The surprise result of the U.S. presidential election injected uncertainty into the short-term appetite for corporate merger activity. But even before the ballots were counted, software dealmaking was already on hiatus.
The summer and early fall of 2016 brought a crazy splurge of announced takeovers for U.S. software companies. Within a couple months, Microsoft Corp., Oracle Corp. and Salesforce.com Inc. each struck the biggest acquisitions in the companies' histories. Relative newcomers to software dealmaking, private equity firms, started to do oddball buyouts in the sector.
June was the biggest month for software deals since 2007, with more than $40 billion worth of takeovers for U.S. software and internet companies, according to data compiled by Bloomberg. The acquisition surge felt like the start of long-promised consolidation of certain tech sectors such as business software and the inevitable result of the huge amounts of cash piled up on tech giants' balance sheets. Once everyone started to pair up, both buyers and potential sellers didn't want to wind up without a dance partner. The momentum seemed unstoppable.
And then just as quickly, the tide went out. October was the busiest month in history for mergers-and-acquisitions globally. And yet there were fewer than $2 billion worth of U.S. software and internet deals last month, Bloomberg data show. November's deal activity isn't much different so far.
So what happened?
It seems the biggest spark for the software M&A surge in 2016 -- cratering share prices for many potential takeover targets -- simply reversed. And that sapped dealmaking interest among both potential buyers and sellers.
Remember that technology stocks, particularly those of fast-growing, richly valued software firms such as Tableau Software Inc. and Zendesk Inc., sank like stones in the early part of the year. The BVP Cloud Index -- a basket of mostly business software firms compiled by Bessemer Venture Partners -- dropped 35 percent from the end of 2015 to early February. The stock swoon caused a lot of soul-searching among software firms, and prompted many formerly unwilling sellers to turn willing.
The BVP index has mostly recovered from its lows, and the recovery sapped momentum from the takeover binge. On a list of Salesforce's potential acquisition targets from May that were hacked from the inbox of Salesforce director Colin Powell, a number of the companies on the wish list and marked as "in play" or scheduled to meet with Salesforce -- ServiceNow Inc., Tableau, Pegasystems Inc. -- haven't been acquired.
The same share price recovery that made smaller software firms less eager to sell also made bigger potential acquirers less willing to buy, now that acquisitions don't look like the relative bargains they did early this year. For example, ServiceNow -- frequently mentioned as a takeover target -- had a market value in mid-February that was 5.6 times its estimated revenue in the next 12 months. It's now about 8 times.
Another factor is that many potential acquirers are distracted with finalizing the deals they struck in recent months or are digesting new acquisitions. Microsoft has a fight on its hands to complete its purchase of LinkedIn. Maybe Salesforce feels a bit gun shy after the shareholder revolt over its pursuit of Twitter this fall. Plus, a more compliant tech IPO market recently has given some young software firms the option to sell shares to the public instead of pursuing a sale.
In good news for bankers and lawyers, the breather in software M&A is likely temporary.
Both private equity firms and tech superpowers are sitting on mountains of cash, and some of that will inevitably go to dealmaking. Congress may overhaul corporate taxes and allow tech giants to free up cash parked abroad to use for acquisitions. In a sign software M&A isn't totally dormant, the New York Post reported this week that private equity firms are working on a deal involving business software company Infor. Adobe Systems Inc. also announced Thursday a $540 million purchase of an advertising-technology company.
Even if it proves temporary, the hot-to-cold swing in software dealmaking is a reminder that especially in M&A, inexorable trends can suddenly stop. There's always an underlying appetite for dealmaking in software. But pulling the trigger requires a unique alignment between targets' fear and buyers' confidence. Even when those stars align, it can be fleeting.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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