Global Software Sector Update–Summer 2024

In this edition of Kroll's Global Software Sector Update—Summer 2024 update from Kroll, Kroll’s investment banking practice evaluate the deal activity, transactions and public markets during Q2 2024 as well as the outlook for the remainder of the year.

In, central banks largely delayed the expected reversal of interest rate hikes due to persistent inflation and ongoing economic resilience. This has subsequently postponed the anticipated increase in M&A deal activity. The quarter saw an 18% decrease in the number of deals compared to Q1, and a 35% drop in aggregate deal value, primarily due to the lack of any deals exceeding $10 billion. However, year-on-year data indicates an improving yet more concentrated market environment, with a strong 148% increase in deal value in H1 2024, despite a 22% decrease in the number of deals. Q2 stood out as the most active quarter for deals in the $1 billion–$10 billion EV segment over the past two years.

In the public markets, SaaS stocks surrendered some of their gains from the previous year, ending with a median EV/NTM revenue multiple of 4.7x on June 30, 2024, slightly down from 4.8x on June 30, 2023. The top quartile multiple was 7.9x EV/NTM revenue, compared to 8.6x the previous year. The only sectors that saw gains in Q2 were the more resilient, high revenue retention sectors of ERP and supply chain and vertical software, closely followed by the leading sectors from Q1, namely engineering software, business intelligence, analytics, and cybersecurity. IPO activity was relatively quiet in Q2.

Transaction multiples for both strategic and private equity buyers in the first half of 2024 have stabilized just above the 10-year median at around 4.5x EV/LTM revenues. However, this figure masks a high degree of market polarization, as the most sought-after assets continue to trade at double-digit revenue multiples in high conviction, pre-emptive processes, often to private equity buyers. As one GP recently stated, it is currently the best time to sell in over two years for the right SaaS business.

This situation, characterized by fierce competition for select assets, underscores the increasing eagerness among software investors and strategics to deploy capital, sometimes with all-equity financing and deal documentation being finalized in just a few days. While the announced and completed deal data does not yet indicate an improving market, it's worth noting that these are lagging rather than leading indicators. More forward-looking datapoints include an increase in deal preparation activity, which we and others in our network are observing. Given the rise in deal preparation activity, the summer months this year are expected to be busier than they have been for some time.