Application Development and Deployment Market Update – December 2023

Converging Software and Services Drives M&A in Application Development Market

Capstone’s latest Application Development (AppDev) & Deployment Market Update reports that the Application Development Market has remained a bright spot in the capital markets through year-to-date (YTD), outperforming the broader market in both merger and acquisition (M&A) and venture capital activity. Accelerated dealmaking in the sector has largely been driven by acquirers and investors looking to converge software and service capabilities to deliver new offerings in development and operations (DevOps) and development, security, and operations (DevSecOps). As a result, both private and public participants with converged offerings have experienced robust M&A attention in the Application Development market.

M&A activity in the AppDev & Deployment sector has reached a record high in YTD 2023, rising 57.6% year-over-year (YOY). This represents a stark contrast to the 24% decline witnessed in the broader M&A market over the same period. A persistent strategic and private equity buyer pool has contributed to elevated levels of sector M&A activity, with both buyer groups engaging in competitive bid processes to capitalize on digital transformation tailwinds. The Services segment has continued to account for the majority (68.4%) of sector M&A targets YTD, led by outsourced information technology (IT) providers, custom application development businesses, and digital and cloud transformation services providers. The Software segment (31.6%% of YTD M&A targets) has attracted strong acquirer interest from strategics and sponsor-backed portfolio companies, with buyers typically targeting segment participants within a specific technology stack.

The middle market (less than $500 million enterprise value) has continued to yield considerable amounts of AppDev & Deployment sector M&A activity in YTD 2023, comprising 88.9% of disclosed transactions. This represents an uptick from YTD 2022 levels (81.8%), illustrating the strength of middle market sector players engaging in sell-side transactions. Profitability, recurring revenue, and asset-light business models have continued to be key investment criteria among buyers in the AppDev & Deployment middle market. Public players in the space have also increasingly engaged in sell-side transactions YTD, largely materializing in sponsor take-private deals as participants have looked to evade public market turbulence. Of note, the aggregate enterprise value of take-private deals has comprised 25% of total disclosed sector deal value YTD. However, select public strategic buyers have demonstrated a willingness to acquire competitors. This includes Cisco Systems’ (Nasdaq:CSCO) announcement to acquire Splunk (Nasdaq:SPLK) in September for an enterprise value of $28.5 billion (7.4x EV/Revenue), marking the largest sector acquisition in the past five years.

Also included in this report:

• 2024 Technology, Media & Telecom (TMT) industry M&A market forecasts from Capstone Partners & IMAP 2023-2024 Trends in Global M&A Survey.
• Why average M&A multiples in the Services segment have increased nearly four turns YOY.
• How Cognizant’s (Nasdaq:CTSH) middle market roll up strategy has supported the company’s growth trajectory.
• Why AppDev & Deployment venture capital funding has rebounded YTD in contrast to the broader market.