UK Software M&A insights and forecast

Article

UK Software M&A insights and forecast

Jonathan Dunn
March 2019

Our analysis of 500 UK software acquisitions reveals new insights on the exit options for software business owners, why now is a good time to sell equity, and which niches are seeing the most M&A action.

What’s going on?

The £32bn UK software industry is currently growing at an estimated 10% a year – five times faster than the overall economy. However, some experts are predicting that will dip to around 7% from next year onwards as new segments begin to mature.

The big three drivers since 2012 have undoubtedly been largescale cloud migration, the popularity of SaaS applications, and accelerated investment in cybersecurity after a string of expensive high-profile breaches. Indeed, the £9bn SaaS market is growing at 18% a year, while cybersecurity is growing at 20%. 

Unsurprisingly, software investor sentiment has remained very positive – with no shortage of possible backers for application developers – however the emerging signs are that many segments are reaching saturation point as new entrants continue to pile in.

In 2018 alone, an extra 12,000 software firms started up in the UK – a 14% increase on the year before – and that doesn’t take account of overseas products and services competing remotely for UK business.

Take marketing technology (“martech”) for example. There are currently 5000 product choices globally, including well-known platforms such as Marketo and Hubspot. Today’s martech developers would need to consolidate by 85% just to get down to 1000 products. That’s a lot of M&A, but in reality it won’t all happen. Not everyone is worth buying or backing, and those big enough to acquire want to leave enough headroom for organic growth.

 

Who is buying who?

As the UK is the world’s fourth most active market for M&A – and software is one of the most acquisitive sectors – it’s fair to say that it’s always a good time to sell a software business.

However, there have been six recent market-wide changes worth noting:

  • TREND #1: Half the buyers are from overseas  – while 52% of UK software firms changing hands go to other homegrown firms, a remarkable 48% are sold to international acquirers. North American buyers and investors were behind 27% of UK software deals, compared to 15% sold to European buyers.
  • TREND #2: Non-tech firms acquiring software – from industrial conglomerates to B2B consultancies, non-tech firms are increasingly acquiring software businesses to accelerate their transformation.
  • TREND #3: Fintech is on fire – it’s now 10 years since fintech took off in response to the 2008 financial crisis and simultaneous advent of smartphones. Today, a UK fintech business is sold every two weeks, across the fintech spectrum of banking, payment processing, loans and investing.
  • TREND #4: Acquirers getting acquired – active serial UK acquirers are often targeted by even larger players. For example, property management software group QUBE acquired three BCMS client businesses before getting acquired by private-equity backed US group MRI Software.
  • TREND #5: It’s all about the vertical – the market size for vertical SaaS products has tripled in the last decade, and dominant niche players serving specific industries are in high demand, particularly in verticals with a fragmented customer base such as legal, insurance or education.
  • TREND #6: Unsolicited offers on the rise – with few retirement sales in software and private equity firms trying to find quality businesses to invest in, software business owners are increasingly being approached even when they are not ‘for sale’. This is flattering but is rarely the best way to maximise value at exit.  

What next for software M&A?

Software developers are the most sought-after of any business, according to BCMS’ proprietary acquirer database which is built on contact with more than 50,000 acquirers every year.

To date, uncertainty caused by Brexit negotiations have had very little impact on overseas appetite for UK software firms. With London’s position as the global leader in fintech, alongside emerging hubs from videogame design (Scotland) to software testing (Cambridge), there are very few market obstacles for software business owners wishing to exit or seek investment.

Unsolicited approaches are expected to intensify as proactive investors and serial acquirers draw up new target lists, and this is a good barometer for saleability and appetite.

Acquirers may value SaaS businesses on annual recurring revenue (ARR) rather than EBITDA multiples, so the most valuable targets in a crowded marketplace will be those with high growth and low customer churn.  

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Key takeaways for business owners

  • Beware of unsolicited approaches – higher offers are only generated by creating competing bidders
  • Business owners seeking an exit need to think globally to ensure they don’t miss out on half the available market. Overseas acquirers are critical
  • Size matters far less in software than with other sectors. 90% of software deals in the last two years were acquisitions with a transaction value below £5m.