(Bloomberg) — Merger investors expect healthy deal flow to extend into the second quarter, especially in software, as buyers remain hungry and valuations are attractive.
It’s already playing out. CDK Global Inc., which was named among potential takeover targets in a Bloomberg News survey of 20 event-driven trading desks, fund managers and analysts, was acquired Thursday morning. Zendesk Inc. also was popular software name on the list.
Kohl’s Corp. was named by survey participants as the most likely company to complete a deal over the next three months. The retailer is already working with potential bidders amid a push by activist investors to explore strategic options.
The mergers and acquisition market in the U.S. is off to a decent start this year against the uncertain backdrop of rising rates, soaring inflation and the war in Ukraine. The total value of pending and completed deals announced in the first three months of 2022 reached $414 billion, according to Bloomberg data. That’s the best first quarter performance in the past five years, though the pace will have to quicken considerably for the rest of the year to approach 2021’s record run.
“There are many opportunistic dealmakers and activists pushing companies to explore a sale or bidding for the companies themselves,” said Tyler Silver, a partner at New York-based investment firm Apex Capital. “Acquisitive big tech and private equity firms with loads of cash will help. Some PEs just have an unlimited appetite for deals.”
Software Sweet Spot
Small to mid-sized software companies are in the sweet spot for consolidation, according to the survey respondents. Merger investors are optimistic that cash-rich strategic and financial buyers will want to take advantage of cheaper valuations caused by the recent tech selloff. The S&P 500 Software Industry index is down more than 10% this year compared with a 5% decline in the S&P 500 Index and a 9% drop in the Nasdaq 100 Index.
Seven out of 20 survey respondents saw a takeover of Zendesk as likely after the company scrapped its acquisition of Momentive Global Inc. and a group of private equity firms was said to line up loan for a refreshed buyout offer. The issue will be price since Zendesk already rejected a bid between $127 and $132 because it was too low. Zendesk closed at $122.58 on Wednesday, down from its February 2021 record high of $158. In addition, two people surveyed said they expect Momentive to also return to the M&A spotlight.
CDK Global was the third most mentioned company in the poll, which was conducted from March 28 to April 1. On Thursday, Brookfield Business Partners announced a $6.4 billion all-cash deal to acquire the auto dealer software provider. Five9 Inc., which in September scrapped its planned sale to Zoom Video Communications Inc., also appeared on the list.
Representatives for Kohl’s, Zendesk, CDX Global and Momentive did not respond to requests for comment.
In addition, Wall street analysts flagged a list of software names to watch after PE firm Thoma Bravo in March announced plans to buy cloud-based software maker Anaplan Inc. for $10.7 billion. Mizuho analyst Jordan Klein touted battered stocks like Datto Holding Corp. and Appian Corp., while Bloomberg intelligence’s Anurag Rana pointed to C3.ai Inc. and Elastic NV among the potential targets with cratering valuations.
“The tech, and software in particular, space should continue to be a favorite given the need for increased productivity and cost cutting in the context of supply chain issues, among other things,” said Frederic Boucher, a risk-arbitrage analyst at Susquehanna International Group. He added that private equity firms still have plenty of dry powder at their disposal.
To be sure, whether financial buyers pick up the dealmaking pace also depends on the debt markets. Their choppy performance this year has stirred fears about potentially cooling private equity buyouts.
Meanwhile, big tech players with strong balance sheets remain another source of transactions. However, they might grow cautious with any deals that could get caught in the crosshairs of antitrust regulators, survey respondents said.
Related: Megacaps With $600 Billion of Cash Have Fuel for M&A: Tech Watch
M&A desks in U.S. are closely watching the evolving regulatory environment, which has been a constant concern. At the moment, their eyes are on UnitedHealth Group Inc.’s pending acquisition of Change Healthcare Inc. The pair just extended their agreement as they wait to litigate the Department of Justice’s suit to block their merger plan.
Related: Deal Market’s Regulatory Worries Deepen Amid Boom: M&A Survey
To Aaron Glick, a merger-arb specialist at Cowen & Co., this is an important demonstration of how willing some buyers are to defend their acquisitions in court.
“Companies that entered into deals this year went in eyes-wide-open knowing that the odds of litigation were higher than they had been in prior administrations,” said “Still, each situation is unique.”
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