UK Software development - Buyer profiles for M&A activity

Article

Who’s buying UK software firms?

Jonathan Dunn
March 2019

Take a moment to learn about the different types of acquirers in the UK software industry, including what they want out of an acquisition. We also explain why a choice of buyers is essential to give vendors the exit they want.

Even if you are years away from selling any stake in your software business, it’s critical to understand the different deal types on offer and understand what drives acquirers to buy a business like yours.

If the owner has appointed a reputable corporate finance advisor, there is no reason why a good quality software business will not receive multiple offers – ideally from a mix of overseas acquirers, private equity investors, firms chasing the same customer base, or wealthy entrepreneurs.

Based on analysis of 500 software deals, we have profiled some common buyer types to help business owners navigate the world of M&A.

Trade acquirer

A trade acquirer buys other companies to capture synergies so that the whole becomes greater than the sum of its parts. These acquirers are interested in doing deals that offer long-term value creation for both parties, and responsible for 90% of M&A activity in the software industry. However, there are a few variants to be aware of, as shown below.

BCMS INSIGHT: Very acquisitive software buyers usually have a strong onboarding process to integrate the new business unit.

Competitive acquirer

It is extremely rare for competitors to offer the best price or terms to make a deal palatable for vendor shareholders. Our study of 500 software acquisitions shows that business sales to competitors tend to be restricted to distress sales for videogame developers – often when a new launch fails to match the financial forecast.

Complementary acquirer

Complementary buyers do not directly compete with acquisition targets but may share a similar customer base in a related industry or offer the same solution in other countries. These are by far the most common buyer in the software industry – responsible for around 70% of all software acquisitions – and are more likely to pay a premium.

Private equity acquirer

Private equity (PE) funds have become a mainstay of the software acquisition landscape and were responsible for one in 10 deals over the last two years. PE deals tend to take two forms – backing a management buyout, or providing growth capital to fund expansion in return for a majority equity stake. Commonly, the PE investor will also bring in a chairman or non-executive director to bolster the management team and introduce the firm to new prospects.

BCMS INSIGHT: PE acquirers are medium-term investors, commonly looking for a quick return over 3-5 years, using tactics to accelerate growth including sales and marketing, product development, new territories and bolt-on acquisitions.

PE-backed acquirer

Private equity is also influential in growing portfolio companies via acquisition, which is very common across the software industry. Strategies vary around whether the investor is “hands-on” and “hands-off”. Hands-on investors tend to identify target companies to bolt on to their initial portfolio company, whereas in the latter case the management assesses acquisition opportunities.

Software acquirer profiles

More than 300 businesses bought UK software developers between 2017-18, with the majority completing just one acquisition. This suggests that exiting shareholders need an advisor who will search far and wide to find the right buyer, along with a track record in the sector.

Beyond these, serial acquirers have also been building market share in their chosen niches via M&A, and it is worth taking a moment to appreciate their underlying acquisition strategies.    

CIVICA GROUP (UK)
Investor:
Partners Group

Private equity-backed Civica has been a consistent acquirer in business software, snapping up 20 firms in the 11 years since it was spun out of Sanderson Group in a £190m deal. In the UK, suitable targets tend to have a public sector-dominated client base, with recent deals including HRM SaaS Carval, case management systems developer iCasework, electoral management software group ERS, and school catering payment software firm NRS. The latter deal was advised by BCMS, who also acted for CRM specialist Asidua on its sale to Civica in 2014. 

IRIS SOFTWARE GROUP (UK)
Investor:
HG Capital/Intermediate Capital

Accounting software specialist IRIS – backed by private equity since 2004 – has in recent years diversified into education with several interesting M&A moves.

In less than three years, IRIS has become the UK market leader in school finance and communication solutions. After its 2016 acquisition of PS Financials, a leading developer of invoicing and communication solutions to academy schools, IRIS bought school-parent messaging app developer Results Squared in 2017 in a BCMS-led deal, closely followed by the purchase of another messaging app Parentmail and rival Contact Group.

ADDNODE GROUP (SWEDEN)
Investor:
Stock market shareholders  

Stockholm’s Addnode has acquired 13 value-added resellers (VARs) in design and engineering software over the last three years, including three UK businesses since the country voted to leave the EU. 

Two significant UK acquisitions include the purchases of Dassault VARs Intrinsys of Milton Keynes – led by BCMS – along with SSA of Oxford. Both have been integrated into Addnode’s PLM division alongside earlier German and Swedish counterparts to become the worldwide #1 in this field.

However, it has also acquired VARs in architecture and facilities management, demonstrating that complementary acquisitions are far more common than buying direct competitors.

MRI SOFTWARE
Investors:
n/a

Privately held Ohio group MRI Software is taking the property management software market by storm, pursuing an “aggressive” strategy – including four UK acquisitions in 18 months – to become the world leader.

MRI is focused on white label apps and platforms for multi-site letting and estate agents to connect landlords, tenants and vendors, and boasts 9500 customers in 170 countries. Of its four UK acquisitions since 2017, the takeover of Qube Global Software has been a gamechanger.

Qube itself had been acquisitive in recent years, including the purchase of BCMS client Aspasia in 2012. Today, Qube has been rebranded as MRI Software.

Other proptech firms joining the MRI stable were lease tracking developer Real Asset Management, residential management SaaS tool Thesaurus Technology, and apartment block management solutions provider CML Software.

BCMS INSIGHT: BCMS has a strong track record in selling to prolific acquirers as well as first-time buyers.

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Key takeaways

  • Overseas acquirers remain very interested in UK software targets
  • It’s not all about IP - your customer base may be just as attractive to an acquisitive firm
  • Although they may show early interest if approached, competitors rarely end up buying rivals
  • Watch: Why software entrepreneur Darren Cairns decided to sell