Analysis-Software selloff is disrupting some M&A and IPO deals, US bankers say

By Milana Vinn, Isla Binnie and Charlie Conchie

NEW YORK, (Reuters) Feb 11 – A broad selloff in software stocks is starting to stall deal-making and IPOs in the sector as volatility makes valuations unreliable and potential buyers cautious, about a dozen financial advisers and dealmakers told Reuters.

The months‑long rout deepened last week, with the S&P 500 software and services index posting its worst three‑month performance since May 2002, Evercore ISI equity strategists said. 

While the sector has clawed back some losses, it is still down about 25% from its October 28 record while the S&P 500 is up 1%.

Bankers and investors interviewed link the slowdown in mergers and acquisitions and initial public offerings to a few related reasons. 

With software shares dropping sharply, the valuation benchmarks from peer companies, such as revenue multiples, are moving too quickly for either side to anchor a price, and buyers fear overpaying for assets that could be marked down again.

Sellers, meanwhile, are reluctant to transact at trough levels. “Some people can’t afford to sell on the way down,” said Vincenzo La Ruffa, managing partner at private equity firm Aquiline Capital Partners.

TRADING ON FEAR

Underneath the volatility is anxiety about artificial intelligence reshaping software business models, dealmakers said.

Investors have been trading on fear, said Wally Cheng, head of global technology M&A at Morgan Stanley. “Everything’s down and there really hasn’t been a very thoughtful, detail‑oriented approach to sorting through who winners and losers are.” 

He said a would-be buyer’s view of a company’s fundamentals may not have changed, but the premium the buyer was originally willing to pay becomes unrealistically high after a share price plunge, unless terms are reworked.

The impact of the repricing is already visible in deals. Fintech software company Brex closed a key funding round around the October peak at a valuation over $12 billion but sold to Capital One last month for about $5.15 billion.

Another financial software provider, OneStream, went public in July 2024 near a $6 billion valuation. It was worth about $4.6 billion when Reuters first reported in early November that it was considering going private again. In January, Hg Capital took it private at about $6.4 billion, barely clearing its IPO valuation and offering limited gains for investors.

Mike Boyd, the global head of M&A for Canada’s CIBC, said agreeing on price is more difficult when the market is volatile, so negotiating deals becomes more challenging.

La Ruffa at Aquiline Capital Partners, which specializes in financial services and technology, predicted: “Over the next few weeks in the market, we think lots of deals will break (apart). Some will slow down, some will reprice. We will see more assets not trade than reprice.” 

Several public software companies are trading at about one times their forward revenue or less, when the sector normally commands a multiple several times higher, said Ron Eliasek, chairman of Global TMT investment banking at Jefferies. 

“This is not sustainable,” he said. “We will either see more take‑privates or an improvement in these companies’ valuations over time.” 

The share rout has extended to Europe, knocking shares in British analytics firm RELX and Dutch legal analytics firm Wolters Kluwer down around 20%. 

The chill is particularly acute for IPOs. Blackstone-backed Liftoff Mobile decided to postpone its planned listing “given current market conditions,” it told Reuters in an email.  

Norwegian software firm Visma may delay a potential $20 billion listing in London due to the selloff, two people familiar with the matter said. 

 Morgan Stanley warned on Monday the trouble could spill into private credit markets where software companies account for about 16% of the $1.5 trillion U.S. loan market.

DRIVEN BY UNCERTAINTY OR FUNDAMENTALS? 

Jon Gray, president of Blackstone, said at a recent conference in New York that AI had spurred an internal risk-assessment exercise at the firm: “We’ve gone through all our portfolios — yellow, red, green — where do we have the most risk” from AI disruption?

Others urge calm. Robert Smith, founder of software‑focused private equity firm Vista Equity Partners, told investors in a letter Monday that AI will “enhance software, not replace it.” 

“We feel the volatility in public software markets is being driven primarily by sentiment and uncertainty, not by fundamental performance,” he wrote.

Goldman Sachs CEO David Solomon told the UBS Financial Services conference in Miami on Tuesday that investors may be veering toward overreaction.  

“The narrative over the last week has been a little bit too broad. There will be winners and losers, and plenty of companies that will deal with it just fine,” he said.

And some investors see a buying opportunity. Eliasek at Jefferies said multiple private equity partners called him late last week wanting to buy software businesses. 

The message they have communicated: “Bring us your best ideas,” he said.

(Reporting by Milana Vinn and Isla Binnie in New York, Charlie Conchie in London, Nivedita Balu in Toronto and David French in Miami; Editing by Dawn Kopecki and Cynthia Osterman)