When Microsoft agreed to acquire LinkedIn earlier this week for $26.2 billion, it prompted speculation that the software market might finally be waking from its long M&A dormancy. But I don’t think this was the right way to think about it. Instead, Microsoft (MSFT) buying LinkedIn (LNKD) should have been viewed as confirmation that software deal-making is back.
Just hours earlier, Symantec (SYMC) had agreed to pay $4.65 billion to purchase Blue Coat Systems, a private equity-owned cybersecurity provider that had been planning to go public. The previous week, Salesforce (CRM) had agreed to buy Demandware (DWRE) for $2.8 billion. And then there was Vista Equity Partners recently agreeing to snap up both Marketo (MKTO) for $1.8 billion and Ping Identity for an undisclosed amount.
If three makes a trend, then Microsoft-LinkedIn is just part of something that has already been established.
So what has changed? In short, prices.
Over the past several years, acquisition targets have just been too damn expensive. Publicly-traded software companies―particularly if their marketing materials emphasized “the cloud”―were trading at absurd price-to-earnings (P/E) ratios. Well, except for all of those that didn’t even have the E; in which case they were just considered overpriced in comparison to common sense. In the private markets, many entrepreneurs believed that there would be an endless supply of capital at ever-higher valuations.
Recently, however, a lot of software company prices have begun to come down. For example, Microsoft is paying less per share for LinkedIn than where LinkedIn was trading on February 1, and a whopping $70 per share less than where it was trading at one point in February 2015. Demandware was taken out for nearly the exact same price as where it was trading last July, after falling by over 60% as of this past February (it had since recovered a bit before the Salesforce news). Marketo also lost over half its value between last summer and this past spring, and is selling to Vista Equity for less than where its stock was trading back in 2014.
And since the private markets tend to follow the public markets, we’ve also finally begun to see ‘down rounds’ for later-stage tech startups (or complex debt financings designed to avoid the ‘down round’ stigma).
At the same time, big tech acquirers and private equity firms are still sitting on heaps of cash. A big supply/demand issue in M&A is that no one wants to buy at the perceived top of a cycle, and no one wants to sell at a perceived bottom. Right now, however, it seems that both sides believe the current environment represents and acceptable compromise.
Consider it the tenuous middle ground between bargain bin and sticker prices. So as long as it holds, many more deals will get done.