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Enterprise Software M&A

By Mustafa Bayramli (UPenn), Gurneek Gill (UCL), Eve Bouffard (McGill), and Abilash Prabhakaran (MIT)

Photo: Marvin Meyer (Unsplash)

 

I. Industry Background


The COVID-19 pandemic created an unprecedented demand for software that enables seamless, robust remote work. The need for cloud integration became essential for online collaboration. Nonetheless, post-COVID practices have in fact become established now as workers have become accustomed to a more adaptable, hybrid office setup. Despite early investment companies made into virtualising and digitalising their setups in 2020, there was a continued demand into early 2021 from companies trying to make sure that teams had even more efficient and continuous access to their technological platforms, be it at home or the office.


Thus, in the first half of 2021 (H1 2021), the sector still rode the wave of the post-pandemic momentum that it gained, as a record-breaking $124 billion was spent on enterprise software transactions, 44% of which came from Private Equity buyers; the highest its ever been. These financially motivated PE backed deals have been targeting verticals from areas such as e-learning and education management technologies since such solutions thrived when so many people were at home.


While deal value in H1 2021 was $12 billion higher than during the peak of the pandemic in first half of 2020 (H1 2020), there was lower deal volume in the first 6 months of 2021, where only 751 deals were seen; slightly smaller than the 836 deals seen in the same period of 2020. The increase in overall deal value was largely down to companies’ higher achieved revenue multiples which in turn led to huge EBITDA multiples being paid out in H1 2021. This shows the profitability that software enterprises created from the sustained demand for remote work systems even after the height of the pandemic. Consequently, buyers from all industries were seeing value in increasing bids to help digitalise and develop their own offerings.


II. Qualtrics - Clarabridge


On July 29th of this year, experience management (XM) provider Qualtrics announced that it entered into a definitive agreement to acquire Clarabridge, a Reston, VA-based Software-as-a-Service (SaaS) company specializing in omnichannel conversational analytics. The all-stock transaction valued the target at $1.125 billion. Qualtrics will complete the acquisition in Qualtrics Class A common stock based on a fixed number of Qualtrics shares and a share price of $37.33. Morgan Stanley & Co. LLC is serving as the financial advisor to Qualtrics, and Qatalyst Partners is serving as the financial advisor to Clarabridge.


It is hard to stress the strategic importance of the Clarabridge sale to Qualtrics. Listening to the target customer base and tailoring the product to its needs have become increasingly crucial to sustaining competitive advantage. With Clarabridge, Qualtrics aims to better help enterprises with connecting and engaging with their customers. Clarabridge’s AI-powered platform allows companies to analyze customer feedback sourced from support conversations, chat, social media posts, etc. Qualtrics stock price closed at $41.73 or 5.6% higher one day after the announcement, reflecting the positive investor sentiment around the strategic move.


III. McAfee Enterprises - FireEye Products


On September 30th, private equity firm Symphony Technology Group (STG) announced that its portfolio companies McAfee Enterprise and FireEye’s Products will merge to create a $2 billion cybersecurity giant of 5000 employees and 40,000 customers worldwide. The new entity will be led by former Blackberry and Cisco executive Bryan Palma, while Ian Halifax, CFO of McAfee Enterprise, will act as CFO.


Initially created as a subsidiary of McAfee Corp., McAfee Enterprise provides industry-leading internet and cyber security solutions for businesses. In an attempt to sharpen focus on consumer technology, McAfee Corp. announced in March the sale of McAfee Enterprise to STG for $4 billion. With over 85% of the Fortune 100 companies being customers of McAfee’s Enterprise business, the subsidiary has been integral to ensuring the protection of the digital assets of the largest enterprises in the world (health care, banking, retail). Other important users of McAfee Enterprise products include police departments, airports, city governments, and universities.


FireEye specializes in the detection and prevention of major cyberattacks and provides automated threat assessments and malware protection against cyber threats for small, medium, and large enterprises. In June, the company announced the sale of the FireEye Products business and the FireEye name to STG for $1.2 billion. The deal, which is expected to close in the fourth quarter of 2021, will separate FireEye’s security products from its parent company Mandiant’s controls software and services, enabling both organizations to accelerate growth investments, pursue new go-to-market pathways, and focus innovation on their respective solutions. 59% of FireEye Products’ customers are computer software and IT companies, followed by financial services, governments, and higher education.


