Though it's easy to forget while staring at the multiples that companies such as Zoom, Datadog and Palantir trade at, there are still a lot of publicly-traded software firms out there sporting moderate valuations.
And for a few different reasons, it's easy to imagine a few or more of these companies getting acquired in the near future.
First, the large run-ups that so many high-growth software firms have seen this year give them a greater incentive to use their stock as currency. The Salesforce-Slack deal could be a sign of things to come in this respect.
Second, major private equity firms, which collectively have made quite a few software acquisitions in recent years, are still generally flush with cash. Ernst & Young estimated that PE funds had $853 billion in dry powder as of the end of Q3.
Third, the secular trends that have made software firms appealing to PE firms and other acquirers look as strong as ever. Software continues to steadily gain IT spending share, and (as this year's events have driven home) the industry's shift from license/maintenance revenue models towards subscription models has made business more predictable for a lot of firms, while also in some cases growing the amount of revenue they get from major clients over the long term.
In addition, a couple of things have happened over the last several days that perhaps point to healthy interest in software M&A.
On Sunday, PE firm Vista Equity, whose portfolio already includes a number of software companies, announced that it's buying Pluralsight (PS) , a moderately-valued provider of software for training and monitoring the work of IT pros, for $3.5 billion.
And a few days before that, Broadcom (AVGO) , which has made a couple of big acquisitions of moderately-priced software businesses in recent years, announced a management shakeup that fueled speculation the company is looking to do more software M&A. Mizuho analyst Vijay Rakesh noted that Tom Krause, who is stepping down as Broadcom's CFO to run its Infrastructure Software segment, has been closely involved with the company's M&A efforts to date.
Which types of software firms could be targeted? Here are a few areas to keep an eye on:
- On-premise software vendors. On the whole, companies whose software is often deployed in traditional enterprise environments sport lower multiples right now than cloud software vendors. Hyperconverged infrastructure software vendor Nutanix (NTNX) , which received a $750 million investment from Bain Capital in August, is one name that comes to mind here.
- Moderate-growth cloud software firms. Think companies such as talent management software firm Cornerstone OnDemand (CSOD) , survey software firm SurveyMonkey (SVMK) and cloud storage/file-sharing firms Box (BOX) and Dropbox (DBX) . The Information recently speculated Oracle could make a bid for Box or Dropbox. Box looks like more of a potential Oracle target to me given its enterprise focus, but Dropbox, which has an enterprise value below $9 billion and is aiming to produce $1 billion worth of free cash flow in 2024, could appeal to another buyer.
- Security software firms. Like software, security's share of IT spend has been steadily moving higher. And there are still a fair number of security software firms out there -- think names such as Proofpoint (PFPT) , Ping Identity (PING) , Tenable Software (TENB) and Mimecast (MIME) -- that don't have sky-high valuations.
