Corum M&A transaction data gathered for 28 years clearly shows that M&A cycles track in close harmony to the broader stock market.  The reason for this is fairly simple.  When companies are doing well, they generate excess cash, and that incremental capital needs to be put to work.

Some companies will hold onto their treasure, often off-shore.  Others will spend it on staff, equipment and infrastructure.  The wise investors, though, will leverage the new capital to acquire game-changing IP, access to growth markets, or breakthrough expertise.

US market indices have continued to set new records this year, with the DOW breaking 16,000 in November (2013).  This suggests an underlying strength in US business and a reasonable indicator for growth of investable capital.  M&A activity has been the beneficiary of a strong market Q3/Q4 2013 and could remain strong into Q1 2014, but these toppy markets are reminiscent of Q4 1999.  Will they remain strong next year?

Hot markets do not last forever.  At some point, changing economics will produce a decline, and investors will quickly worry that the market has peaked.  When investors worry, they hold back on new investments, and M&A activity can slow dramatically as the window of opportunity closes.

I experienced the dramatic effect of a market window closure with a software company that I founded and ran for 13 years.  We delivered enterprise software in the project management space, grew explosively, and effectively owned our market within 5 years, hitting #50 on the Inc.500.   We put most of our competitors out of business and were the de facto standard in our space.

During these heady times, I attended a Corum ‘Selling Up, Selling Out’ workshop and became enthusiastic about preparing our company for an exit, but my co-founder disagreed.  The success was intoxicating, and there was a belief that, like Icarus, we could fly a little closer to the sun.  Unfortunately, a few years later, the market window had slammed shut as the dot-com bubble burst, and we lost very significant market value that we never recovered.

If you are a software CEO, hitting on all cylinders and accumulating market share, you may be an excellent candidate for an M&A exit at peak of market.  The window is wide open at the moment, but don’t wait too long to look through that window.  Capitalize on your good fortune, and at least explore a transaction.  Opportunities like these do not last forever.