By merging McAfee Enterprise and FireEye Products, STG aims to solidify its position within the U.S. Enterprise Cyber Security Solutions market, expected to grow at a CAGR of 12.1% for the next 4 years. With the merger, STG wants to leverage the new entity’s integrated security portfolio to offer a differentiated, all-in-one enterprise cyber security solution that would compete against the market’s largest players, namely Cisco Systems, Inc., IBM Corporation, Intel Corporation, and Akamai Technologies, Inc., but also against innovative and younger firms like Crowdstrike.


Concerning the merger, STG Co-Founder and Managing Partner William Chisholm said:


“Cyber risk is the number one threat facing modern organizations and we are excited to advance our growing portfolio of cybersecurity companies. Given Bryan and Ian’s respective experiences leading transformations, we are thrilled to partner with them to unlock value in the cybersecurity market.”

Goldman Sachs & Co. LLC served as financial advisor to Mandiant whereas UBS Investment Bank and Jefferies LLC acted as financial advisors to STG. UBS Investment Bank and Jefferies Finance LLC provided financing for the transaction.


IV. SpotOn - Appetize


On September 20, 2021, San Francisco-based company SpotOn Transact, Inc. announced the acquisition of Los Angeles-based point-of-sale (POS) software developer Appetize Technologies, Inc. for $415 million in cash and stock. The deal is funded with a $300 million Series E raise led by Andreessen Horowitz and will make SpotOn one of the world’s largest organizations in the Cloud POS business alongside Square, Inc., Lightspeed Commerce, Inc., Shopify Inc., and Toast, Inc.


SpotOn Transact, LLC (SpotOn) was created in 2017 and has since focused on providing software services such as custom website development, e-commerce, reservation and point-of-sale solutions to small and midsize businesses (SMBs), primarily retail businesses including restaurants. The young company has seen more than 100% year-over-year growth, with revenue more than tripling in the last 18 months to attain $212.8 million at the end of 2020.


Appetize Technologies, Inc. (Appetize) was founded in 2011 and specializes in touchless payment and mobile ordering systems, including kiosks and handheld devices to food and beverage clients in the business of supplying sports and entertainment venues, theme parks and college campuses. Appetize technology can be found at the San Diego Zoo as well as major sports league stadiums like the Yankee and Dodger Stadiums. Appetize's estimated annual revenue is currently $34.9M per year.


This acquisition will create a 1600-employee organization (1300 from SpotOn and 300 from Appetize) and help SpotOn become a “one-stop-shop” for POS software and processing payments. While SpotOn’s core product payments and management software products mainly cater to SMBs, Appetize focuses on larger businesses, such as sports and entertainment venues, theme parks, zoos and college campuses. Thus, the acquisition will allow SpotOn to access a new pool of customers and scale its technology offerings for larger clients. Once the deal is completed, the combined company will serve tens of thousands of clients, ranging from family-owned businesses to theme parks, within a market growing by “thousands [of new customers] every month”, according to SpotOn CEO Zach Hyman. Moreover, Doron Friedman, SpotOn co-founder and chief product officer, added that Appetize’s features can be easily integrated into SpotOn’s offerings, such as the offline mode that allows businesses to continue running even without internet service.


Appetize CEO Max Roper, who will serve as a head of division under SpotOn, discusses the main benefits of the agreement:


“This acquisition enables our combined team to accelerate investments into our core product and client base while expanding to fill a void in the mid-market space. By bringing the two companies together, businesses from a major league ballpark to a local clothing boutique will have access to modern, intuitive, cloud-based technology that delivers exceptional customer experiences from one trusted provider.”

The cloud POS market is expected to reach $9.9 billion by 2027, rising at a market growth of 22.8% CAGR between 2021 and 2027. The need for cloud POS is fueled by the soaring popularity of digital payments, prompting businesses, including retail, restaurants, and healthcare providers, to implement advanced payment and cloud POS solutions to stay competitive.


