Software M&A likely to see meaningful pick up next year, tech banker says

Maksim Labkouski

Deals in the software space are likely to increase next year as companies valuation expectations come down and as private equity looks to use its immense cash hoard, according to a Bank of America banker.

"I do think we are going to see an increasingly active M&A market and that's something that we are very active in," Bofa tech banker Rick Sherlund said in an interview with CNBC on Thursday. "I think the strategics, the companies with all the cash, would like to see more capitulation in valuation thinking by the private companies."

"As you go into next year I would expect that you will see more capitulation on valuation expectations and the premiums that are required to make these deals happen," Sherlund, a former sell-side software analyst added who ranked No. 1 analyst 17 times in a row on Institutional Investor’s all-star analyst.

He also expects that private equity firms with a "boatload of cash" are looking to deploy their funds.

"They are very eager and actively looking at the sector," Sherlund explained. "I think it suggests that M&A. in the absence of an IPO market, we're just going to be see a lot more consolidation coming in the sector."

Sherlund's comments come after Adobe (NASDAQ:ADBE) on Thursday agreed to pay $20 billion for design plaform Firgma, double the $10 billion valuation that the firm was valued at in a fundraising round last year. The acquisition news sent Adobe's shares plummeting, crashing 17% on Thursday.

Sherlund added that the debt markets appears to be working better than they have earlier this year, which could help with financing for deals.

"We are starting to see signs that the debt markets are becoming more functional," Sherlund said. "We are starting to see more block trades so we are kind of encouraged by increasing financing activity. But I think that's been a constraint on private equity's ability to do all the deals that they would like to do. But also, like the strategics, you needed to see greater capitulation and I think as more time goes by companies will have their valuation expectations softened and that combined with a more fully functional financial markets I think will accelerate the pace of M&A."

Sherlund's comments come after an Apollo Global (APO) executive on Wednesday said that he doesn't expect banks to to start financing debt for leveraged buyouts anytime soon.

Banks aren't likely to fund large transactions until at least the fourth quarter due to the current economic uncertainty, David Sambur, co-head of private equity at Apollo told Bloomberg TV in an interview at the SuperReturn North America conference.

Sambur explained that debt commitments from banks appear to the most problematic issue, but should improve as banks have to make money.

Also see from last weekend, Twitter likely to win in court, First Horizon/TD Bank likely to be approved.