Jefferies: Strong M&A activity in software likely to continue in the near term

IGV, a major exchange-traded fund (ETF) that tracks the performance of the US software sector, has witnessed a challenging first half of 2024, gaining just 1%.

As a result, software has been broadly underperforming the semiconductor sector, which has surged 30% year-to-date.

According to Jefferies analysts, investors have been favoring semiconductors, where the benefits of artificial intelligence (AI) have been more apparent in financial metrics.

Despite the underperformance in the software sector, mergers and acquisitions (M&A) activity has rebounded significantly in 2024, surging by 238% year-to-date after a steep decline of 75% in 2023, Jefferies highlighted.

An exemplification of this trend is the recent acquisition of Squarespace by private equity firm Perima for $6.9 billion, which implies a next twelve months (NTM) revenue multiple of 5.5x.

Moreover, recent media reports have indicated that Bain Capital is strategically interested in acquiring PowerSchool Holdings at an enterprise value of $6 billion. This potential deal suggests a mid-20s share price and a 7x 2025 estimated revenue multiple, although neither company has publicly commented on these reports.

“We note that $59B of large Software M&A (greater than $1B EV) has been announced in ’24 YTD, 4 of those deals being strategic M&A and the remaining 4 being private equity take-outs,” analysts at Jefferies said in a note.

Citing their analysis of M&A activity in the software sector from January to May, dating back to 2018, the investment bank highlighted that 2024 has recorded the second-highest level of activity in the past seven years. This surge is only surpassed by 2022, which set a record for M&A in the sector.

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Looking ahead, analysts expect this uptrend “to continue in the near term as take-out multiples remain attractive.”

“We believe rebounding M&A should provide support to valuation near term,” they added.