A $US1.4 billion hedge fund expects a new wave of tech M&A, particularly in software, as new kinds of buyers come to the fore.
“The types of companies looking to acquire software businesses have expanded well beyond … traditional acquirers” like private equity firms and Oracle and IBM, Praesidium Investment Management wrote in a letter to clients last week.
Enterprise software makes up 40% of the fund’s portfolio, according to the letter.
“We believe that we are now in the early part of a major M&A wave that will be more intense than any period in the past,” Praesidium’s Kevin Oram and Peter Uddo wrote in the note. A copy was reviewed by Business Insider.
The deals can be a boon for the buying companies. According to New York-based Praesidium, that’s because “the acquirer in most software transactions can normally cut 40-60% of the operating costs of the companies they acquire in a relatively short period of time.”
Here’s more from Praesidium’s letter on the shift taking place:
“Technology companies like, Cisco, Google, and even Microsoft, who didn’t buy many enterprise software companies in the past, are also now aggressively bidding for software assets. Further, major industrial companies, like GE, Siemens, and Honeywell see a significant opportunity to sell software that their customers are increasingly using to control, monitor, analyse, and service the industrial equipment these companies provide. These industrial firms recognise the value they can create in their own businesses by developing high-margin, recurring software-driven cash flow streams from their huge installed bases of equipment. As a result, they are all allocating tremendous amounts of capital towards software acquisitions and internal investments.”
The fund returned 17.6% net of fees last year compared to a 11.9% gain in the S&P 500, including dividends, according to the letter. This year, the fund was up 3.8% net of fees through February and currently manages about $US1.4 billion firmwide, a person familiar with the matter said.
Praesidium isn’t the only fund opining on the future of tech M&A. Samantha Greenberg’s Margate Capital told clients earlier this year that it expected “hundreds of billions of dollars” in deals.
Bankers at Goldman Sachs also previously told Business Insider that they’re having a record year for tech dealmaking.
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