Third Quarter SaaS Sector Review

Software Equity Group’s recent quarterly review of SaaS companies shows the sector continuing to outperform in a year of uncertainty and significant market volatility. The sector rebounded from market lows earlier in the year, with the SEG SaaS Index up 25.9% YTD and shares trading at record multiples (see SEG’s 3Q20 SaaS Public Market Report). Strong M&A activity resulted in a record number of deals, with SaaS M&A multiples also at an all-time high (see SEG’s 3Q20 SaaS M&A Report). Read below for some key findings from our review.

SaaS Public Market Performance:

Public SaaS companies had an exceptional quarter, with the SEG SaaS Index up 25.9% YTD, leading all major indices. Despite ongoing volatility, the SaaS sector rebounded strongly, with the quarter’s median EV/Revenue multiple reaching a record high of 11.2x, 13% greater than 3Q19’s previous record of 9.9x and 31.7% above the 3-year Index median of 8.5x.

Given the uncertain economic and political environment, investors flowed to quality assets, ascribing the greatest valuations to companies with high gross profit margins and strong revenue growth. With increased demand from COVID-19 work from home mandates, Development Operations & IT Management and Communications & Collaboration garnered the sector’s highest valuation multiples with EV/Revenue of 20.7x and 19.9x, respectively.

Quarterly Review of SaaS M&A Activity:

The aggregate software industry M&A deal volume exhibited a sharp V-shaped recovery in the third quarter, with a record 815 transactions. This 40% increase over the prior quarter was a positive sign of the industry’s resilience during a challenging year.

SaaS M&A also saw record levels of deal activity, benefitting from a V-shaped recovery, sizeable investment capacity from private equity buyers, and robust growth since the sector bottomed in May. M&A deal volume surged to a record 374 deals in the third quarter, an 81% increase over the prior quarter and 15% higher than 3Q19’s record of 326 deals. Notably, SaaS monthly deal volume trended up the entire quarter and was higher in each month of this quarter than any prior quarter to date.

With pent up demand from both strategic and financial buyers, September monthly SaaS M&A deal volume rose 129% above the May trough, capping off an impressive recovery in deal making during the third quarter. Private equity buyers, with their stockpiles of cash, represented 52.4% of that volume. Transaction analysis showed a similar flight to quality with strategic and financial buyers paying up for relatively safer, high quality SaaS businesses during continued times of uncertainty. This pushed up transaction values to a record median SaaS M&A multiple of 5.1x EV/Revenue during the quarter. SaaS companies with over $50M in TTM Revenue benefitted from an even higher 5.3x multiple, with 30% of companies acquired at 7.0x or more TTM Revenue.

Looking Ahead

SaaS companies showed their strength and resiliency in 3Q20, outperforming in a year of market uncertainty and volatility. While market uncertainty still prevails, SaaS M&A deal volume and public market valuations are expected to hold strong through the end of the year. Download SEG’s 3Q20 SaaS M&A Report and 3Q20 SaaS Public Market Report for more detailed insights, and visit our research page for more timely updates.  

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