DECODING THE COMPETITIVE SOFTWARE M&A MARKET
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DECODING THE COMPETITIVE
SOFTWARE M&A MARKET
By Jens Kengelbach, Daniel Friedman, Florian Schmieg, Maximilian Bader, Daniel Kim,
and Samina Lademo
T he M&A market for software compa- Rapid Growth and Favorable
nies has been booming. The cumulative Economics
value of software M&A deals soared to an In an increasingly digitized world, software ap-
all-time high in 2020 even as overall M&A plications have become omnipresent in busi-
activity decreased. And the volume of soft- nesses. There are three broad categories of soft-
ware deals has continued to grow, approach- ware: horizontal applications that cut across
ing the record level of the dot-com bubble. industries (such as for customer relationship
Nontechnology companies and financial management and enterprise resource plan-
sponsors are helping to fuel the hot market, as ning), vertical applications for a specific in-
they increasingly join traditional technology dustry (such as health care or insurance),
players in pursuing software targets. and infrastructure software (such as for IT
security and network management).
However, our analysis found that, on aver-
age, these nontraditional strategic buyers The global market for these applications
struggle to create value one and two years has grown faster than the GDP of Western
after an acquisition. This suggests that they countries, and we expect this impressive
are overpaying for targets or that they are growth to continue. In fact, Gartner proj-
not certain about how to create value. ects that the global software market will
grow by approximately 10% each year
To succeed in software M&A, nontechnology through 2024.
players and financial sponsors, in particular,
need an in-depth understanding of what From a buyer’s perspective, the software
drives valuations in the industry as well as industry is attractive because of several
for specific companies. Conducting a com- factors:
prehensive and rigorous due diligence pro-
cess at the company level is essential to •• A Large and Growing Industry. The
gather facts for an accurate assessment. megatrend of digitization is propellinghigh growth in the software industry— tary policy and government stimulus pro-
many segments are growing at an grams in Europe and the US. The M&A
annual rate of more than 10%. market largely froze, but then it gradually
returned to the historically normal range of
•• Recurring Revenues. Many software monthly deal volume in the past ten years.
business models feature recurring
revenue streams—such as annual An industry-level analysis reveals a more
subscription or licensing fees and a subtle picture. Some industries—such as
periodic maintenance charge. travel and tourism, oil and gas, and insur-
ance—were generally hit hard because the
•• A High Potential for Scaling Profit- pandemic caused investors to question
ably. Because the product has already companies’ future viability. Other indus-
been developed, an incremental increase tries—notably medical technology, soft-
in sales does not lead to a corresponding ware, and high tech—held up strongly, on
increase in costs for inputs. average, although there were winners and
losers in their ranks.
•• Customer Stickiness. Churn rates are
typically quite low, owing to high Looking at software industry players in
switching costs for customers. This is depth, the first three months of 2020 saw a
especially true for business customers— mix of well-performing and poorly per-
software, once adopted, can become forming companies. This diversity of per-
integral to business operations. A quite formance created attractive M&A opportu-
common sales strategy is to get a foot in nities. As of the end of 2020, a greater
the door by selling customers small share of companies had a net positive
bundles of products or services. The share return, indicating that software is
company then expands the relationship among the winning industries in the crisis.
through upselling and cross-selling of As would be expected, software companies
additional software products. were among the first to restart plans for
IPOs and other transactions.
•• An Abundance of Potential Targets.
The software industry is fragmented, Underlying the software industry’s general-
offering the potential for consolidation. ly strong performance is the fact that the
More than 10,000 assets globally are held pandemic has pushed businesses to take
by private equity and venture capital several types of actions:
owners, and many more are in public
markets (approximately 1,500 companies) •• Accelerate Digital Transformation.
or privately held (more than 40,000). The crisis has made companies realize
that they need to digitize their core
The high growth rate, favorable economics, operations and offer radically improved
and numerous prospective targets promote customer experiences through a
the overall attractiveness of software digital-first approach. Many have begun
companies. to catch up by implementing next-
generation digital sales and marketing
solutions.
The Pandemic Has Accelerated
Trends Affecting the Industry •• Use Data for Competitive Advantage.
