Software M&A Valuations By Vertical and Horizontal Markets

Another important determinant of exit valuation is the seller’s target market focus and related domain expertise.  We analyzed 3Q11’s median software M&A multiple horizontally and vertically, segregating software company sellers with vertical market solutions (e.g. retail, financial services, telecom, manufacturing, etc.) from sellers with horizontal software solutions (infrastructure, enterprise applications, etc.).

In 3Q11, providers of vertical software accounted for 37% of all software M&A, confirming vertical providers remain attractive acquisition targets primarily because of their predictable and substantial recurring revenue, domain expertise, and highly defensible market positions.  Horizontal solution providers accounted for the remaining 63% of sellers (Figure 31).

During the third quarter, vertical market sellers received a median 2.1x TTM revenue multiple, while their horizontal market counterparts were paid a median exit multiple of 2.3x TTM revenue multiple.  The higher horizontal multiple follows three consecutive quarters of higher median exit multiples paid to vertical software company sellers (Figure 32).