price tag included $32.6 billion on 21 mega-deals.

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