The key stakeholders of the cloud POS market are Oracle Corporation, Lightspeed POS, Inc., Square, Inc., Shopify, Inc., Intuit, Inc., and Touchsuite. Fast-growing players also include Toast, Inc., Clover Network, Inc., and SpotOn. SpotOn’s competitors like Square, Inc. and Shopify, Inc. mainly focus on SMBs, with 83% and 73% of their customers having less than 50 employees respectively. Similarly, small businesses (generating less than $50M in annual revenue), notably restaurants, retail businesses, and computer software companies, are the primary targets of Toast, Inc., and Clover Network, Inc., representing respectively 74% and 69% of the companies’ customer base. With the acquisition of Appetize, SpotOn will not only compete against key market players by providing for the first time an end-to-end platform for businesses of all sizes but also the company will be able to tap into Appetize’s attractive and highly underserved customer base, i.e. the middle market (businesses generating annual revenues between $10 million and $1 billion).


It is not every day that a 4-year old company buys another company that is more than twice as old. Thanks to tremendous support from the world’s leading technology and software investors at Andreessen Horowitz (a16z), SpotOn was able to close in May a financing round of $125 million, tripling the company’s valuation to $1.875, making the company a unicorn, and providing SpotOn with the financial means to acquire Appetize for $415 million in cash and stock. Following the deal, SpotOn hopes to continue its exceptional journey and maintain its skyrocketing trajectory.


RBC Capital Markets acted as exclusive sell-side advisor to Appetize.


V. Epicor - KBMax


On May 27th 2021, Epicor announced that it would be acquiring KBMax, a Configure Price Quote (CPQ) and visualization software provider, for an undisclosed fee. Given that Epicor is a worldwide pioneer in industry-specific enterprise software, this acquisition will be a great addition to its portfolio as it looks to broaden its customizable offering to customers.


KBMax’s cutting-edge, stand-alone module cloud software complements Epicor’s prominent productivity suite and proficiency in the international manufacturing engineer-to-order space and helps connect Epicor’s customized enterprise resource planning (ERP) modules to the sales-to-order process, providing improved customer outcomes. Moreover, both firms can expect increased network and accessibility as part of the synergy. The deal opens up new international growth markets for Epicor across Europe and allows KBMax to scale and expand its technology suite by accessing customers in essential businesses who make, deliver and sell the things everyone needs. These businesses are constantly trying to find new compelling ways to reach customers and digitally evolve and KBMax’s integration of its CPQ tools within Epicor’s ERP system will allow it to create an information-rich and immersive online purchasing experience.


The deal is the latest strategic acquisition for Epicor, who similar to the rest of the industry have adjusted their M&A strategy to concentrate more on targeting businesses that show resilience and an alignment to digital technology. Epicor is leading the way in this regard as software companies look to dominate and consolidate market share through acquiring established software such as KBMax. As 2021 continues, many more similar deals can be expected as large companies in the enterprise software sector seek M&A as a lever of growth. This appears to be a better option to organic growth techniques which are becoming more limited and harder to achieve as the scope for innovation on current products and services is decreasing.


VI. Future Outlook


The COVID-19 pandemic spurred software M&A. The attempt to slow down the spread of the pandemic forced classrooms into bedrooms and offices into kitchens. Retailers that had been prodded to get online for the past two decades were forced to digitize overnight. The changes accelerated both the addressable market and stock prices of many application vendors – giving them the motive and the dry powder to tap into the M&A market. Acquirers smashed the previous annual record, spending $142 billion purchasing vendors that develop software for business users and consumers. That's a 49% bump from the 2018 record – a phenomenal outcome considering that nearly all of the spending came in the back half of the year. Less than $20 billion went toward application software targets in the first two quarters of 2020. The momentum in the second half, along with the improving picture for company IT budgets, sets up 2021 for a significant start. In the short term, the software M&A looks strong: PE firms looking to enhance returns and strategic acquirers will continue to capitalize on low financing rates as well as distressed debt investing opportunities. However, the low cost of inorganic growth may eventually come to an end as inflation worries prompt the Central Banks around the world to scale back support for capital markets.


The figure illustrates the consistent positive trend of increasing software M&A deal flow.

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