During COVID-19, Strategic Buyers Have Tightened Their M&A Belt, and If They Have Not, They Will.
There were 1,248 SaaS M&A deals in 2019, 27% higher than 2018. Only two months ago, it was reasonable to think 2020 would follow suit. Times have changed. Due to the economic downturn, 2020 will likely be the first year in the history of SaaS M&A to see reduced deal volume. It is also the first true test for SaaS businesses (see post: The SaaS COVID-19 Pressure Cooker). This comes as no surprise as most strategic parties have tightened their M&A belt or are in process of doing so due to the COVID-19 downturn.
It is Not all Bad News.
The software industry is an interesting segment. Unlike manufacturing, life sciences, and other industries, software businesses do not require a huge capital outlay to launch (see 2009 post: “How will the Software Industry Fare in the Worst Recession in Eighty Years?”). One to two people and a garage has been the recipe for many successful software companies. There are tens of thousands of software companies in the US market today, and for some the current market may be the exact time to consider an exit.
Nice to Have vs. Need to Have:
Strategic buyers assign bolt-on acquisitions to one of two groups: “nice-to-have” and “need-to-have” products. Nice-to-haves are not mission critical to the buyer or its customers and in today’s environment will likely find their way to the back burner, or off the shelf entirely. On the other hand, need-to-haves are deemed critical offerings a buyer needs to serve its customers or compete. The critical variable is time.
Given enough time, a capable buyer will build the product it needs to service its customers/compete. Often, time is not on the buyer’s side, especially in the SaaS world where time moves at a pace faster than a typical 24-hour day. If customers need an offering that is critical and a buyer is unable to provide the offering, there is a real risk customers will find what they need from another SaaS provider. Depending on the size and significance of the end customer need, strategic buyers are forced to act… And, M&A will likely be the most viable choice.
Just take a look at all the strategic deals that happened during the Global Financial Crisis of 2008/2009. By February 2009, the S&P 500 had fallen more than 50% from its late 2007 peak. Yet deals like Adobe’s acquisition of Omniture, CA’s purchase of NetQos, and VMWare’s acquisition of SpringSource were happening, albeit at a slower pace. The deals that did happen were mission critical need-to-haves, large consolidation deals, or companies that were unfortunate and saw their cash runway shorten rapidly, which created arbitrage M&A opportunities.
In parallel to COVID-19, it is interesting to go back in time to look at what some of today’s leading strategic buyers thought about M&A in 2008/2009. The demand for bolt-on acquisitions to complement their offerings was clear:
Adobe Looks for Acquisition Opportunities To Fill Holes in Portfolio
Adobe Systems Inc held its earnings conference call. The company will continue to look for acquisition opportunities. Shantanu Narayen, President and CEO of the company said: “Well, we continue to look for acquisition opportunities . We’ve said that the sweet spot for Adobe tends to be small technology companies that fill out holes in our portfolio, as well as gets us great D&A talent. But we will continue to look for opportunities to capitalize on the multiple opportunities that we have.” (2009)
Google Looks to Expand Through Acquisitions
Google Inc. is looking to expand through acquisitions. Eric Schmidt, CEO of Google has said Google has “begun seriously looking at acquisitions again.” In an interview with the Nikkei, Eric said Google is looking at acquisitions to expand its cloud computing business. It wants venture-stage firms with potential for growth. Google Inc plans to acquire small technology companies in order to enhance its technology portfolio. Eric Schmidt, Chief Executive of Google said in an interview with the Fox Business network: “We have been (looking to acquire). We have been wandering around looking at all of the different companies. With the big ones we haven’t come across anything we’ve particularly liked. We are definitely talking to a number of smaller companies but we’ve done that routinely.” (2009)
Salesforce Wants to Boost its Portfolio
Marc Benioff, Chief Executive of Salesforce.com said that the firm is seeking acquisition opportunities. He added that Salesforce wants to acquire firms that can boost its own portfolio of products on customer service, sales automation, and on technology that will allow businesses to craft their own Web-based software. Mr. Benioff said that he is always looking to make acquisitions. He stressed that he was not restricting his search to companies of any particular value. He added that his company has about $1 billion in cash reserves. Mr. Benioff noted, “The size of the deal is not as important as the quality of the technology and the team.” (2009)
The example we always used to give in the late 2000s to drive home this point were the acquisitions of SuccessFactors, Taleo, and Kenexa, which happened in this order. The M&A multiples for these three businesses were 11.7x, 5.7x, and 4.1x, respectively. SAP bought first and spent a fortune ($3.64B) on SuccessFactors. We wonder if given the opportunity to go back in time if other talent management providers would have tried to exit sooner.
Timing is Everything
SaaS operators need to ask themselves: are they managing a SaaS business with a need-to-have offering? If yes, be careful not to ignore knocks on the door. While it may not feel like the “right time to sell,” often the market dictates the right time. Reluctance to act may cause strategic buyer(s) to acquire the next best option, leaving SaaS operators that didn’t answer on the outside looking in. After all, timing is everything!
If you’d like to discuss this article or how your business may be impacted by current events, don’t hesitate to reach out.