June 6, 2016 – Solganick & Co. has issued its latest monthly M&A updates for May in the software, IT services and digital media sectors.
Although the number and volume of deals tumbled in the first quarter of 2016, the second quarter has seen improvement in deal counts of software, IT services and digital media activities. The M&A market in May also demonstrates a promising trend, with significant merger and acquisition activities in these industry sectors. While the valuation in technology sector drops significantly, IT services remained in a similar valuation pattern as previous quarters, and improved from April to May. Digital media valuations are slightly down from last year as are software company valuations.
Responsible for much M&A deal activity in May were strategic buyers who are acquiring software companies to increase efficiency and acquire new verticals. In addition, customer care continued to materialize as a driver for deal activity this year. Part of this trend were Oracle’s acquisition of Opower and NICE Systems’ acquisition of inContact, which are discussed below. Overall, the Enterprise Software segment fared the best in May. Compared to multiples for April, revenue multiples for the software industry decreased in each segment except for the Enterprise Software segment. Nonetheless, EBITDA multiples increased modestly in each segment except the Security Software segment. Despite May’s slight slump, we expect deal activity—especially in customer care—to remain healthy.
The market valuation of IT services have also improved significantly in all sectors except the VAR sector. The offshore EV/Revenue has been improved the most from 2.77x (April) to 2.96x (May). The EV/EBITDA multiple has been improved from 12.88x to 13.78x,representing a significant jump in a single month. This further demonstrates the strong confidence in the IT service market.
M&A activity for the Digital Media and Marketing sector in the month of May continues to grow. Content and digital transformation strategies have driven M&A activity so far in 2016 with no signs of slowing down. The most dominant trend in the industry at the moment is the change in consumer purchase behavior. Consumer decision behavior continues to increase in complexity, meaning customers prefer multiple devices as well as high-value purchases, along with an immense increase in mobile use. Mobile Marketing will continue to be one of the key trends to follow for the remainder of 2016. As we near the halfway point of 2016, Digital Media and Marketing may again be the leading sectors for transactions, partially due to the “domino effect” where corporates that were inactive in 2015 seek to replicate peer deal success and related advantages.
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