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BofA predicts merger breakout as cycle slows

Software mergers could be about to break out.

Bank of America’s top investment banker Rick Sherlund sees a wave of struggling companies coming up for sale at lower prices due to the economic downturn.

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“You need to see more capitulation,” the vice president of the company’s technology investment bank told CNBC’s “Fast Money” on Thursday. “Companies will see their valuation expectations soften, and that will combine with more fully functioning capital markets. I think that will accelerate the pace of mergers and acquisitions. [mergers and acquisitions].”

Its overall analysis follows Adobe’s $20 billion deal on Thursday for the Figma design platform. Adobe failed to generate excitement on Wall Street. Its shares fell 17% due to questions about the price.

Sherlund, a former software analyst who topped Institutional Investor’s star analyst list 17 times in a row, worked at Goldman Sachs during the 2000 tech bubble. a difficult market cycle.

“You need to scour third-quarter earnings reports to be sure that bad news may be spreading widely in the market as companies report lengthening 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 get leverage to get deals done,” Sherlund noted. “They are very impatient and are actively watching this sector… This suggests that [for] M&A, in the absence of an IPO market, we’re just going to see a lot more consolidation coming to the sector.”

He notes that the IPO was affected by rising interest rates and inflation.

“[The IPO market] is not open. But when the window reopens, you’ll 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 bullish on the long-term fundamentals of the sector,” Sherlund said. “Every business is becoming a digital business.”