Volatility in the Software Sector Disrupts Deal-Making and IPO Activity
A significant downturn in software stocks is hindering transactions and initial public offerings (IPOs) in the industry, as cited by numerous financial advisers and dealmakers in communication with Reuters.
The prevailing market volatility renders valuations precarious, engendering a more cautious stance among prospective buyers.
The extended selloff intensified last week, marking the S&P 500’s software and services index with its most dismal three-month performance since May 2002, according to insights from Evercore ISI equity strategists.
Despite some recovery in the sector, stocks remain approximately 25% lower than the record highs reached on October 28, while the S&P 500 index has experienced a modest 1% increase during the same interval.
Bankers and investors attribute the slowdown in mergers and acquisitions, alongside initial public offerings, to several interrelated factors.
With the precipitous decline in software share prices, traditional valuation metrics—such as revenue multiples—have shifted rapidly, complicating negotiations. Buyers express concerns over potentially overpaying for assets liable to further devaluation.
Sellers, conversely, show hesitation to execute transactions during these depressed market conditions. “Some individuals cannot afford to divest while the market is in freefall,” remarked Vincenzo La Ruffa, managing partner at private equity firm Aquiline Capital Partners.
Fear-Driven Trading
Beneath the surface turbulence lurks apprehension regarding how artificial intelligence may fundamentally alter business models within the software domain.
Wally Cheng, head of global technology M&A at Morgan Stanley, indicated that investors currently engage in fear-based trading, lacking a nuanced and detail-oriented approach toward discerning potential winners and losers in the market.
He asserted that while a buyer’s assessment of a company’s fundamentals may remain unchanged, it is the premium initially offered that becomes untenably inflated following a sharp decline in share prices unless deal terms are revisited.
This phenomenon is already manifesting in various transactions. The fintech company Brex concluded a significant funding round at the peak of the market in October, valued at over $12 billion, only to be acquired by Capital One last month for approximately $5.15 billion.
Similarly, the financial software provider OneStream went public in July 2024 at a near $6 billion valuation, but it was valued at about $4.6 billion when Reuters reported its considerations for going private again in early November.
Mike Boyd, global head of M&A at Canada’s CIBC, noted that negotiating prices becomes increasingly arduous amidst market volatility, complicating the establishment of agreements.
La Ruffa projects that in the upcoming weeks, “we anticipate numerous deals will fall through—some will slow, others will adjust their valuations. We expect to witness a halt in transactions more prevalent than recalibrated pricing.”
Many public software firms are currently trading at roughly one times their forward revenue or even lower, contrasting sharply with historical multiples that are considerably higher, as observed by Ron Eliasek, chairman of Global TMT investment banking at Jefferies.
“Such valuations are untenable,” he argued. “We will either witness an uptick in take-privates or an eventual improvement in these companies’ valuations.”
The share decline extends beyond U.S. borders, adversely impacting European equities, with British analytics firm RELX and Dutch legal analytics firm Wolters Kluwer experiencing declines of around 20%.
The ramifications are particularly pronounced for IPOs. Liftoff Mobile, backed by Blackstone, opted to defer its planned listing “due to current market conditions,” as stated in correspondence with Reuters.
Additionally, sources indicate that Norwegian software firm Visma may postpone its anticipated $20 billion listing in London because of the ongoing selloff, raising concerns with Morgan Stanley about potential implications for private credit markets, where software companies constitute about 16% of the $1.5 trillion U.S. loan market.
Uncertainty vs. Fundamentals
Jon Gray, president of Blackstone, shared at a recent conference in New York that AI has provoked an internal risk assessment at the firm, categorizing portfolios based on perceived susceptibility to disruption from AI innovations.
Conversely, some industry veterans advocate for composure. Robert Smith, founder of Vista Equity Partners, informed investors through a recent letter that AI is poised to “enhance software, rather than replace it.”
He contended, “The fluctuations in the public software markets are primarily driven by sentiment and uncertainty, rather than fundamental performance.”
Goldman Sachs CEO David Solomon, addressing the UBS Financial Services conference in Miami, suggested that investor reactions may be disproportionately severe.
“The narrative dominating the last week appears overly broad. Certain companies will navigate these challenges effectively, yielding both winners and losers,” he asserted.
Amidst this turbulence, certain investors perceive a prime opportunity for acquisition. Eliasek from Jefferies conveyed that numerous private equity partners contacted him late last week, expressing a desire to secure software businesses, conveying the message: “Present us your most promising opportunities.”
Source link: M.economictimes.com.