The software industry has been among the Companies are increasingly looking for
most resilient industries during the pan- software solutions that will allow them
demic. As the threat posed by the novel to leverage unstructured data and
coronavirus became clearer in February democratize the use of data in their
2020, stock markets plummeted. By late organization.
March, however, valuations began to im-
prove as investors took encouragement •• Focus on Flexibility and Agility. The
from further quantitative easing of mone- increasing prevalence of remote work
Boston Consulting Group | Decoding the Competitive Software M&A Market 2and the need for cost flexibility (to shift that customers need more analytics and
spending from capital expenditures to cybersecurity software solutions—ones
operating expenses) has required compa- that incorporate technology such as
nies to deploy new software solutions. artificial intelligence and machine
learning.
The crisis has also accelerated trends in the
software industry: •• The Adoption of New Business
Models. Software companies are
•• Increased Implementation of Cloud increasingly adopting the as-a-service
2.0. Cloud providers are beginning to approach and transaction-based busi-
implement the next generation of ness models to capture higher margins.
cloud computing, which features hybrid
and multicloud environments and These trends will drive higher demand and
focuses on platforms, integration, and affect the technological playing field. They
interoperability. will also create new competitive advantag-
es and M&A opportunities in the coming
•• Faster Innovation Cycles and the months and years.
Growing Use of Automation. More
and more, new solutions and products The findings of a recent BCG survey of en-
have substantially shorter life cycles, terprise IT purchasers reinforce the view
which means software companies need that the software industry’s resilience and
to constantly push for innovation. At growth will continue in the coming years.
the same time, customers are increasing (See the sidebar “IT Purchasers Expect
their use of automation, creating an Spending to Rebound.”)
opportunity for software companies to
expand their offerings. As this overview makes clear, now is the
time for companies to consider M&A as a
•• Expanding Interest in Data Analytics way to gain access to new software capabil-
and Cyber Protection Software. ities and assets. The timing is also good for
Ever-increasing amounts of data mean companies to divest businesses that are no
IT PURCHASERS EXPECT SPENDING TO REBOUND
BCG’s survey of 700 enterprise IT pur- corporate security were cited by respon-
chasers found that companies expect dents as the most critical software for
investments for fundamental IT capabili- competitive advantage. Respondents
ties to fully bounce back to prepandemic also expect more software applications
levels in 2021. Respondents in some to transition to the cloud.
industries (industrial goods, travel, and
financial services) expect that spending Across industries, spending on cloud-
on IT tools to support remote work and based applications will be highest for
collaboration will remain a key strategic communications, collaboration, content
priority even after the pandemic. How- management, customer relationship
ever, respondents in other industries management, and artificial intelligence
(retail and health care) and the public and machine learning solutions. The
sector expect to revert to their prepan- survey found that media and technology
demic focus on spending related to companies plan to allocate the highest
analytics and the digital customer share of their IT budgets (more than
experience. 40%) to cloud applications.
Applications for analytics, business
intelligence, cybersecurity, and overall
Boston Consulting Group | Decoding the Competitive Software M&A Market 3longer part of their core strategy for digital soared to an all-time high despite the eco-
and that may create more value under new nomic headwinds.
ownership.
As we know, internet software deals drove
the high levels of software M&A during the
A Closer Look at the Software dot-com bubble. In contrast, the recent
M&A Market surge has been strongly driven by acquisi-
Our analyses of M&A activity in this article tions of companies that sell enterprise soft-
focus on only part of the full universe of ware, including customer relationship man-
technology M&A—those deals involving tar- agement solutions, tools for digitizing core
gets that have software as their core offering. operations, and analytics applications.
In recent decades, software M&A activity— In terms of volume, software acquisitions
in terms of deal value (the cumulative val- in 2020 represented approximately 6% of
ue of reported transactions) and volume all M&A deals. This is about twice as high
(the number of deals)—has generally fol- as the percentage ten years ago, and it sup-
lowed broader market trends. Activity was ports the view that software assets are in-
high during the buildup to the 2000–2001 creasingly important across all categories
dot-com bubble, before the 2008–2009 fi- of buyers.
