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The Largest Software Acquisition in History

Broadcom announced it will acquire VMWare for $70b, the largest software acquisition in history.

Remarkably, this goliath union transpires during the deepest bear market of the last ten years. This merger also suggests a wave of acquisitions may punctuate 2022, in particular, take-privates.

Public companies can’t hide from the 70% collapse in multiples the way startups can. Publics are marked to market daily. Big acquirers walking through the aisles of the stock exchanges are staring at buy-one-get-one-free specials.

Software companies haven’t been this cheap to buy for a decade. VMWare traded at a 4.4x enterprise-value-to-forward-revenue (EV/NTM) multiple down from 7.3x in 2019, a fall of 65%, consistent with its peers by growth rate.

Ticker Growth Rate EV/NTM Multiple
VMW 9% 4.4x
DBX 12% 3.6x
BOX 13% 4.5x
ZUO 14% 2.7x
AYX 14% 5.5x
Average 12% 4.14

MW traded at 4.4x before the acquisition. The sale pushed it to 6.6x

If VMWare is attractive, shouldn’t these other companies entice a cash-rich acquirer? Or a flush private equity firm desirous of a SaaS company’s consistent cash flow? Interest rates may be increasing, but they’re still low enough to make leveraged buy-out math work.

Plus, publics are “always on sale.” Anyone can submit a valid offer. Even more, public company boards are subject to intenser scrutiny and more frequent shareholder lawsuits, which makes them likelier to consider a sale, even if there’s just one offer.

Look no further than Elon’s on-again, off-again pursuit of Twitter as a real-time example of the tight-rope public companies must navigate after receiving unsolicited bids; and the destabilizing winds that a lack of other suitors and oppressive shareholder scrutiny bring. Acquisition targets are weakened after the market hears of an offer, and weaker still after they agree to terms and await a definitive agreement.

In this environment, with valuations plummeting, plus uncertainty and fear rampant in the market, we might see a vibrant M&A market for public companies and perhaps the reemergence of the Barbarians at the Gate, the corporate raiders.