We predict that 2010 will likely be one of the most active years for Canadian Software M&A in many years for a number of reasons.
On the Supply Side - Firstly, many companies that might have sought suitors in 2009 have held off for better valuations. Those valuations have arrived. Secondly, many VC-backed companies are nearing the end of their tolerance period and the VCs need to provide liquidity to their LPs. Further on the VC side, the lack of additional capital in Canada means that some companies that needed more rounds of financing to make growth targets will be unable to raise the money and seek acquisition instead. Although the recent federal budget decision to ease American VC entry into Canada sounds good, most Canadian software companies need too little capital to attract the larger American players. The flat recovery predicted over the next few years also suggests that companies who were forecasting 50% CAGR in years past will likely be looking at much slower growth, prompting shareholders to wonder whether the wait (and risk) will be worth it or maybe take advantage of better valuations now and exit. (Software entrepreneurs are famously optimistic and I fear that the anticipated growth will likely not be met.)
Another reality is that many Baby-Boomer CEOs and shareholders are simply tired and want to cash in. While the IPO markets are open for software companies (after a long time closed), regulatory costs and softness in the micro-cap markets (where most Canadian software companies would start) dont make this option too attractive for most. In a recent report, less than 7% of respondents are considering IPO.
On the Demand side very simply buyers are buying. In spaces like Mobile, Healthcare and Infrastructure especially, there is a land grab as Strategic buyers try to own new territory and grab new technology including patents which are becoming relevant in the software industry again (just ask i4i). Also, I think that buyers are getting smarter at integrating smaller deals. The Harvard Business Review studies of years ago, showing that 70% of acquisitions fail, have been processed and buyers are smarter. Although most deals are never disclosed, we see some buyers doing almost a deal a week. Finally, Private Equity firms are flush with cash hundreds of billions - and they are looking to deploy.
Are you ready?