Home Deals Cyber security can make or break mergers: study

Cyber security can make or break mergers: study

Cyber security concerns rank high on the list when corporates and private equity firms consider mergers and acquisitions of software companies, according to a survey conducted by the legal firm West Monroe Partners and Mergermarket, an intelligence tool used for tracking mergers and acquisitions.

More than half the respondents (52%) in the survey said they had discovered a cyber security problem after closure of a deal. And cyber security was the second most frequent reason why deals were abandoned, or why buyers regretted going through with an acquisition.

The survey was carried out in the first quarter of 2017 and covered 100 senior global executives who were quizzed about the appetite, strategy, and processes for software M&A transactions.

The regions covered were North America (80%) and EMEA (20%), and the respondents were divided among corporate executives (40%) and private equity executives (60%). Every company involved has bought at least one software firm in the last three years.

Corporate respondents were split: 43% were from firms with up to US$250 million in annual revenue; 18% from firms with annual revenue between US$251 million and US$500 million; 13% between US$501 million and US$1 billion; and 25% between US$1 billion and US$3 billion.

The survey predicted that the buying momentum seen in 2016 would continue this year, with 57% of those surveyed planning to buy or merge with three or four software firms in the next two years. The appetite for expansion was much stronger among private equity players with 78% expecting two to four acquisitions and 13% expecting five deals or more.

Buyers were found to be concentrating more on the right target rather than paying the right price. More respondents (38%) said the right target was defined by technical factors, followed by those (37%) who considered operational factors, with those looking solely at price (25%) somewhat less in number.

While 82% of the study respondents said they would look at buying mature targets - companies that had been business for at least four years - 52% looked primarily at older targets. Looked at by buyer type, private equity firms (59%) preferred to buy software companies that were four or more years old, while corporate buyers (55%) looked to swallow companies that were between two and four years old.

The survey suggested that the push by private equity firms to buy software companies would continue. "There is so much dry powder on the sidelines that it can be a struggle for some private equity firms to deploy capital today,” Matt Sondag, managing director of Mergers and Acquisitions for West Monroe Partners, commented.

Unsurprisingly, the main area of focus for acquisition targets was North America. Among North American respondents, 78% said they looked for deals in their own region, with only 4% looking in Europe.

But Asia-Pacific targets were topmost on the minds of 18% of North American buyers.

Almost one-third (29%) of respondents were looking for targets that were involved in making industry-specific software, like fintech, digital media and digital health.

Asked what were the top operational and personnel issues in an acquisition target, respondents put speed to market (22%) and software development processes (21%) at the top of the pile. Consolidation of acquisition teams and processes was ranked next with 21% ranking it first and 18% putting it second.

Hardly any respondents seemed to be bothered about talent acquisition and retention - it was a primary concern for only 5% and a secondary concern for 2%.

Nearly two-thirds of respondents (63%) said they had walked away from a software deal in the past; this included half of the corporates and more than two-thirds of private equity firms.

In the US, failed deals set a record in 2016, amounting to 59 deals worth US$463 billion in the first half alone. Globally, the year 2016 saw 1009 deals worth US$797.2 billion abandoned.

The survey can be downloaded here, after registration.

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Sam Varghese

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A professional journalist with decades of experience, Sam for nine years used DOS and then Windows, which led him to start experimenting with GNU/Linux in 1998. Since then he has written widely about the use of both free and open source software, and the people behind the code. His personal blog is titled Irregular Expression.