Piper Jaffray Technology Investment Banking

The Art to Managing Your Software M&A Sale Process

Part II of our advice on how to optimize a sell-side process 

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

Key Takeaways

The market for well-performing software companies is very strong – this is a great sellers’ market for companies with truly differentiated market positioning, strong financials and unit economics. Both strategic acquirers and private equity firms have excessive amounts of capital to deploy into the software market.

However, the process management challenges facing selling companies have also never been greater. The previous Tech Insights article discussed the rise of private equity in software M&A and how selling companies should prepare for an M&A process with both strategic acquirers and private equity firms in the mix. However, creating and maintaining a competitive process aligning both of these constituencies is often a challenge. This article follows up on the previous one by discussing the means for managing such sale processes effectively.

Highly motivated, well-capitalized strategic buyers have the ability to clear the market in a sale process – getting these buyers motivated is critical for a successful process. M&A functions within these organizations are often under-resourced and stretched between managing partnering opportunities, pursuing tactical tuck-in M&A transactions, and evaluating truly strategic M&A transactions. Given these competing demands, getting the timing of a sale process right is vital for generating strategic interest. Ideally, a selling company’s product offering should match a critical "buy" priority for multiple acquirers to maximize buyer engagement.

Private equity firms have become an increasingly competitive alternative to the strategic buyer. PE firms are generally much more responsive and nimbler than strategic buyers. When armed with strong conviction in their investment thesis, these firms have demonstrated the ability to top the market in terms of value, terms and conditions and speed of close. Therefore, investing time and effort in bringing private equity firms into an M&A sale process has meaningful potential to increase competitive tension. However, private equity firms are sophisticated in exploiting weakness in a seller’s position, often have numerous concurrent investment opportunities they are pursuing, and may stipulate financing conditions on a deal, all of which can cause complications when it comes time to close the transaction.

Below are three particularly important areas of consideration in running a deal process in today’s complex environment.

Deciding when to launch a formal sale process

Absent the receipt of an inbound bid from a strategic acquirer, deciding when to launch a formal M&A sale process is always an artful exercise. In any process, considerations include:

Strategic buyers are a "must seek" relationship for selling software companies, worthy of building well in advance of a sale. While a few software companies are aggressively identified and courted by large strategic buyers, most sellers will need to be pro-active and artful in generating interest in their company. Sellers should ideally launch a sale process when they believe they have achieved one or more of the following objectives: