Piper Jaffray Technology Investment Banking

Software Company Sale Processes with Both Private Equity and Strategic Acquirers – Part I: Preparing for a Process


Michael Kim, Co-Head of Piper Jaffray Technology Investment Banking
Peter Lombard, Managing Director and Head of Technology M&A

Key Takeaways

Developing a strong roster of interested buyers is critical to any M&A process. A competitive process almost always involves multiple buyers who have demonstrated strong interest.

Strategic acquirers should remain a focus in acquirer solicitation, but private equity firms now deserve equal amounts of attention. Strategic acquirers continue to be very active in software M&A, and they deserve thoughtful engagement. However, private equity firms are also now big players in software, and they should be included in most M&A processes.

Private equity firms are now a major force in the software M&A market According to our analysis, since 2014 private equity firms have been the acquirer in 27% of software M&A deals with transaction values over $100 million. That percentage increases further when transactions with PE-backed strategic acquirers are included. Piper Jaffray’s technology banking team has advised in several recent software transactions with financial sponsors on the buyside, including:

Traditionally, large strategic vendors used M&A to create software platforms. M&A served two strategic purposes: one was to add complementary technologies and solutions with high cross-selling potential, and the other was to acquire companies that provided newly demanded functionality in the acquirer’s existing products. Through these acquisitions, vendors were able to provide comprehensive product suites.

Private equity firms are creating new “platforms” in the software market. These firms and their portfolio companies are often nimbler than both publicly-owned and independent, privately-held software companies in revitalizing their products and platforms to address changing customer needs, penetrate new markets, and sustain growth. PE firms have responded to the environment of rapid technology innovation and change by (i) enabling platform companies to make strategic acquisitions of complementary businesses, (ii) plugging skills gaps in management teams, (iii) improving operational performance, and (iv) divesting non-core assets and technologies to enhance focus.

PE firms are now experienced operators of software companies. PE firms have well-developed playbooks and demonstrated expertise to help management teams accelerate growth and create value through product revitalization and the re-architecting of sales and marketing structures and strategy. The best PE owners often develop strategic visions built around aggressive, well-planned and implementable acquisition programs. It is not unusual for PE buyers to immediately embark on multiple acquisitions after closing a platform acquisition.

Credit markets have become very receptive to software deals (especially for SaaS and other recurring-revenue businesses). These favorable markets have provided PE firms the financial firepower to compete head-on with strategic buyers and build their software franchises.

Given their strong presence in the software M&A market, private equity firms need to be a central focus in planning a software company sale process. Many PE firms now have extensive track records in the software industry, not only in terms of what assets they have owned and sectors they know, but also in what they look for, what they contribute to help management augment value, and how they evaluate and manage companies.

Sellers need to approach potential private equity acquirers with the same thoughtfulness and nuance as they do with strategic acquirers. Below are several actions sellers should take in fostering interest from both private equity firms and strategic acquirers to create the optimal competitive sale process.

Identify Which Private Equity Firms Are Likely to Be the Right Ones to Solicit

Just as we can assess a strategic acquirer’s potential interest in a target company, so too can we evaluate a private equity firm’s likely appetite for a transaction. There are now over 100 private equity firms that actively evaluate software acquisitions. While certain firms have broad common themes and investment styles, each firm has its own particular perspective, approach, value proposition, and unique experience. We’ve listed below some criteria to help narrow the field:

Identifying firms with likely interest in the company will focus the seller’s energies on the right buyers and make a resource-intensive process more efficient and effective.

Pre-market to both strategic acquirers and private equity firms

Emerging software company CEOs have broadly adopted the best practice of “pre-marketing” their companies to potential strategic acquirers months or years ahead of a formal sale process. This is especially important when soliciting very large software vendors or non-traditional software buyers. These buyers, in particular, need multiple internal stakeholders to understand the business, get to know senior management, and support the acquisition, a process often at odds with a typical sale timeline.

Companies need to make a similar effort to pre-market to high-probability private equity firm candidates. Besides getting private equity firms up to speed on the business, meeting with private equity firms provides value to the selling company in additional, important ways:

Tailor messaging for strategic acquirers vs. private equity firms

Strategic acquirers and private equity firms evaluate potential transactions through a different lens. Each type of buyer requires somewhat different messaging to maximize interest in the selling company’s business.

Strategic acquirers are most interested in businesses with the following attributes:

Private equity firms are more focused on the following considerations:

Taking these steps to prepare for engaging both private equity firms and strategic acquirers provides a strong foundation for a future software M&A process. A follow up to this article will discuss how to manage private equity and strategic acquirers once a formal M&A sale process has kicked off.

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