Dive Brief:
- M&A transactions are on the rise in the enterprise software sector of the IT market, according to a new report from global investment bank Drake Star.
- The sector saw 50 deals take place in 2021, up from 41 and 37 in the two previous years. M&A deals in 2022 are on pace to match or surpass last year's total.
- While infrastructure management software accounted for the largest share of M&A activity between 2019 and 2021, DevOps accounted for the largest share of M&A activity in 2022.
Dive Insight:
Enterprise IT spending has so far weathered the combined forces of high inflation, slowing growth and geopolitical instability this year. M&A activity in the enterprise IT sector has also continued to thrive, despite gloomy economic forecasts.
Several high-profile, big-dollar deals in the first half of the year provided a major numbers boost.
Total M&A activity has already reached $104.7 billion this year, led by TIBCO’s leveraged buyout of cloud and SaaS provider Citrix Systems for $13.8 billion in January. Broadcom's May acquisition of cloud and virtualization tech company VMware for $61.0 billion, and the approval by Zendesk shareholders of a $10.2 billion private equity takeover of the SaaS products company on Sept. 19 were two of the year's other blockbuster deals.
The dollar value so far this year nearly quadruples the combined value of the three preceding years, according to Drake Star.
“Usually in a downturn, blockbuster quality $10 billion-plus deals dry up and you're left with a steady stream of small- and mid-market private deals,” said James Turino, managing partner and co-founder of Drake Star. “What’s interesting is that we’ve had a couple of these larger deals, which you could argue have been sparked by the [economic] downturn.”
The pace of cloud migration has pushed large tech companies to accelerate new product deployments at a time when there are numerous younger, smaller companies innovating in the enterprise IT space, Turino said. Given the right conditions, M&A provides a faster, cheaper way to remain competitive.
“It's a lot more efficient for these big companies to acquire a private business than to try to go out and build something internally,” Turino said.
Databricks is a case in point. The software company has taken a more aggressive M&A stance since the economic slowdown started, Ali Ghodsi, CEO and co-founder of Databricks, said during the Wall Street Journal’s CIO Network Summit on Sept. 20.
Investment in startups had been strong until recession concerns began surfacing early in the year.
With VC investments shrinking, Databricks sees an opportunity to onboard the innovative capacity of smaller, cash-strapped companies, especially in cyber, data, and automation, said Ghodsi. “These are areas where we spend a lot of energy looking at innovations that we could tap into and help a company that maybe needs a new home.”
DevOps, infrastructure, and IT service management applications are the three categories of companies Drake Star classifies as IT Tech, and all three have shown deal volume rise in tandem with modernization. Companies are adopting cloud technologies, updating legacy systems and onboarding new IT systems, leading to increased system complexity and cost concerns.
“There are control of cost, control of security and control of infrastructure issues that CIOs are grappling with, but cloud is just too attractive to pass up on in the long run,” Turino said. “It’s a huge transformation and it’s driven a lot of M&A.”
Correction: This article has been updated to reflect Broadcom’s acquisition of VMware is valued at $61 billion.
