Pagemill Partners, the technology division of Duff & Phelps, has published data revealing a sharp bounce-back in software deal activity in Q3 2020, with 466 transactions recorded between July and September 2020. As boardroom focus shifted away from bracing-for-impact, a combination of strong operating performance and more readily available financing resulted in a surge of activity, with both deal volume and spending reaching levels higher than any other quarter over the last three years.
Large-cap deals also returned in full force over the last quarter, with aggregate deal values almost 90% higher than in Q3 2019. With deals above USD1 billion (bn) valued in aggregate at USD40 billion in the quarter, large-cap deal activity was the highest for the last six quarters.
The data goes on to show that buoyant public markets and strong investor appetite for SaaS business models have also created a vibrant IPO market, with a median increase in share price for software companies since listing sitting at around 80% this year.
Rory O’Sullivan, Managing Director at Pagemill Partners, says: “Given the strong uptick in M&A activity in Q3 2020 and our own visibility into current deal activity with strategic and financial buyers, we are cautiously optimistic that the positive momentum in tech M&A in Q4 2020 will likely remain strong heading into 2021. However, we note that near-term political and macro risks are likely to continue to fuel periods of increased volatility, especially in the public markets.”
Pagemill Partners data also revealed that three times more special purpose acquisition companies (SPACs) have been formed in 2020 compared to 2019 (183 vs 59, respectively), resulting in a record high of over USD72.9 billion of capital raised year-to-date. Many of these ‘blank-cheque’ companies are targeted at tech and enterprise software.
Private equity median deal multiples for software buyouts, which currently sit at 4.0x revenues this year, remain comfortably above the 10 year average for the sector (3.2x) and, for the first time, eclipse both the 10 year average and current median deal multiples for strategic buyers (3.8x and 3.2x, respectively). This indicates investor confidence in the strong macro drivers for continued adoption and penetration of enterprise software, which are, in many cases, being accelerated by Covid-19.