High valuations and more M&A in European Software - EY-Parthenon and TMT Finance report

A scarcity of quality assets and continuing abundance of dry power will propell valuations to new heights, say European software leaders and investors.  

Senior software leaders, investors and advisers are expecting an even busier year ahead of deals with a scarcity of quality assets and continuing abundance of dry power propelling valuations to new heights, according to a new Leadership Survey Report jointly produced by EY-Parthenon and TMT Finance.

In H2 2021, TMT Finance, on behalf of EY-Parthenon, surveyed 50 senior executives on the topic of value creation and investing in European software and found that 57% of advisory respondents expected deal volume to increase by 15% or more with 80% of investor respondents expecting it to increase by 5%. Only 10% of advisory respondents felt that there would be any kind of decrease in 2022.

Key findings from the report – which you can download here – include:

  • Cybersecurity, ER, and AI & Analytics highlighted as leading Subsectors for M&A growth
  • US investors continue to ramp up focus on European Software
  • European Software businesses continue to offer "significant discount" on similar US companies , attracting large US buyers and investors
  • Consolidation of highly fragmented European software space tipped be a continued battleground for M&A
  • Software holding companies are building up an acquisitive European portfolios in multiple sectors
  • Valuation multiples of European Software business expected to continue to grow by 15% or more as international buyers increase
  • Find out post-acquisition priorities from leading Software investors and buyers

All respondents agreed there would be more buyouts and minority investment deals with advisory respondents identifying Special Purpose Acquisition Company (SPAC) mergers as becoming more popular as assets mature.

The overall feedback was also that increasing interest, particularly from the US, and a lack of available good quality targets would mean that valuation multiples would not fall over the next 24 months with 42% of advisors saying they would increase, 30% stay the same and 27% pointing to a decrease. Investors and advisors agreed valuations were too high while industry respondents said they were too low.

Advisory respondents said strategic clients generally put proprietary software and existing product synergies ahead of high recurring revenues and high customer retention rates though advisors themselves cited these second and third factors as among their main risk concerns. Industry respondents by contrast worried about a lack of sustained growth and the knock-on effects from COVID-19 while investors pointed to overpayment and cybersecurity breaches.

While all respondents pointed to Artificial Intelligence & Analytics and Enterprise Resource Planning (ERP) software as the main areas likely to see activity over the coming years, ERP software is also seen as a riskier subsector because the unbundling of offerings is reducing the prevalence of full-suite buying. Respondents also felt financial downturns could leave the financial software sector exposed while professional services are also at risk from the increasing impact of automation.

To read the full report click here.