nancial crisis, and during the bull market
that preceded the pandemic. Recent years The majority of software deals in 2020
have seen new highs for deal value and a (73%) were valued at less than $100 mil-
return to volume levels last seen during the lion. However, recent years’ deal values
dot-com bubble. (See Exhibit 1.) have been strongly driven by large deals in-
volving US and European targets. Notable
However, in 2020, the software M&A mar- recent US deals include:
ket seemed to decouple from the broader
M&A market, which slumped because of •• Salesforce’s acquisitions of Slack
the pandemic. Software M&A deal value Technologies ($29.3 billion) and
Exhibit 1 | The Strong Software M&A Market Is Fueled by Nontech Buyers and Financial Sponsors
Deal value has risen to an all-time high in recent years, Nontechnology buyers’ and financial sponsors’
driven by large deals shares of deal value have increased (%)
Deal value ($billions)1 Number of deals 100 100
200 2,000
18
31
150 1,500 18
100 1,000 31
50 500
64
38
0 0
1990 1995 2000 2005 2010 2015 2020
2010 2020
1.2 6.7 2.9 6.2 Private equity or venture capital firms
Share of total M&A volume (%) Nontechnology companies
Deal value ≥ $5 billion Deal value < $5 billion Number of deals Technology companies
Sources: Refinitiv; BCG analysis.
Note: The total of 33,237 M&A transactions (as of January 2021) comprises pending, partly completed, completed, unconditional, and
withdrawn deals with a software company that were announced from 1990 through 2020 and that had no threshold for deal value. Self-tender
offers, recapitalizations, exchange offers, repurchases, acquisitions of remaining interest, minority-stake purchases, privatizations, and spinoffs
were excluded.
1
Deal value includes assumed liabilities.
Boston Consulting Group | Decoding the Competitive Software M&A Market 4Tableau Software ($17.4 billion), automotive manager put it: “Tesla builds
announced in December 2020 and June the car around a computer; we’re now trying
2019, respectively to get the computer into the car.”
•• Hellman & Friedman’s acquisition of Capital markets appear to perceive soft-
Ultimate Software—$11 billion, an- ware deals as creating value, especially for
nounced in February 2019—which it nontechnology buyers. Our analysis found
combined with Kronos that over the past two decades, publicly list-
ed acquirers of software targets had posi-
•• Visa’s acquisition of Plaid—$4.9 billion, tive abnormal returns upon the announce-
announced in January 2020 ment of a deal. The announcement return
was even higher by 0.6 percentage points,
Large European deals include: on average, for nontechnology buyers, com-
pared with the returns for technology buy-
•• Insight Partners’ acquisition of Veeam ers. Interestingly, technology buyers, on av-
Software—$5.0 billion, announced in erage, pay a higher transaction multiple
January 2020 than nontechnology or private equity buy-
ers (20 times EBITDA, compared with 15
•• EQT’s acquisition of SUSE—$2.5 billion, times and 13 times, respectively). For non-
announced in July 2018 technology buyers, the benefits of such ac-
quisitions can extend beyond strengthening
•• Schneider Electric’s voluntary public their competitive positioning. If done right,
takeover of RIB Software—$1.3 billion, these deals offer the potential to transform
announced in February 2020 how investors perceive companies—and
thereby increase the valuation multiple.
The robustness of the IPO market for soft-
ware companies on both sides of the Atlan- The value-creation advantage for nontech-
tic also points to the strength and resil- nology companies can also hold true for oc-
ience of software companies. For example, casional buyers and serial acquirers. Inves-
in September 2019, TeamViewer was listed tors apparently regard experience in
on the Frankfurt Stock Exchange with a making software deals to be less important
valuation of $2.2 billion. And even after than whether the buyer is from outside the
the onset of the pandemic, the market re- technology industry.
mained active. Among the noteworthy
deals, Snowflake listed on the New York Our discussions with nontechnology buy-
Stock Exchange for $3.4 billion in Septem- ers suggest that their higher returns may
ber 2020. And SAP took public its subsidi- be attributable to the fact that they careful-
ary Qualtrics in January 2021. ly consider these transformative, cross-
industry acquisitions from a strategic per-
Which organizations are buying software spective. As a result, they are generally bet-
companies? In many cases, the acquirers ter prepared to capture value than they are
are not technology companies. From 2010 when consolidating with a company in
through 2020, the share of deal value at- their industry to capture synergies. For
tributable to acquisitions by technology technology buyers, in contrast, software
companies decreased from 64% to 38%. deals do not materially affect share prices,
During this period, the share of deal value on average, because they are business-
for private equity and venture capital firms, as-usual transactions. They are commonly
as well as for nontechnology companies, used to accelerate product development,
rose from 18% to 31%, respectively. Finan- secure critical talent, or promote growth in
cial sponsors recognize the potential for adjacent segments, markets, or customer
high returns. Nontechnology companies, groups.
