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Software companies will remain the target of big-dollar acquisitions in 2020, Morgan Stanley predicts

Software companies will continue to be sought-after acquisition targets throughout 2020, even if such activity does not rise to historic levels, according to an analysis by Morgan Stanley.

The investment bank tracked 90 publicly announced acquisition deals in 2019. That wasn't as high as 2018's 117 deals, “but still nicely ahead of the historical average of 76 deals seen over the past seven years,” writes equity analyst Keith Weiss in a research note.

And 2020 is already off to a bang, with a flurry of activity suggesting that appetite for software startups, even before they come out of stealth, will remain strong, Weiss notes.

These deals include:

  • Procurement platform Coupa buying travel price monitoring startup Yapta (terms undisclosed).
  • Cloudflare buying browser security startup S2 Systems for $39 million (before it even came out of stealth).
  • Low-code platform Appian buying robotic process automation Novayre Solutions (terms undisclosed).
  • Insight Ventures buying Israeli IoT security company Armis in a deal estimated to be worth $800-$1.1 billion.
  • Email security Mimecast buying Israeli anti-phishing startup Segasec.

Those wanting to buy software companies may be encouraged by the fact that enterprises are increasing the amount of money they spend on technology in 2020 with a good chunk going to software — although they are not upping their annual budgets in a record-breaking way, Weiss says.

Morgan Stanley's last survey of 100 CIOs, performed in April, showed their Q1 2019 budgets would increase by 4.6% growth in IT spending, compared to budget increases of 4.8% cited in 2018. Gartner forecasts that total IT spending for the year will grow 3.7% to nearly $3.9 trillion. Software spending is expected to increase by 10% to $507 billion.

As for more software mega deals, Weiss doesn't have a crystal-ball prediction but he does note that big prices forlsuch deals continued to sustain peak levels throughout 2019.

The average between 2017-2019 was 8.8x the target's trailing 12 month sales, driven up by pricey deals in these years such as Microsoft buying LinkedIn, Salesforce buying MuleSoft, or IBM buying Red Hat. That price compares to 6.9x TTM sales from 2012-2016.

So, there are a lot of indicators that the software acquisition market will remain hot, including planned increased spending by deep-pocket enterprises. There are lots of types of buyers out there, from big players to mid-sized companies, to private equity, Weiss finds. And given that, there's every reason to believe that those selling their companies will be demanding high prices in 2020 just like they have in the past two years.

As for who will be buying who, no doubt 2020 will bring its share of surprises. Right now, the big mega deal drama launching 2020 is smaller Xerox (about $8 billion market cap) attempting a hostile takeover of its bigger competitor HP ($30 billion market cap), with the urging of activist investor Carl Icahn, who has a stake in both companies.

Are you an insider with insight to share? Contact Julie Bort on encrypted chat app Signal at (970) 430-6112 using a non-work phone (no PR inquiries, please), or email at [email protected]. Open DMs on Twitter @Julie188.

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