Oct 25, 2022

Mergers and acquisitions in AEC part deux

This is part deux of my look into the state of M&A in architecture, engineering and construction (AEC) software in October 2022.

Last week I wrote about the last 18 years of acquisitions and how they shaped 9 leading AEC software firms – from Autodesk over Trimble to Unity and Epic.

But that’s not where the story ends. With the economy in tumble, I wonder if some (if not all) of these players to be active acquirers in 2023 and 2024. Hexagon seems to already lead the charge with 5 acquisitions year to date in 2022.

So I became fascinated by the logical follow-up question: What might happen in AEC M&A in 2023 ? What strategies and targets are available to buyers?

I prefer numbers. The best numbers available to us to work out available strategies and targets is funding data. It should allow us to look at a large share of the AEC-Tech universe (though not all firms). It should be accurate enough, and much better than no numbers.

6‘900 AEC-Tech firms received some form of external investor funding (incl. VC or corporate investments) since 2005 until October 2022. In total they fundraised $120B – no chump change.

Of those 6‘900, 560 have been acquired (not counting IPO‘s). A meager 8% !

Then I pulled a looooooong list of active AEC-Tech firms who have not yet been acquired, not IPO‘d and not deadpooled. This gave me ca. 4’000 firms, the vast majority of which are software. These firms generally could be seen as targets by potential buyers in 2023 and 2024.

I was wondering how a buyer in 2023 might view the landscape. One approach someone in corporate M&A told me is that they use four characteristics to describe AEC-Tech firms.

Based on this, the following picture of which firm might be available emerges:

I was particularly fascinated by two clusters of AEC-Tech firms for this debate:

  1. Firms in difficult cash positions (either young and no differentiated tech but high burn, or older firms with or without differentiated tech) in the anticipation they might face a difficult fundraising environments. More a 2023 target. I call this Strategy 1.
  2. or older firms who have raised in the last 2 years, preferably with interesting tech or otherwise good businesses in the anticipation they might reach a plateau in the next year. More a 2024+ target, but opportunities to build a pole-position relationship early might be available in 2023 already. Let’s call this Strategy 2.

For Strategy 1, I was able to find ca. 4’380 AEC-Tech firms right now. Of those, 1’390 who raised last between 2017-2020, so prime candidates for a discussion. Some acquirers might be having debates to get in front of the firms with the most exciting products or ARRs, and find ways to have acquisition discussions. I imagine a big challenge will be to filter effectively, as a lot of these firms will require cash for a reason … but how to know outside in? Protracted discussions with all 1’390+ firms will hardly be possible. Probably only a small fraction of them. Positive is that founders might be more motivated though.

Ca 1’180 firms are available for Strategy 2. 75 firms raised $100M+, 180 firms $20M+, 130 firms $10M+, and 130 firms $5M+. The entire rest raised less than $5M and might not be that interesting. I wonder if an interested buyer would first focus on the middle of the pack with $10-100M raised, since the quality of these firms might be highest. Remember the 8%/560 firms acquired in last 18 years I mentioned at the top of this post? My guess is that a fair share of those 8% in the NEXT years will come from these Strategy 2 targets. Here founders and shareholders might not yet be particularly interested in soliciting M&A offers right now, as they probably see their firm on the up and promising. It might be that interested buyers find more luck in taking minority stakes, building an internal view how the tech and business performs, and moving into pole position to make future offers in 2024+ if the firm begins to plateau.

Strategy 2 could allow for high payout if executed well. The challenge to overcome might be the adverse signaling that founders and shareholders will be afraid of when a potential strategic buyer takes stakes. Something to consider for the acquirers, I imagine.

Overall, it looks like some 400+ potential AEC-Tech firms might attract interest by potential acquirers in the next years. I expect smart buyers to follow one or both of the above strategies. Both are not easy to execute since information is hidden and adverse signaling is real.

My conclusion of last week and this week is: it looks like a lively 2023 in AEC software M&A might be on the horizon.


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