even in seemingly hardware-dominated in-
dustries such as automotive, see software However, longer-term value creation has
as a future differentiator. Or as a German been more challenging for nontechnology
Boston Consulting Group | Decoding the Competitive Software M&A Market 5buyers. They have not outperformed tech- Strikingly, even after controlling for profit-
nology buyers in terms of relative total ability and growth, US companies have a
shareholder return one or two years after statistically significant premium for the val-
acquiring a software target. uation multiple—approximately two times
revenues.
The challenges of longer-term value cre-
ation point to a clear imperative for non- One possible explanation for this finding
technology buyers: gain a strong under- could be the presence of broader and
standing of the value drivers for software more-liquid capital markets in the US. In-
M&A generally and for individual targets deed, the total market capitalization of
specifically. software companies is 13 times larger in
the US, while the daily trading volume is
40 times higher.
What Drives Valuations for
Software M&A? Another factor is that US companies have
To understand what drives the valuation of direct access to the larger US software mar-
software M&A transactions, we analyzed ket. This access promotes revenue growth
the valuation of a set of publicly traded and provides revenue potential, and there-
software companies. We found that valua- by value. The US is one of the biggest mar-
tion multiples (measured as enterprise val- kets for software products, largely due to
ue divided by projected revenues for the the high affinity for technology among US
next 12 months) strongly correlate with companies.
two factors: a positive growth outlook and
a US headquarters. (See Exhibit 2.) Con- Looking at software deals, we similarly
trary to standard valuation theory, profit- found higher valuations for US-based soft-
ability does not explain valuation levels. ware targets. For acquisitions involving
Exhibit 2 | Growth and Location—Not Margins—Are the Main Drivers of Software Company
Valuations
Future growth drives the valuation of large Location significantly affects the valuation of
software companies software companies
Valuation multiple1
Difference between
50 US-based companies
and non-US-based
Multiple increase
Cloudflare companies
resulting from
40 1 p.p. increase
Datadog
2.13x5
30
0.25x4
Zoom
Multiple increase
20 resulting from
1 p.p. increase
10
Microsoft
0.05x3
0
–50 0 50 100 150
EBITDA margin Revenue growth2 US company
Two-year forward revenue CAGR2
EBITDA margin > 0% EBITDA margin < 0%
Sources: S&P Capital IQ; BCG analysis.
Note: We analyzed a subset of companies with a market capitalization of more than $10 billion. The multivariate analysis included all
companies with a market capitalization of more than $1 billion. p.p. = percentage point.
1
The calculation for valuation multiple is enterprise value divided by projected revenues for the next 12 months.
2Estimated CAGR of revenues over the next two years.
3Statistically significant at p < 0.1.
4
Statistically significant at p < 0.01.
5
Statistically significant at p < 0.05.
Boston Consulting Group | Decoding the Competitive Software M&A Market 6these companies, the median transaction down the total value creation for buyers into
multiple (enterprise value divided by three categories: top-line growth, margin ex-
EBITDA) from 2015 through 2019 was 27, pansion, and valuation multiple expansion.
which is at least 10 points higher than it
was for software deals involving non-US We found that value creation was strongly
targets or for deals in general. And, as with driven by top-line growth (accounting for
trading multiples, profit margins were not 57% of the total valuation increase) and
a significant factor in determining transac- margin expansion (27%). However, for the
tion multiples. most successful deals, the lion’s share of
value creation (74%) was attributable to in-
creasing the valuation multiple, even in the
How Can Buyers Create Value face of a negative contribution from profits.
from Software M&A? This finding highlights the path of financial
In contrast to the valuations for targets in sponsors, which seek to maximize their exit
other industries, the valuations for soft- proceeds. They make what is called an ini-
ware targets are primarily a function of the tial platform acquisition and then build
outlook for growth. Moreover, when acquir- upon that with subsequent acquisitions, de-
ing a software company, the average trans- veloping the investment story of the com-
action multiple that buyers pay is higher bined assets, rather than improving profits.
than the average paid in other industries.
