Focusing on the Lessons of a Wave of Recent Consecutive Acquisitions in the US Software Sector-June 7, 2022 13:43

Flash News ODDOBHF Artificial Intelligence

Flash News ODDOBHF Artificial Intelligence

In this new monthly flash, we want to draw lessons from the recent wave of consecutive acquisitions in the US software sector. Mainly from private equity funds.This sector is best represented by the ODDOBHF Artificial Intelligence Fund..

Private equity fund to step up acquisitions in the US software sector

Since the beginning of 2022, the US software sector has entered a phase of ongoing acquisition by private equity funds. At the end of January, the first Citrix announced plans to acquire Vista and EverGreen Coast Capital funds for US $ 16.5 billion (one of the largest businesses in four years). Later, Anaplan by Thomas Bravo (an American publisher of planning solutions, but not a common target for PE funds due to low FCF generation) was acquired with an offer of $ 66 per share, close to 30%. The premium has been revealed. At the last estimated price. Last April, publisher Datto was acquired by a consortium of investment funds, including managed services company Kaseya and TPG. In the same month of April, Sailpoint received an offer from the same Tohma Bravo to evaluate an American cybersecurity publisher in cash of US $ 6.9 billion. It should be noted that for Citrix (US $ 16.5 billion) as well as Anaplan ($ 10.7 billion), the 10 billion threshold has been breached and no longer constitutes the glass ceiling for the entire operation.

First lesson: Fundamentals in this sector are one of the healthiest on the coast.

Private equity funds have historically concentrated most of their investment in the software sector, given the unique characteristics of the sector that combines rare assets. Cloud or cybersecurity is still in its infancy). 2) There is continuous sales, and the business model is becoming more and more so (given the sector transition from the license / maintenance model to the subscription model, also known as software as a service). 3) High operating profit and relatively low investment (WCR and CAPEX) generate much higher free cash flow than the market.

Second lesson: Sector valuation provides entry points that are considered attractive by funds familiar with the sector

The rise in long-term interest rates in North America (2.9% at the time of writing this flash) put pressure on the sector’s valuation (a reduction of about 17% in these companies’ valuations for a 100 bp rate hike). It provides a much more attractive rating for private equity funds that take a long time to generate value (although the final IRR depends on the entry rating). At the time of writing this flash, the IGV (US Software Sector ETF) was nearly 27% integrated compared to the highest score on November 9, 2021. As of April 18, 2022, the US software sector was valued at 9.6x sales (9.5x on average over the last five years, 17.2x at the peak of the 2021 sector), according to Morgan Stanley. I did.

Third lesson: This sector is currently ripe for “transformative” integration

In the North American market, the wave of acquisitions we are entering in terms of the number of companies listed on the stock market during 2019/2021 follows the wave of unprecedented IPOs. These companies are not all. 1) It is also recognized in the market. 2) Not everyone has found the right management team for them (eg Splunk, Dynatrace, Anaplan). The need to operate a business model migration from licenses to SaaS (Software as a Service) also constitutes reasons for underestimation (Cyber ​​Ark, Ping Identity, etc.) and, rarely, the following reasons: Also note that. Delisted.

Since the business model of private equity funds is also to create value through debt, the current rise in US long-term interest rates can be considered to make trading more difficult in nature.

This has two consequences: 1) Sector integration players believe that not only these funds, but also large software publishers will enter the stage of buying future organic growth by buying other “point solution” publishers. Who offers entry into one or more high-growth markets? Even access to specific technologies. The most attractive segments should be left alone. Cybersecurity, Devops, analytics, observability, ITSM and ITOM, and finally collaboration software. 2) Sector outlook and fundamentals are excellent as it allows private equity funds to find attractive IRRs despite entering the world of higher interest rates.

We now believe that we are entering a period of sector integration, which we describe as “unchangeable.” In short, it features the entry of several types of buyers in addition to private equity funds. 1) So-called “legacy” software publishers (Oracle, SAP, Software AG, Teradata, VM Ware) who have to relocate themselves by buying companies that offer growth and more modern technology; 2) External A software publisher whose growth represents all or part of the business model (Progress Software) (Salesforce.com, Microsoft). 3) Software publishers whose “family” is too fragmented and needs to integrate leadership within this family (these phenomena can be seen in cybersecurity, observability, or analytics / big data). .. 4) Large semiconductor companies wanting to invest in software for financial (Broadcom) or strategic (Nvidia, and perhaps AMD and Marvell tomorrow) purposes.

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None of the above companies make up an investment recommendation
Past performance does not indicate future performance and is not constant over time.

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