As part of my M&A for Startups course with Miguel Arias at the IE Business School, I was asked to analyze the M&A environment for SaaS startups.
In this paper, I assess the SaaS M&A space in Europe and the US. Expect an emphasis on Europe’s: Saas & Cloud landscape, SaaS M&A activity, top acquirers and trends. Artificial intelligence is mentioned briefly.
Europe SaaS Landscape
In 2016, Accel released an article titled “SaaS Wars: Europe Awakens” where they shared a bullish perspective on SaaS by saying “Software is eating the world, and Software-as-a-Service (SaaS) is eating software” a la Andreesen Horowitz and then providing an assessment of the Euroscape SaaS Landscape. For the assessment, they “took a systematic look at more than 1,000 SaaS startups across 12 countries,” and then mapped the most promising 100 companies in the following categories: marketing/content management, Sales/Lead Gen/Support, Finance, HR, Resources, Productivity/Collaboration, Data/Analytics, and Developers/Infrastructure. See Figure 1.
The analysis showed that 80% of the companies were horizontal SaaS and that 100 companies raised nearly $900 Million in 2015 alone. Relative to the US, European SaaS companies raised, on average, between 30% and 40% less.
Taking the research a bit wider, Point Nine Capital dove in on Accel’s research and noted two interesting points: (1) 30% of SaaS companies flip to the US and (2) vertical SaaS companies are on the rise and are showing faster growth than horizontal ones. Knowing this, European entrepreneurs need to consider the vertical versus horizontal SaaS approach.
Europe SaaS M&A Landscape
CatCap Corporate Finance put together a European Software M&A Market Mid-Year Snapshot 2017. I share the highlights below.
Between 2014 and 2017, in the first half (FH), there was a -19%, +25%, and +4% YoY growth, respectively. In 2017 FH, 221 deals were transacted. Of the deals, 50% were vertical, 41% were business process, and 9% were systems and security focused. According to the report, 2017 FH has seen larger deals than 2016 FH. In fact, 2017 FH saw a combined value in 3.1 Billion Euros versus 2016 FH (which reached a combined value of 1.7 Billion Euros).
The biggest deal in 2017 FH came from the Visma buyout led by HgCapital; KKR and Cinven Partners agreed to the acquisition with Cinven keeping 17% of the stake. See Figure 3.
The assessment of Europe’s M&A activity by geography showed Germany leading the pack with 54 strategic investor deals (up from 44 acquisitions last year), followed by the UK at 39 strategic investor deals (down from 61 acquisitions last year) and France at 34 strategic investor deals. See Figure 4.
Other notable deal observations from the report include a pattern of marketing automation software deals with Salesforce landing at the top of the active strategic software buyers; in 2017 FH, they bought Demandware in June (with a sales multiple of 12.3X) and Autopilot in July.
In terms of Europe’s Revenue-SaaS multiples it can be noted that the median multiples are about 30% of the US SaaS multiples (See Figure 5) and Europe SaaS EBITA-Multiples are less than 50% relative to the US multiples (See Fig 6).
It appears that the multiples are based on high scalability of the SaaS business model which justifies the higher valuations of SaaS companies relative to companies using “on-premise” models. According to the CatCap report, the strong performance of the US SaaS market has to do with “outstanding growth rates led by pure SaaS” plays (e.g. Salesforce, Workday).
US vs Europe SaaS M&A Landscape
Hampleton’s M&A Market Report 2017 for SaaS and Cloud, notes that information management and enterprise applications/networking grew 7% YoY. According to the report, the interest from buyout funds pushed the total value of the SaaS and Cloud sector to $5.22 Billion (€4.45 Billion). See Figure 7.
From 2015 to 2017 FH, the volume of SaaS and Cloud deals went up to 2,428 deals, with a total value of $7.2 Billion and a trailing 30-month median EV/S of 3.8x. See Figure 8.
The number of acquirers in the last 30 months is 1765, with 361 of them closing more than 1 deal at a median disclosed transaction value of $41M. The top acquirers are j2 Global (with 18 deals), Vista Equity Partners (with 16 deals), Microsoft (with 14 deals), and Salesforce (with 13 deals). See Figure 9.
Trends in SaaS and Cloud are showing: (1) Private equity is increasing the spend in SaaS and Cloud; (2) Security-related SaaS & Cloud acquisitions are increasing; (3) Collaboration SaaS & Cloud acquisitions are increasing; and (3) Artificial intelligence (AI) is becoming a force of disruption.
Global Geographical breakdown shows the distribution of SaaS & Cloud companies’ headquarters (HQ) and the HQs of acquirers of European targets. For the latter, acquirers for Europe SaaS & Cloud startups come from 53% Europe, 43% from US, and 4% from the rest of the world. See Figure 10.
The outlook looks bright for Europe’s SaaS & Cloud ecosystem and it expects higher multiples and an increase of SaaS & Cloud demand. Nonetheless, it’s important to keep an eye on how Artificial Intelligence (AI) will evolve the global SaaS & Cloud market.
Coming full circle to Accel’s “SaaS Wars: Europe Awakens,” pay close attention to Accel Partner Philippe Botteri’s words, “if SaaS is eating software, Artificial Intelligence is starting to eat SaaS. It’s early days, but legacy SaaS applications will be disrupted by a new generation integrating Artificial Intelligence and machine learning technologies.” It may be that AI augments SaaS in automation, personalization, and enhanced security or replaces SaaS altogether with bots in a not such a far future.
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About Author: Lolita Taub is a TEDx speaker and keynote, a World Economic Forum Global Shaper, an artificial intelligence enthusiast, and an enterprise tech professional and investor at Portfolia. She holds 9 years of enterprise B2B software-hardware-and-services sales experience at IBM, Cisco Systems, and in Silicon Valley. Lolita has been recognized for her work on Forbes, Inc.com, The Huffington Post, Entrepreneur.com, and Los Angeles Times, among other publications.