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Software Stocks Are Considered Merger Darlings as Deals Heat Up -Breaking

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© Reuters. As Deals heat up, Software stocks are considered Merger darlings

(Bloomberg) — Investors in mergers expect a healthy deal flow for the second quarter. The strongest is software. Buyers continue to hunger and the valuations are appealing.

It’s already playing out. CDK Global, (NASDAQ:) Inc. was one of the potential targets for a takeover in a Bloomberg News poll that included 20 fund managers, event-driven trading desks and analysts. It was bought Thursday morning. Zendesk (NYSE.) Inc. was another popular name. 

Kohl’s Corp. was named by survey participants as the most likely company to complete a deal over the next three months. As activist investors push to look at strategic options, the retailer has been in contact with potential bidders.

Amidst uncertain conditions such as rising interest rates, high inflation, and war in Ukraine this year, the U.S. mergers and acquisitions market is getting off to a good start. Bloomberg data shows that the value of the pending and finalized deals for 2022’s first three months was $414 million. 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 

Survey respondents believe that small- to medium-sized companies in software are best suited for consolidation. Investors in mergers are hopeful that financial and strategic buyers with cash will be able to benefit from the lower valuations resulting from recent tech sales. The S&P 500 Software Industry index is down more than 10% this year compared with a 5% decline in the and a 9% drop in the .

77% of the 20 respondents to our survey saw Zendesk being taken over after Momentive Global Inc. had been dissolved. Private equity groups were also reported to be lining up loans in order for Zendesk to make a fresh buyout offer. Since Zendesk had rejected bids between $127 to $132, the price will become an issue. Zendesk ended Wednesday at $122.58, a drop from the $158 record it set in February 2021. In addition, two people surveyed said they expect Momentive to also return to the M&A spotlight.

In the poll which ran from March 28th to April 1, CDK Global was number three. Brookfield Business Partners, NYSE:), announced Thursday that they had reached an all-cash agreement worth $6.4 billion to purchase the provider of auto dealership software. Five9 Inc. (NASDAQ:) Inc. canceled its September sale. Zoom Video Communications Also, (NASDAQ.) Inc. appeared on this list.

Representatives for Kohl’s, Zendesk, CDX Global and Momentive did not respond to requests for comment.

Wall street analysts noted a number of software names that should be monitored after Thoma Bravo (PE) announced plans in March to acquire a cloud-based company. Anaplan (NYSE.) Inc. to $10.7 Billion. Mizuho analyst Jordan Klein touted battered stocks like Datto Holding Corp. and Appian (NASDAQ:) Corp., while Bloomberg intelligence’s Anurag Rana pointed to C3.ai Inc. and Elastic (NYSE:) NV is one of the targets that could be attracted by cratering values.

“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 said that private equity companies still have plenty to work with.

It is certain that the ability of financial buyers to pick up dealmaking speed depends also on the state of the debt markets. There are concerns that private equity buyers may be cooling due to their erratic performance in 2018.

Transactions continue to flow from big tech firms with strong balance sheets. Survey respondents suggested that they may become more cautious about any transactions that might be subject to antitrust regulation. 

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 (NYSE:).’s pending acquisition of Change Healthcare (NASDAQ:) 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.”

©2022 Bloomberg L.P.

 

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