According to about a dozen financial advisers and dealmakers who spoke to Reuters, a widespread decline in software stocks is causing a slowdown in deal-making and initial public offerings in the sector. The volatility in the market is making valuations unreliable and potential buyers cautious.

Evercore ISI equity strategists noted that the S&P 500 software and services index had its worst three-month performance since May 2002 last week, deepening the months-long rout.

Although the sector has recovered some losses, it remains down approximately 25% from its October 28 record, while the S&P 500 has seen a 1% increase.

Bankers and investors attribute the slowdown in mergers and acquisitions and IPOs to various factors.

The sharp drop in software shares has made valuation benchmarks like revenue multiples move too quickly for both buyers and sellers to establish a stable price. Buyers are concerned about overpaying for assets that could depreciate further.

On the other hand, sellers are hesitant to sell at low points. Vincenzo La Ruffa, managing partner at private equity firm Aquiline Capital Partners, mentioned, "Some people can’t afford to sell on the way down."

Fears Driving Trading

Dealmakers highlighted anxiety about how artificial intelligence is reshaping software business models as a key factor underlying the market volatility.

Wally Cheng, head of global technology M&A at Morgan Stanley, stated that investors have been driven by fear, leading to a lack of thoughtful analysis in distinguishing winners from losers in the sector.

He pointed out that while a buyer's perspective on a company’s fundamentals might not change, the premium they were initially willing to pay becomes unreasonably high post a share price drop unless terms are renegotiated.

The impact of repricing is evident in recent deals. Companies like Brex and OneStream have seen significant valuation adjustments, affecting their recent funding rounds and IPOs.

Market instability makes price agreements more challenging, according to Mike Boyd, the global head of M&A for Canada's CIBC.

La Ruffa predicted that many deals might fall through or need repricing in the coming weeks, reflecting the uncertainty in the market.

Ron Eliasek, chairman of Global TMT investment banking at Jefferies, pointed out that several public software companies are trading at significantly lower valuations compared to historical norms.

He added, “This is not sustainable. We will either see more take-privates or an improvement in these companies’ valuations over time.”

Market turbulence has also affected European software firms like RELX and Wolters Kluwer, with shares dropping approximately 20%.

The impact on IPOs has been particularly harsh, with companies like Liftoff Mobile and Visma reconsidering their listings due to the ongoing selloff.

Goldman Sachs CEO David Solomon and others believe that the market reaction may be exaggerated, and there will be companies that can navigate through the challenges successfully.

Despite the uncertainties, some investors see this as a buying opportunity, showing interest in acquiring software businesses.