Mergers in the software space may be about to erupt.
Leading investment banker Rick Sherlund of Bank of America sees a surge of struggling companies for sale at cheaper prices due to the economic downturn.
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“They need to see more capitulation,” the firm’s vice chairman of technology investment banking told CNBC’s Fast Money on Thursday. “Corporate valuation expectations will ease and that will come with more fully functioning financial markets. I think that will speed up the pace of mergers and acquisitions [mergers and acquisitions].”
His comprehensive analysis follows Adobe’s $20 billion deal for design platform Figma on Thursday. Adobe failed to generate excitement on Wall Street. Its shares plunged 17% on price tag questions.
Sherlund, a former software analyst who was ranked #1 on Institutional Investor’s All-Star Analysts list 17 straight years, worked at Goldman Sachs during the 2000 tech bubble. He believes the street is now in the early stages of a difficult market cycle.
“You have to go through the third quarter earnings reports to be confident that the bad news may be mostly known in the market as companies will report lengthening of sales cycles,” he said. “We need to reset expectations for 2023.”
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Sherlund and his team are very active in the M&A market.
“They have private equity with a boatload of cash, and they need functioning debt markets to do business,” Sherlund noted. “They are very eager and actively looking at this sector… That suggests it [for] M&A, since there is no IPO market, we’re just going to see a lot more consolidation in the industry.”
He notes that the IPO has been damaged in the context of mounting headwinds in interest rates and inflation.
“[The IPO market] is not open. But when the window opens again, you will see a lot of companies going public,” he added.
According to Sherlund, the long-term prospects for software are extremely attractive.
“The long-term fundamentals of the sector must be very bullish,” Sherlund said. “Every company becomes a digital company.”
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