The sub-prime mortgage meltdown effects software M&A both directly and indirectly. If buyout debt is expensive or unavailable to buyout firms that rely on leverage, then valuations will go up or deals will evaporate. The busted First Data buyout is an example of a leveraged deal that fell apart when lenders balked at proposed terms. Several other large unannounced transactions were shelved as credit tightened. The collapse of deals like that has a lot to do with the market correcting itself after a huge run-up in debt multiples.
Anecdotally, several PE firms that we worked with in the first half of 2007 have told us that valuations would be roughly 20% lower in today's climate. Busted deals and lower valuations are symptoms of tightening credit and implicate the broader market rather than the consumer mortgage market, but consumer mortgages were the straw that broke the camel's back.
A secondary effect of the sub-prime meltdown will come into play as the battered consumer cries uncle and declines to buy more stuff. Over 100,000 workers in the home building trade have been laid off. Housing prices are in decline. The bar for home equity loans has been raised, even as appetite has diminished. We can expect regulatory intervention aimed at raising the jumbo threshold (which will have the unintended consequences of raising mortgage rates for low end buyers who are most in need of relief), and financial assistance to those on danger of foreclosure. Will these measures be enough to sustain consumer spending, which ultimately sustains corporate growth and confidence, which in turn helps drive risk-taking behaviors such as M&A? Time will tell.
Meanwhile, awash in bad news about credit, fuel prices, war and recession, we are having one of our best quarters since early 2007. The market is active, companies are preparing for M&A in near record numbers and deals are getting done. If we learn anything from the lessons of 2000, it is that we should run as fast as we can while the track is clear, because it won't last forever.
A version of this article originally appeared in Soft•letter and Software Success.