A chasm has opened in the M&A world, especially for software companies. On one side, public companies like Progress, with their feet firmly planted in current market realities. On the other, private firms, still clinging to the 'irrational' valuations of 2021. Jeremy Segal, EVP of Corporate Development at Progress, sees the disconnect clearly, and it shapes his company's strategy to double revenue every five years through inorganic growth.
The Valuation Chasm in Software M&A
Remember 2021? Interest rates were zero. Money was cheap, and private equity firms were riding high, making aggressive bids that public companies simply couldn't justify. Segal recalls, “the values were crazy money was free right you know interest there was interest rates was at zero so you know if private equity could just go do deals and you know that's when it was a little more challenging for us too because you know they they could be a lot more aggressive from a value standpoint because the debt that they needed to do these deals was so cheap.”
Today, the tables have turned. Rising interest rates and a more sober public market mean valuations have cooled significantly. Progress, a billion-dollar company with 40% operating margins and 30% free cash flow, grounds its M&A targets in public market multiples. They can't overpay. But many private software companies, particularly profitable ones backed by private equity, haven't adjusted their expectations.
This creates a bizarre situation. Progress might eye a private company, say, one doing $50 million with 5-10% operating margins, but the asking price reflects a pre-rate-hike world. Segal puts it plainly: “the math doesn't add up.” The public buyer's discipline clashes with the private seller's lingering ambition.
The Coming Capitulation (and Your Opportunity)
The current valuation gap isn't sustainable. Pressure is building on private equity and venture capital firms to show liquidity for their portfolio companies. This pressure will eventually force private sellers to capitulate and accept lower valuations. It's not happening en masse yet, but it's coming.
As Segal notes, “There's going to be more pressure because private equity needs to show liquidity. venture capital is going to be focused on investing in AI and is going to want to find liquidity for some of its port codes that are in the software ecosystem and it could create great buying opportunities for progress.” The key for Progress, and for any disciplined acquirer, is patience. They won't relinquish their financial discipline, even when presented with a potential deal.
This dynamic means that truly compelling buying opportunities will emerge for those with the capital and the resolve to wait. It’s a game of strategic patience, observing the market shift and preparing to act when private expectations finally align with public realities.
What Not to Buy (or Become)
While waiting for the right opportunities, Progress is also clear about what they absolutely won't touch. They're seeing companies that are “significantly worse that are willing to trade anything.” These are the "crash and burn" companies, as Segal calls them. He specifically points out businesses that are declining, have net retention rates in the 70s, or gross margins in the 50s. These are red flags, data points that scream 'stay away.'
This isn't just about M&A targets; it’s a warning for founders. Even as AI dominates headlines, software is far from dead. “AI also realizes that they're highly dependent on software to inform their LLMs and to basically make the AI have some semblance of value,” Segal says. Building a resilient software company means shoring up those core financial and operational metrics.