Software M&A
Valuations Suck
I have not written much about Software/Fintech/Info Services M&A over the past few years as everything has been overvalued in my view since 2021.
The day will come when U.S. Treasuries are less sought out and therefore will command a higher yield (I’m thinking of the 10-year in particular). Higher long bond yields will force risk asset valuations lower. We will get a glimpse as to how much demand there is for long bonds when Treasury issues $1-2 Trillion in debt this fall to plug the fiscal deficit. Long bond yields could rise as Powell lowers yields at the short end of the yield curve.
CEOs ought to be patient and have the courage to sit out the M&A game until valuations come in - no matter how long it takes, if ever.
Valuations are at historically high multiples, so why play the M&A game? Bragging rights? History will paint you a fool if you pay 75x EBITDA only for valuations to fall by 40-50% over the next number of months.
Instead of chasing shiny new objects, M&A teams ought to opportunistically look for strategic, under-the-radar, tuck-in acquisitions. Assets outside of the U.S. - especially non-U.S. private companies - carry discount valuations to public and private companies based here in the U.S., especially those U.S. companies that are venture or PE-backed. Get to know those companies. Get on a plane and fly to western Europe, eastern Europe and Australia. Go find the diamond in the rough.