Do Strategic Buyers Pay More Than Financial Buyers?

In a recent interview on SaaS valuations, SEG Vice President Karam El-Harami and Ben Murray, Founder of The SaaS CFO, discussed whether strategic or financial buyers pay more for SaaS businesses. Below we share some thoughts from the discussion:

Karam noted that strategics typically pay higher multiples than private equity firms simply because of synergies and differentiation. “However, more recently, private equity firms have become more competitive than they’ve ever been,” Karam noted.

In recent quarters, private equity activity spiked as firms are sitting on record amounts of capital. In 2Q21, private equity-driven deals accounted for nearly 60% of SaaS transactions in the quarter. By comparison, private equity accounted for just 44% of SaaS M&A deals in 2017 and around 5-10% in the mid to late 2000s.

Private equity firms will be aggressive for companies that can be acquired as a platform or are highly strategic add-ons to existing investments. As Karam indicated, “PEs will get competitive for companies that check all their boxes and are viewed as scarce assets.”

On occasion, private equity buyers will outbid strategics. This trend has been apparent in the public markets recently, where there has been a spike in private equity firms taking public companies private. Select deals include Thoma Bravo’s acquisitions of Medallia (NYSE: MDLA, $6.4B, 12.3x EV/Rev), Stamps.com (NASDAQ:STMP, $6.6B, 8.3x EV/Rev), Proofpoint (NASDAQ:PFPT, $12.3B, 11.3x EV/Rev), Talend (NASDAQ:TLND, $2.4B, 8.3x EV/Rev), and RealPage (NASDAQ:RP, $10.2B, 9.4x EV/Rev); Nordic Capital and Insight Partners’ acquisition of Inovalon Holdings (NASDAQ:INOV, $7.3B, 10.2x EV/Rev); and Vista Equity Partner’s acquisition of Pluralsight (NASDAQ:PS, $3.3B, 8.9x EV/Rev). This competitiveness has also trickled down into the lower, mid-market. See SEG’s 2Q21 SaaS M&A Update for more notable transactions.

In conclusion, differentiation, cost synergies, strong metrics, and growth opportunities (organic and inorganic) will drive competitive tension between private equity and strategic buyers. Watch the full video interview on SaaS valuations here. If you have any questions about SaaS valuations, please don’t hesitate to reach out.