For close to 20 years in M&A, I’ve heard the conventional wisdom that strategic buyers pay more than financial buyers. The logic of the synergies mantra has always seemed to make sense. In theory, strategic buyers can find concrete cost synergies (and also some revenue synergies) to justify paying a higher price. As an advisor on sell-side M&A transactions, I often hear clients, colleagues and prospects repeat this mantra in our go-to-market strategy sessions.
Here’s the thing, over the last couple of years I’ve seen more than a few instances where PE players have done transactions in which the conventional wisdom would have predicted the winner to be a strategic player. Our team at M&A dug into some data to determine to what extent this paradigm has shifted.
As recently as 2013, the average revenue multiple paid for mid-market software companies M&A in the US was 3.5x for Strategics vs 2.4x for PEs. In 2015, while the multiple remained around 3.3x for Strategics, it reached 4.2x for PE acquisitions, almost double that of two years before.
Also, while the number of technology (software and services) deals is clearly increasing, the number of PE deals is increasing even faster: in 2010, PE buyers closed 220 out of 3,308 transactions; in 2015, they closed 295 out of 3,850 transactions – a 61% increase in PE deals over 2010 (vs 38% increase in total deals).
This trend is even more accentuated for the software segment: the percentage of financial buyers grew 66%, while the overall number of transactions grew 25% between 2010 and 2015.
Earlier this year, Francisco Partners, a leading tech PE firm, took the workforce management solutions provider ClickSoftware private in a $440 million cash transaction, implying a 3.0x LTM revenue multiple. One would have expected significant interest from strategic players such as SAP, Oracle, ADP, etc., all with the means and the cash to support a transaction.
Last year, the same Francisco Partners sold eFront, a well regarded provider of software to alternative asset managers, to Bridgepoint for €300M, implying a 4.1x LTM revenue multiple. There were a number of logical fintech buyers such as Broadridge, Markit, SS&C, SunGard, Thomson Reuters in this case, but in the end none were the top bidder.
The trend is not limited to mid-market transactions. Last month, Silver Lake and Thoma Bravo agreed to take private SolarWinds, the provider of IT management software, for $4.5 billion, implying a 9.1x revenue multiple and a 29.6x EBITDA multiple. Where were Microsoft, HP, EMC, CA and others?
We have seen this trend in more than a few of our recent transactions here at M&A (e.g., IPREO, Tagetik, SR Labs).
It will be interesting to see how these investments fare in the long-term for the PE players. They may not bring synergies to the table, but a strong financing market and stable cash flows seem to provide ample opportunity to defy (disprove?) the conventional wisdom.
More to come on this. We welcome your comments.
– Jason Panzer