AppDev Market Update – September 2024

M&A Flourishes in AppDev Market, AI Software and Services Gain Heightened Acquirer Interest

Serving as an underlying and pivotal mechanism for information technology (IT), the Application Development (AppDev) & Deployment sector has been at the forefront of technological innovation. As a result, merger and acquisition (M&A) and financing activity in the space has persisted throughout economic cycles, showcasing significant strength year-to-date (YTD). Many secular trends have continued to buoy the AppDev market including elevated cloud computing demand, digital transformation tailwinds, and the convergence of software and services. However, the rapid adoption of artificial intelligence (AI) and machine learning (ML) solutions has accelerated demand and created new revenue streams for many AppDev & Deployment sector participants. Global spending on AI software, hardware, and services in 2023 reached an estimated $154 billion and is forecasted to surpass $300 billion by 2026 through a compound annual growth rate (CAGR) of 27%, according to International Data Corporation.¹ Elevated AI spending has largely materialized in three key areas of the AppDev market: AI/ML Development, AI/ML Testing, and AI for IT Operations (AIOps).

Due to its substantial utility and growth potential, the introduction of AIOps has headlined the sector. Of note, the global AIOps market size is expected to reach $645 billion by 2030 via a 37.9% CAGR between 2021 and 2030, according to Allied Market Research.² AIOps has marked the next phase of development and operations (DevOps), employing AI, ML, and advanced analytics for IT operations data. To-date, this technology has been primarily utilized for application monitoring, automating rapid responses for debugging, and predictive analytics on application performance. AIOps can also dramatically reduce the operational risks of cloud migration for businesses transitioning from legacy systems by providing clear visibility into common interdependencies. Acquirers and investors in the space have increasingly pursued AI-centric participants to capitalize on the growing market and reduce operational costs.

As is the case across the Technology sector, AI and ML are transforming the ways in which DevOps software providers are addressing critical needs of their customers in the areas of application development, application monitoring, debugging, and application performance.

David DeSimoneManaging Director, Capstone Partners

M&A Activity Persists in AppDev Market, Software Segment Yields Heightened Deal Volume

The AppDev & Deployment sector has remained a bright spot in the capital markets, outpacing the broader market in both M&A and financing activity. Sector M&A volume to date has risen 15.8% year-over-year (YOY) with 286 transactions announced or completed. In comparison, total volume YTD in the U.S. M&A market has declined 10.8% YOY. Sector participants’ ability to showcase earnings growth or a path to profitability, advanced technological capabilities, and strong partnerships with leading multi-segment vendors, has increasingly piqued acquisition interest from strategic and financial buyers. Strategics have continued to account for the majority (64.3%) of sector deals to date, led by private strategics (41.6%) acquiring complementary software and services providers to gain scale and reduce their time-to-market. Robust dry powder levels and a softening Syndicated Loan market have created a strong backdrop for private equity acquisitions in the sector. Financial buyer activity in the space has increased 27.5% YOY through YTD. Sponsors have particularly focused on add-on deals, which have comprised 78.4% of sector private equity buyouts to date. Private equity firms have increasingly pursued targets in the Software segment, rolling up businesses with interoperable solutions within the same technology stack. Software providers have accounted for 46.1% of sponsor M&A targets YTD compared to 28.8% in the prior year period.

While services businesses have continued to comprise the majority (57.7%) of sector M&A targets, the Software segment has attracted significant levels of acquirer interest—not just from the private equity community. Software segment M&A volume YTD has increased 65.8% YOY to comprise 42.3% of total sector deal flow. This spike can be attributed to the rise of big data and large language models (LLMs) in the AppDev market, which have further necessitated automation. In addition, the convergence of software and services has largely materialized in services companies targeting software providers to enhance productivity, offset personnel shortages, and bolster recurring revenue opportunities.

AppDev & Deployment M&A Multiples Remain Strong, Buyers Move Up Market

Average M&A multiples in the AppDev & Deployment sector have remained healthy as buyers have demonstrated a willingness to acquire scalable technology products and services businesses with enterprise client exposure. From 2021 through YTD, sector purchase multiples have averaged 3.4x EV/Revenue and 13.1x EV/EBITDA, outpacing the broader Technology, Media & Telecom industry averages of 2.6x EV/Revenue and 12.1x EV/EBITDA during the same period. Both the Software and Services segments of the market have drawn strong M&A pricing increases. Heightened private equity competition for software players has driven the average revenue purchase multiple in the segment to 5.5x (2021-YTD) from 3.6x (2018-2020). In the Services segment, the average EBITDA purchase multiple has spiked to 12.0x (2021-YTD) from 8.3x (2018-2020). Acquirers in the sector have increasingly moved up market, contributing to a favorable M&A pricing environment. This has been evidenced by the average enterprise value rising to $537.3 million in YTD 2024 from $206.5 million in YTD 2023. Sponsors have moved up market to target sector participants with clear exit opportunities amid diminishing returns while strategics have increasingly prioritized scale and margin strength to shore up balance sheets.

