Home > Technology > A Slew of Software Firms Went Private in 2021. Here Are 2022 Buyout Targets. – Barron’s

A Slew of Software Firms Went Private in 2021. Here Are 2022 Buyout Targets. – Barron’s

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Private equity firms have been aggressively shopping for mid-sized enterprise software companies to buy. And the recent sell-off in the group could trigger a buying spree in 2022.

That’s the view from Baird research analyst Rob Oliver. In a research note Wednesday, he notes that deal activity in the software sector hit new records in 2021, and he expects further acceleration in the buyout market in 2022. 

“Given the underperformance of public software stocks over the past year amidst favorable underlying demand trends, a greater number of ideas are closing in on conditions/attributes that have garnered PE buyout interest in the past,” he writes. 

Since 2012, he reports, there have been more than 40 acquisitions of public software companies, with typical deal sizes in the $3 billion to $4 billion range, with an average premium of about 35% to pre-announcement levels.

Oliver says targets have generally been companies underperforming the S&P 500 by 5 to 10 percentage points in the trailing 12 months before the deal, with valuations on a multiple of sales basis 40% below the stocks in the iShares Expanded Tech-Software Sector ETF (ticker: IGV).

Targets generally were trading at three- to four-times the next 12 months’ revenue, with on average 10% anticipated forward revenue growth and positive Ebitda margins. He notes that since 2019, the average deal size has increased to the $4 billion to $5 billion range, with valuations inching up to between four- and five-times forward revenue.

The list of public software companies to reach go-private deals in 2021 includes Mimecast, McAfee, Innovalon, Cornerstone OnDemand, Medallia, Stamps.com, QAD, Cloudera, Proofpoint and Talend.         

Oliver in his note breaks down a list of potential future targets by sector.

In the software-as-a-service segment, he finds that Citrix (CTXS) screens as the top private equity target. Late last year, in fact, there were reports that Elliott Investment Management and Vista Equity Partners were considering a joint bid for Citrix. Elliott, an activist investment firm, was previously reported to have acquired a 10% stake in the company.

“We view Citrix’s solid portfolio of assets as potentially attractive for PE or a strategic buyer,” Oliver writes. He adds that other SaaS names that could draw buyout interest include PagerDuty (PD), which does IT incident response software, and BlackLine (BL), which sells financial accounting software. He says that both companies are “too good…to trade where they are.”

With the recent selloff in the group, he sees some additional potential buyout targets in the cloud sector. He cites ZenDesk (ZD) and Amdocs (DOX) as companies with strong free cash flow that could attract interest, as well as Bandwidth (BAND), Everbridge (EVBG) and ShotSpotter (SSTI).

In the security and infrastructure segments, Oliver points to Qualys (QLYS) and Splunk (SPLK) as potential targets. (Though he notes that in Splunk’s case it would be a bigger deal with a current market cap of about $19 billion.)

Oliver writres that there has been an active market among private equity buyers for vertical market focused enterprise software, pointing to recent deals for Bottomline Technologies (EPAY) in banking, QAD in manufacturing software, RealPage in real estate and Majesco in insurance, all acquired by Thoma Bravo.

The analyst sees multiple potential targets in this area, including Q2 Holdings (QTWO) in banking, Instructure (INST) and PowerSchool (PWC) in education, Phreesia (PHR) in health care, Model N (MODN) in life sciences and Latch (LTCH) in commercial real estate.

Write to Eric J. Savitz at eric.savitz@barrons.com