Energy M&A Banker: Software firms have arrived

A well-known banker in the space reached out after seeing a few of the Energy Transition M&A posts. We talked about the current market trends as well as likely / active engagements. Here are a few key notes from that call:

1-Potential Acquiror Market has broadened: In a recent M&A process there were >25 management presentations. This was because potential buyers for the asset came from many different backgrounds:

  • Energy management firms
  • Industrial technology giants
  • Progressive utilities
  • Generalist software companies

The normal firms participating in M&A over the past few years have been the energy management firms and industrial technology giants. But, the more progressive utilities showing up looking for ways to expand their own businesses is a NEW addition. And for avoidance of doubt, the presence of traditional software firms playing in the energy transition space is VERY RARE. Over the past decade only a few software firms have acquired an energy transition company- with the headline acquisition being when Oracle acquired OPower.

2- Everyone now understands SaaS: the banker claimed that in years past he would have to give a presentation to the “older school acquirors” about why SaaS gets valued at a premium and to share about the multiples. While education needs to occur to share the new heights of SaaS multiples, the industry execs now appreciate the delta between perpetual sales and SaaS sales.

3- Industrials Pay Premium for Standalone Scale: The largest industrial technology firms have big balance sheets. And despite a lot of public clamoring about wanting to be acquisitive to better enter the software market, these industrial giants tend to only pay the true SaaS multiples when a business reaches scale. Why? A big concern these giants have is that their corporate culture may hinder continued growth of the target. So the M&A heads want these businesses to stand-alone and be a pillar for future M&A opportunities themselves. This usually means a revenue base of at least $50M for an industrial technology firm to get active in the software market. And even when these industrials get comfortable with M&A rarely is a multiple > 10x revenue.

I imagine we will continue to see more “non-traditional” firms be active in the energy transition M&A market.