As new software solutions expand into all areas of the economy, tech continues to fuel mid-market mergers and acquisitions, and is expected to soar in 2017. Much of this activity is being driven by tech firms that are leveraging SaaS models to reduce costs, speed delivery to market and better manage updates for customers.
Rich Lawson, CEO of mid-market private equity firm HGGC, told Mergers & Acquisitions that as technology is “invading every end market,” companies are growing increasingly competitive. SaaS models allow companies and their clients to work through the cloud and offer service from a single platform. These models are more efficient than old models of software licensing and allow for easier installation, deployment and updates.
And while they save end users by not requiring as much hardware, they also can be more profitable for companies, since the subscription-based model delivers a recurring revenue stream. Lawson says the increasing competition and widespread use of such software solutions on so many levels is significantly increasing demand for such products.
“What’s changed is the proliferation of a computer in everyone’s pocket. There’s a much more sophisticated end-user base, and that is driving change in how businesses will have to compete,” said Lawson.
Scott Kupor, managing partner at Andreessen Horowitz, told Business Insider that SaaS rids the industry of the “versioning debt problem” by shifting the onus from the customer to the vendor. And instead of sitting on the shelf unused as which happens with many on-premise softwares, SaaS products are actually used. Kupor said these SaaS companies can grow rapidly because their success is directly tied to the success of their customers. He said it also reduces a barrier to M&A activities relative to traditional on-premise solutions, by making change of ownership and acquisition easy. “There’s no better example of an alignment in incentives that ensures SaaS M&A would be more successful in the long run,” said Kupor.
2016 was a big year for tech acquisitions with companies like Microsoft and Oracle buying mid-market SaaS firms at a rapid pace. Private equity firms also have been racing to acquire tech companies that are using cloud computing and SaaS to address cybersecurity.
Mergers & Acquisitions’ Mid-Market Pulse report said that M&A in the technology, media and telecommunications sector will “soar” over the next year as companies in a wide array of industries leverage software to improve efficiencies and reduce the risk of cyberattacks. The Pulse report surveyed 250 mid-market M&A professionals and found that, as organizations seek to better manage and analyze data, they’re raising the value of tech companies. Respondents also predict that lower corporate taxes, as promised by the Republican-controlled federal government, will translate into lower corporate taxes and fewer regulations, which could fuel M&A in general.
Morgan Stanley telecom analyst Simon Flannery told Fortune that we can expected “a prolonged period of M&A activity given the more benign regulatory outlook.”