The year 2023 saw an unprecedented decline of 61% in software M&A deal value compared to 2022, with Q4 2023 marking the lowest in disclosed deal value as well as volume since the depths of Q2 2020. The decline in number of M&A deals for the year was more modest at 20%. This led to 2023 being the third most active in terms of number of transactions in the last decade as the market shifted toward smaller, bolt-on deal activity. EMEA activity continued to grow to 66% relative to North American deal activity, which was up from 34% a decade ago. Some of the headwinds earlier in the year abated in Q4, most notably through stabilization in both interest rates and macroeconomic outlook. Although deal volumes have yet to recover, we are seeing a marked improvement in both deal pipeline and process engagement by buyers, which encourages us as we look forward to a more robust market in 2024.
Amid some of the toughest operating conditions experienced by software vendors, the focus on capital and operational efficiency that started in 2022 continued in 2023, as many businesses focused on cost cutting and internal housekeeping while standing on the sidelines of M&A activity. For some it also marked another year of postponing the day of reckoning on valuation reconciliation, as companies aim to grow back into valuation levels that were set in the heady fundraising days of 2021. Both of these factors contributed to a dearth of M&A opportunities for PE and strategic buyers, although intense competition and strong valuations continued for the highest quality assets that came to market.
Although risks remain front of mind for deal makers, there is no question that conditions today are more supportive for a healthy M&A market in software than a year ago. PE deals in 2023 have been constrained by the divergence in bid/ask spreads between buyers, which look at current credit market and future exit market conditions, and sellers, which look at recent, elevated valuation benchmarks. The passage of time has helped narrow this spread, leading to pent-up demand on both sides to get deal machine wheels spinning freely again. There are limits to how long dry powder can sit on the sidelines, and many deal makers expect to see more capital deployed in 2024 as these issues resolve. Strategic buyers have been supported by more buoyant public equity market conditions, seeing an increase of 13% in median public equity multiples over Q4 2023, and they have started to selectively engage in M&A processes. Investors are being reminded that growth is still the primary driver of value, and capital efficient growth vectors will be on the radar for many buyers during 2024.