BofA predicts outbreak of mergers due to downturn cycle

BofA predicts outbreak of mergers due to downturn cycle

Mergers in software may be about to break out.

Bank of America top investment banker Rick Sherlund is seeing a wave of companies struggling to come up for sale at cheaper prices because of the economic downturn.

“You need to see greater capitulation,”[ads1]; the company’s vice president of technology investment banking told CNBC’s “Fast Money” on Thursday. “Companies will have their valuation expectations softened, and that will be combined with more functional financial markets. I think that will accelerate the pace of M&A [mergers and acquisitions].”

His broad analysis comes on the heels of Adobe’s $20 billion deal Thursday for design platform Figma. Adobe failed to generate excitement on Wall Street. Shares plunged 17% amid questions about the price tag.

Sherlund, a former software analyst who hit No. 1 on Institutional Investor’s all-star analyst list 17 times in a row, worked at Goldman Sachs during the tech bubble of 2000. He believes the street is now in the early stages of a difficult market cycle.

“You have to get through third-quarter earnings reports to feel confident that maybe the bad news is largely out in the market because companies will report extended 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.

“You have private equity with a boatload of cash, and they need functioning debt markets to be able to do deals,” Sherlund noted. “They are very keen and actively looking at this sector … It shows that [for] M&A, in the absence of an IPO market, we’re just going to see a lot more consolidation coming into the sector.”

He notes that the IPO has been damaged in connection with rising interest rate headwinds and inflation.

“[The IPO market] is not open. But when the window opens again, you’re going to see a lot of companies going public,” he added.

The long-term outlook for software is extremely attractive, according to Sherlund.

“You have to be very positive about the long-term fundamentals of the sector,” Sherlund said. “Every company is becoming a digital business.”


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