How is SaaS going to change the company landscape

How is SaaS going to change the company landscape

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“Breaking down the conventional, traditional ways of using spreadsheets and shared drives, SaaS is bringing a revolution in the M&A Industry by accelerating deal implementation”

The M&A market for software companies has been booming. And the number of tech transactions has continued to rise, approaching the maximum level of the dot-com bubble. Non-technology companies and financial sponsors are looking forward to driving the hot market by pursuing software targets alongside conventional technology players.

According to a research report by BCG, these non-traditional strategic buyers struggle to generate a deal value between one and two years after an acquisition. This suggested that they are overpaying for targets or are unsure about generating profits.

Non-technology players and financial sponsors needed in-depth knowledge of what influences valuations in the market and real firms to excel in M&A software.

This is where SaaS deals related to M&A come into the picture. In such a case, gathering information for an accurate evaluation, a thorough and robust due diligence process at the business level becomes an absolute necessity.

How is SaaS going to change the company landscape?

With Cloud-based technology stacks becoming more numerous and complicated, mergers and acquisitions are expected to bring more complex integration problems in the age of SaaS than in previous years. According to a new Zylo consumer data report, the average company now holds nearly 600 SaaS applications because of the overwhelming amount of resources available; technology exploration and prioritization is now a necessary process in any M&A integration. Therefore, applying best practices derived from contemporary SaaS management, on the other hand, opens the door to cost-cutting opportunities, helps in avoiding any risks, and helps in improving the efficiency for years to come. Breaking down the conventional, traditional ways of using spreadsheets and shared drives, SaaS is bringing a revolution in the M&A Industry by implementing the deal more effortlessly and accelerating deal implementation.

Rapid growth and desirable economic factors

Software applications have become ubiquitous in industries in an increasingly digital world environment. The global demand for these applications has expanded faster than Western countries’ GDP, and we anticipate that this remarkable growth will continue. According to  Gartner, the global software market will expand by 10% each year through 2024.

Now, let’s dig our brains and try to think about what makes this industry super attractive?

If we think from the buyers’ perspective, The software industry is appealing to them for a variety of reasons, including:

  • A vast and expanding industry: The megatrend of digitization propels rapid growth in the software industry, with many segments growing at more than 10% annually.
  • Revenues that come in regularly: Many tech business models depend on recurring revenue sources, such as yearly membership or license payments and a monthly maintenance cost.
  • Customer loyalty: Due to the high switching costs for consumers, churn rates are usually meager, particularly for business clients, once adopted, the software can become an integral part of business operations. A typical sales strategy is to get a foot in the door by offering small packs of goods or services to consumers.
  • There are a plethora of potential targets: The software industry is fragmented, which presents opportunities for consolidation. Private equity and venture capital investors hold over 10,000 assets globally, with hundreds more in public markets (approximately 1,500 companies) and privately owned assets(more than 40,000).

The high growth rate, favorable economics, and a plethora of potential targets all contribute significantly to software companies’ attractiveness.

Effect of the pandemic on the software industry

During the pandemic, the software industry was one of the most robust industries. Stock prices collapsed in February 2020 as the threat posed by the novel coronavirus became apparent. However, by late March, valuations had begun to increase as markets were encouraged by further quantitative tightening of monetary policy and government spending schemes in Europe and the United States. The M&A market essentially froze, but it eventually recovered to the historically normal range of monthly transaction value over the previous ten years.

However, in the pandemic situation, software companies’ performances during the first three months of 2020 were mixed, creating M&A opportunities.

The crisis made companies realize the value of digitalizing their core operations and offering improved customer experiences through a digital-first approach. Companies started looking for software solutions that allowed them to leverage unstructured data and democratize data in their organization. This increasing prevalence of remote work and cost flexibility made companies feel the need to deploy new software solutions.

With the increased implementation of cloud computing, faster innovation cycles, growing use of automation, and adoption of new business models, these trends drove higher demand and affected the technological playing field. These factors became the primary reason for the boost behind unique competitive advantages and new M&A opportunities in the coming times.

A closer look at the software M&A market

The software M&A market seemed to decouple from the broader M&A market in 2020, which had slumped due to the pandemic. Despite economic headwinds, the volume of software M&A transactions was able to reach an all-time high.

In terms of value, software acquisitions accounted for nearly 6% of all M&A transactions in 2020. This is about double the percentage from ten years earlier, and it reinforces the perception that software properties are becoming increasingly valuable in all buyer groups.

In 2020, the bulk of software deals (73 percent) were priced at less than $100 million. In 2020, most tech transactions (73 percent) were priced at less than $100 million. However, large deals between US and European targets have significantly boosted deal values in recent years.

For most of 2019, the backdrop for deal activity in North America has been the proliferation of M&A in the technology space. The Information Technology sector accounted for 25.7 percent of deal volume in the second quarter alone, due to a lift from software and SaaS firms.

With time, companies are now becoming more aware of the specific benefits that SaaS firms have, such as stability and adaptability, which can supplement their add-on strategies. Similarly, corporations have become steadfast with their purchases of software companies, often seeking these deals to expand product scope rather than scale. In today’s hyperconnected world, undergoing a digital transformation is crucial, and using SaaS for their M&A deals has become essential for achieving that aim.

Mergers and acquisitions in the computing industry are distinct from those in other fields, necessitating advanced expertise and experience. The MergerWare team has a wealth of expertise in and around the software M&A industry. We understand the market, the key players, and the factors that drive strong M&A activity and help enterprises digitize their M&A mechanism from the deal inception to the deal closure process. The accelerated pace of M&A necessitates a faster and more effective M&A mechanism as well as the right integration approach. A better understanding of the actual cost of integration can provide SaaS leaders with better clarity of what benefit needs to be extracted from a deal. In such a situation, MergerWare could be the best fit in the hands of a CFO and help him immensely in driving overall deal execution and in tracking the entire deal’s information remotely through a virtual platform.

Within the industry, the delivery and deployment of software are evolving from on-premise to software-as-a-service (SaaS) and mobile apps. SaaS companies can be categorized as both software companies and as a part of the emerging cloud industry. Knowing where a company fits in the industry is a step in creating an exit strategy, finding the right buyer, and making the best possible deal. Wherever you fit in the industry, MergerWare is here to help you with strategic Acquisition, Integration & Divestiture.

Want to ensure a higher chance of success with your acquisition by trusting on a SaaS-based digital M&A platform dedicated towards management and execution of M&A deals right from the start?

Connect with us, establish a systematic, high-quality M&A process that diminishes the risks that come bundled along with the traditional approach of deal management, and get appropriate guidance in building and executing your plan from day one.

Visit us at  mergerware.com and schedule a  personalized demo with one of our product specialists.

Author

Muskaan