In fact, it is often significantly above the Strategic acquirers, specifically nontech-
acquirer’s trading multiple. Given these nology buyers, tend to follow a similar
facts, it is imperative for buyers to under- route. For them, increasing their overall
stand the path to value creation followed valuation multiple by adding and integrat-
by successful acquirers. ing a software asset into their company is
a key value-creation approach.
We analyzed European software deals over
the past decade (using data from Cepres). In our experience, the exact set of value le-
Our analysis considered majority buyouts vers, especially for nontech buyers, depends
as well as growth deals (usually minority on the organization’s maturity with regard
investments) by financial sponsors. It broke to software capabilities. (See Exhibit 3.)
Exhibit 3 | A Buyer’s Value Levers Depend on the Maturity of the Company
Nascent Emerging Dynamic Established
Legacy business transformation
• As-a-service transformation: Develop new as-a-service offerings
• Cost transformation: Raise efficiency of engineering and business functions
• Re-platforming: Move legacy software to a cloud platform
• Carve-outs and financial engineering: Realize value through divesting
Penetration
Company maturity
• Sales excellence and effectiveness: Improve account management, pricing, and deal terms
• Customer segment expansion: Enter new regions and new industry verticals
• Product “modularization”: Add modules and new, vertical-specific use cases
• Transactional monetization: Benefit from transactions and payments
Consolidation and scale-up
• E2E platform for buy-and-build strategy: Prepare to consolidate the market
• Realizing synergies: Create value from cross-selling and reducing the cost base
• Scaling up: Aggressively grow the customer base
• Generalizing the offering: Evolve from specialist to generalist users
• Building a standard product architecture: Integrate data platforms and improve
service accuracy and resilience
Business model innovation
• Setting direction: Establish the vision, culture, and leadership
• Product development: Consider new use cases and “productization”
Source: BCG analysis.
Note: E2E = end to end.
Boston Consulting Group | Decoding the Competitive Software M&A Market 7First-time buyers of software assets primar- The Competitive Landscape and Advan-
ily create value through business model in- tage. A buyer should assess four main
novation and, potentially, new products. topics:
More mature companies are most likely fo-
cused on consolidating the market and •• Customers’ Key Purchasing Criteria.
scaling up their business by acquiring as- Determine why customers buy the
sets along different steps of the value target company’s solutions and how
chain. Buyers with the highest maturity de- innovation and marketing can address
ploy the new software capabilities through- different customer segments.
out the whole organization, thereby in-
creasing the penetration of new technology •• The Go-to-Market Strategy. Evaluate
in the company and transforming their leg- the prospective acquisition’s distribu-
acy business. tion channels, key customers, and
partnerships, which are all crucial to its
go-to-market strategy.
An Accurate Assessment
Requires Rigorous Due •• The Product Portfolio and Innova-
Diligence tion Pipeline. Ascertain each product’s
In order to accurately assess a target and contribution to the company’s revenues
avoid overpaying, buyers of software com- and its market penetration. Also assess
panies need to conduct a comprehensive the robustness of the company’s
and rigorous due diligence process. In the innovation pipeline, considering the
software industry, the process is distinctive adaptability of the software architec-
in some respects, especially with regard to ture, technology platform, and lan-
assessing the potential for technological guage to future applications and the
disruption. suitability of the software for cloud-
based SaaS offerings.
A buyer should structure its software due
diligence along three dimensions. Additionally, look at whether the
company implements best practices for
Market Growth, Trends, and Risks. A buyer software development (such as DevOps
needs to understand: and agile). In many cases, it is also
helpful to understand the technical
•• The Market. Investigate the sizes of the debt (that is, the necessary develop-
total addressable market and the service- ment work that has been delayed).
able addressable market; the growth
potential of each software application, •• Key Strengths and Weaknesses.
market segment, and region; and the Evaluate the company’s competitive
underlying growth drivers. advantages relative to those of its
peers, as well as its market positioning
•• The Market’s Maturity. Evaluate the and resilience against disruptions.
customers of a prospective acquisition, Issues to consider include how fre-
their adoption levels of the target’s quently the company has prevailed
products, and the cyclicality of demand. over direct competitors in recent years
Determine how using various business and the risk of competitors’ products
models, such as software as a service substituting for or disrupting the
(SaaS) and on-premises software, could company’s offerings. The assessment
affect the growth of the target company should also consider the likelihood that
and its market penetration. open source software or free add-ons
will render the company’s products
•• Potential Technological Disruptions. obsolete.
