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M&A "Software as a Service" TRENDS
Three times a year, Meridian Capital publishes its Technology M&A Update, which focuses on key trends in the technology M&A market. The Fall edition focuses on the Software-as-a-Service (SaaS) sector.
The M&A market for SaaS companies remains robust, supported by the high growth profile and positive outlook for the industry as SaaS continues to become the standard for software delivery. The industry as a whole is on pace to generate $73.6 billion in revenue by the end of 2018 and is expected to continue this growth to $117.1 billion by 2021,1 representing a three year CAGR of 16.7%. Additionally, 73% of organizations say nearly all their apps will be a SaaS model by 2020.2
NEW INDUSTRY ENTRANTS THROUGH ACQUISITION
- The M&A market has experienced new entrants on the buy-side from legacy on-premise software providers and non-software acquirers purchasing SaaS capabilities.
- Spending on off-premises cloud IT infrastructure is expected to grow at a five-year CAGR of 12.0%, reaching $51.9 billion in 2021. During the same period, spending on on-premise software is projected to decline at a 2.7% CAGR.3 Many legacy software providers are recognizing the need to innovate and capitalize on the industry momentum through acquisition. Over the past few years, Oracle has been a prime example of a company that has utilized this strategy, having already made three substantial SaaS acquisitions during 2018.
- Additionally, non-traditional software companies have become acquisitive in the space in order to promote cross-selling opportunities and realize cost synergies with their existing business lines. This trend was illustrated by German industrial engineering giant Siemens’ acquisition of Mendix in early October 2018 for $730 million, as well as Cisco Systems’ acquisition of Broadsoft in February 2018 for $1.9 billion. Other noteworthy transactions by non-software acquirers include the August 2018 AT&T acquisition of AlienVault and Broadcom’s July 2018 announcement of an agreement to acquire CA Technologies.
INCREASING DEMAND FOR VERTICALLY-FOCUSED SaaS
- Vertically-focused SaaS companies have remained attractive targets as companies are realizing the increased benefits of specialization. Due to a targeted customer base, vertical SaaS companies realize 8x less expensive customer acquisition costs, on average than horizontal SaaS platforms. Further, vertically-focused SaaS providers are able to more easily adapt to the demands of their user base by developing tailored features for a specific industry. Ultimately, this flexibility translates into decreased churn and the ability for further upsell opportunities to existing customers.
- As of November 2018, vertically-focused public SaaS companies trade at 6.6x EV / REV compared to 5.1x for horizontal SaaS (based on an index of representative companies). The healthcare vertical followed by the financial services vertical have seen the most M&A activity, comprising 21% and 13% of total vertical SaaS deal volume, respectively during the first half of 2018.4
- Recent transactions include Allscripts Healthcare’s acquisition of HealthGrid Corp, a provider of a mobile patient engagement platform for the healthcare vertical, and Invesco’s acquisition of IntelliFlo, a practice management software for the financial services vertical.
PRIVATE EQUITY FIRMS CONTINUE TO SEEK INVESTMENT IN SaaS PROVIDERS
- Due to their highly recurring revenue models, potential for rapid growth, ability to scale, and tendency to have automated marketing and sales strategies, SaaS companies are very attractive investment opportunities for financial investors.
- Private equity and venture capital firms have continued to raise record high levels of committed capital, giving them well over $1 trillion in dry powder that is ready to be deployed over the coming years.5
- According to Pitchbook, there have been 125 PE buyouts of SaaS companies in the first half of 2018, putting 2018 PE buyouts on pace to exceed the 2017 and 2016 totals of 242 and 182, respectively.
M&A ACTIVITY AND PUBLIC MARKET METRICS
SELECT CASE STUDIES
Acquired in April 2018
Deal Size $150M
Target Description: Seattle-based provider of cloud software solutions for governments to transform data into actionable insights.
Investment Rationale: With this acquisition, Tyler will help local government understand procedural bottlenecks and create predictive models to assist in improving government operations.
Buyer Quote: “We are excited about… the data sharing and analytical capabilities of the robust Socrata platform.” – Lynn Moore, President of Tyler Technologies
Acquired in May 2018
Deal Size $43M
Target Description: Developer of cutting-edge software intended to improve effectiveness and efficiency of higher education fundraising efforts.
Investment Rationale: Acquisition will enable Blackbaud to offer its customers enhanced benchmarking capabilities and drive more effective fundraising.
Buyer Quote: “This is one more way Blackbaud is delivering on our commitment…[of] helping institutions ensure that their individual fundraisers are as effective as possible…” – Mike Gianoni, President and CEO of Blackbaud
Acquired in February 2018
Deal Size $43M
Target Description: Developer of management solutions that provide control over IT spending and budgets.
Investment Rationale: The acquisition allows Apptio to further extend its leadership of the $6 billion Technology Business Management (TBM) market.
Buyer Quote: “We are invested in the ongoing success of Digital Fuel customers and our combined customer base will have access to the most advanced innovation in TBM” – Sunny Gupta, CEO of Apptio
Acquired in May 2018
Deal Size $7M
Target Description: Seattle-based developer of profile and directory management software.
Investment Rationale: The acquisition combines two of the fastest growing and most exciting companies in the Microsoft ecosystem. Their technologies will enable LiveTiles to deliver organizations the most advanced intelligent workplace platforms.
Buyer Quote: “Hyperfish software will enable us to expand the LiveTiles Intelligent Workplace platform to deliver exciting new capabilities to…customers.” – Karl Redenbach, CEO of LiveTiles
SELECT PUBLIC VERTICAL SaaS COMPANIES
AVERAGE ENTERPRISE VALUE/REVENUE
- EBITDA multiples - Average 7.8x
Select Public Horizontal SaaS Companies
SELECT PUBLIC HORIZONTAL SaaS COMPANIES
AVERAGE ENTERPRISE VALUE/REVENUE
- EBITDA multiples - Average 6.7x
“As SaaS continues to become the standard for software delivery, we can expect to continue seeing a robust SaaS M&A market with strong valuation multiples”
Tony Richardson, Industry Advisor