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A significant downturn in the software industry is beginning to hinder deal-making and initial public offerings (IPOs), as professionals grapple with increased volatility and uncertain valuations. Over the past week, the S&P 500 software and services index experienced its most severe three-month decline since May 2002, with a notable 25 per cent drop from its peak last October. Financial experts suggest that this slump is prompting caution among potential buyers and sellers alike.
Market Volatility Fuels Hesitance
The recent decline in software stock prices has disrupted the typical valuation benchmarks that guide mergers and acquisitions. With revenue multiples fluctuating dramatically, both buyers and sellers find it challenging to agree on fair prices. Vincenzo La Ruffa, managing partner at private equity firm Aquiline Capital Partners, explained, “Some people can’t afford to sell on the way down,” highlighting the reluctance among sellers to engage in transactions at what they perceive as rock-bottom prices.
Investors are increasingly trading with trepidation, as Wally Cheng, head of global technology M&A at Morgan Stanley, noted. “Everything’s down and there really hasn’t been a very thoughtful, detail-oriented approach to sorting through who the winners and losers are,” he stated. This environment leads to difficulties in determining accurate company valuations, resulting in a disconnect between what buyers are willing to pay and what sellers expect to receive.
Notable Consequences for Recent Deals
The repercussions of this market turmoil are becoming evident in ongoing financial transactions. For instance, fintech firm Brex, which secured funding at a valuation exceeding US$12 billion last October, sold to Capital One for around US$5.15 billion last month. Similarly, OneStream, which went public in July 2024 near a US$6 billion valuation, saw its worth drop to approximately US$4.6 billion shortly after, prompting speculation about a potential return to private ownership.
Mike Boyd, the global head of M&A at CIBC in Canada, emphasised the challenges faced during negotiations in such a volatile market. La Ruffa predicts that the coming weeks will see numerous deals faltering or being repriced, stating, “We will see more assets not trade than reprice.”
The Broader Impact on IPOs
The chilling effect of the software sector’s decline is particularly pronounced for upcoming IPOs. Liftoff Mobile, backed by Blackstone, has opted to delay its listing plans due to current market conditions. Furthermore, reports suggest that Norwegian software firm Visma may postpone its anticipated US$20 billion listing in London, further illustrating the hesitance sweeping the sector.
Morgan Stanley has cautioned that the turbulence could extend into private credit markets, where software companies constitute approximately 16 per cent of the US$1.5 trillion loan market. Jon Gray, president of Blackstone, recently shared insights on how AI disruption has prompted a thorough review of their portfolio risks, underscoring the pervasive anxiety surrounding AI’s impact on the industry.
Contrasting Perspectives Among Investors
Despite the prevailing pessimism, some industry leaders advocate for a more measured view. Robert Smith, founder of Vista Equity Partners, reassured investors that AI will “enhance software, not replace it,” attributing the current volatility to sentiment rather than underlying performance. Similarly, Goldman Sachs CEO David Solomon cautioned against overreaction, asserting that while challenges exist, numerous companies will navigate these waters effectively.
In a twist of fortune, Eliasek from Jefferies has reported an influx of interest from private equity partners seeking to invest in software businesses, signalling that some investors perceive this downturn as an opportunity. “Bring us your best ideas,” he relayed, indicating a readiness to capitalise on potential bargains.
Why it Matters
The current turmoil in the software sector is more than just a market fluctuation; it reflects broader uncertainties about technology’s future and the impact of artificial intelligence. As valuations fluctuate and investor sentiment shifts, the implications for deal-making, IPOs, and the overall economy are profound. Understanding these dynamics will be crucial for stakeholders as they navigate a landscape marked by both risk and opportunity.