Identify the key trends and risks that
could disrupt the target company’s Performance and Value Creation. A buyer
business. needs to understand the target’s opportuni-
Boston Consulting Group | Decoding the Competitive Software M&A Market 8ties and challenges and the current man- •• Company Culture and Ways of
agement’s ability to address them: Working. Evaluate the target’s ap-
proaches to innovation and work.
•• Value Creation Levers. Identify Following the merger, strategic buyers
opportunities to expand the customer need to focus on integrating the
base, access new regions, upsell and software company’s culture and ways of
cross-sell, expand into adjacent value working into the existing organization.
chain segments, improve pricing, or This post-merger integration can be
transition to SaaS. Financial sponsors highly beneficial for the buyer’s existing
will want to determine if the company organization and help to foster future
can take advantage of these opportuni- innovation.
ties within their holding period, given
that they seek to take the software asset •• Management Buy-In to the Value
to a higher level of performance. Creation Plan. Determine the feasibili-
Technology companies should pay ty of the current business plan and the
attention to the potential for revenue ability to engage the current manage-
synergies, in particular. ment in pursuing changes if it stays on.
In assessing the organization’s ability
BCG’s synergy database shows that and willingness to change, the buyer
revenue synergies are a major factor in should consider the risk of losing key
value creation for half of the transac- talent (such as the founder) and
tions involving technology and software whether the target has developed or is
companies, compared with one-quarter actively developing the skills it needs
of the deals across all industries. A for the future.
recent BCG survey of software compa-
nies found that it takes, on average, two
years after closing a deal for synergies
to materialize. Given that they are
critical to value creation, it is important
H igh prices for software targets are
an economic consequence of the high
demand for software assets and capabili-
to pursue synergies even before finaliz- ties. To ensure that an acquisition price ac-
ing an acquisition. Practical approaches curately reflects the value of the assets and
such as using a clean team can prepare capabilities, buyers need to first under-
a buyer to accelerate go-to-market stand which companies they are competing
planning and take advantage of against and the underlying drivers of valu-
cross-selling opportunities. ations. They can then dive deeper into the
sources of value for specific industry seg-
•• Challenges to Value Creation. Assess ments and, ultimately, specific targets. Buy-
the threats arising from switching and ers that succeed in acquiring the right soft-
churn, new competitors, complexity, ware assets and capabilities at the right
and technology. The challenges also price will position themselves to reap sig-
include capability gaps within the nificant benefits in the digital future.
organization and a current manage-
ment team that could impede efforts to
take the company to the next level.
Boston Consulting Group | Decoding the Competitive Software M&A Market 9About the Authors
Jens Kengelbach is a managing director and senior partner in the Munich office of Boston Consulting
Group. He leads the firm’s global work in M&A. You may contact him by email at kengelbach.jens
@bcg.com.
Daniel Friedman is a managing director and senior partner in the firm’s Los Angeles office. He leads
BCG’s M&A and post-merger integration work in North America. You may contact him by email at
friedman.daniel@bcg.com.
Florian Schmieg is a managing director and partner in BCG’s Munich office. He is an expert in value cre-
ation and growth strategy for software and technology companies. You may contact him by email at
schmieg.florian@bcg.com.
Maximilian Bader is an associate director in the firm’s Munich office. He is a core member of BCG’s
Transaction Center. You may contact him by email at bader.maximilian@bcg.com.
Daniel Kim is a lead knowledge analyst in BCG’s Munich office. He is a core member of the firm’s Trans-
action Center. You may contact him by email at kim.daniel@bcg.com.
Samina Lademo is a senior associate in the firm’s Boston office. She is a core member of BCG’s Tech-
nology, Media & Telecommunications practice, focusing on software and the cloud. You may contact her by
email at lademo.samina@bcg.com.
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