AI M&A Transactions on Pace to Set Annual Record in AppDev Market

Demand for custom AI solutions and the need for more efficient development and deployment tactics have afforded AI-centric sector participants with substantial exit opportunities. Through YTD, there have been 28 sector M&A transactions involving AI-focused targets. Although this represents a minor portion of total sector M&A, deal volume in this vertical has increased 33.3% YOY and is on pace to exceed full-year 2023 levels (30 transactions)—the highest on record. To-date, buyer interest in the AI vertical has been evenly split between AI software and services providers. Leading application lifecycle management company ServiceNow (NYSE:NOW) has been among the sector’s most active acquirers of AI businesses, with seven AI-focused transactions announced or completed from 2018 through YTD. ServiceNow’s fervent AI acquisition strategy has been in support of developing its generative AI platform for digital transformations and its broader initiative to raise subscription revenue. The company cited generative AI as a majority contributor to its subscription revenue gains, which rose 23% YOY in Q2 2024 to $2.5 billion, according to its Q2 2024 earnings release.³ Several sector M&A transactions exemplifying acquirers’ appetite in the AI vertical are outlined below.

• Cloudera Acquires Verta (June 2024, Undisclosed) – In June 2024, Cloudera acquired Verta for an undisclosed sum. Verta offers an AIOps platform for the development and deployment of generative AI applications. The company’s end-to-end solution packages any ML model and standardizes deployment processes. The addition of Verta is expected to bolster Cloudera’s ML group with business-ready LLMs for enterprise clients, catering to all developers regardless of their ML expertise. “Cloudera is acquiring Verta’s AI Operational platform to strengthen our team and accelerate our operational AI capabilities. We are moving quickly to provide our customers with the technologies they need to drive their data and AI initiatives, and we have no plans to slow down. This is the first of several strategic moves we expect to make as we extend our leadership in data and trusted enterprise AI,” said Charles Sansbury, CEO of Cloudera, in a press release.⁴
• KKR-Backed BMC Software Acquires Netreo (April 2024, Undisclosed) – KKR (NYSE:KKR)-backed BMC Software acquired Netreo in April 2024. Terms of the transaction were not disclosed. BMC develops software that provides system and service management solutions for enterprises. The acquisition of Netreo enables BMC to provide clients with a full-stack and open observability AIOps solution, reducing silos between IT operations and development teams. Netreo marks BMC’s eighth acquisition announced or completed in the AppDev & Deployment sector since receiving a majority investment from KKR in May 2018 (undisclosed), demonstrating sponsors’ affinity for buy-and-build strategies in the space. Although Netreo represents BMC’s first AI-focused acquisition, the company plans to continue investing in innovative technologies to broaden its software offerings and deepen its enterprise client base.
• Accenture Acquires ARHS Group (March 2024, Undisclosed) – In March 2024, Accenture (NYSE:ACN) acquired ARHS Group for an undisclosed sum. ARHS primarily offers custom software development, mobile application development, and ML model development and deployment services. The company serves the public and private sectors throughout Europe, specializing in digital transformation projects. Accenture pursued the acquisition to enhance its digital transformation capabilities with ML services and bolster its European footprint. The transaction has also aided Accenture’s net new generative AI bookings, which exceeded $900 million in its fiscal year (FY) Q3 2024, according to the company’s FY Q3 2024 earnings release.⁵ ARHS is expected to benefit from Accenture’s global reach and expansive service offerings. “By joining Accenture, with its capabilities in digital, design, AI, cloud, security, and customer experience, we can have an even greater impact on both private and public organizations’ transformation, irrespective of size or complexity, as well as open up exciting opportunities across Europe,” said Jourdan Serderidis, Founder and CEO of ARHS, in a press release.⁶

Venture Capital Firms Prioritize Innovation in AppDev Market, Focus on AI and ML

Financing activity in the AppDev & Deployment sector has held strong, with total capital invested rising 7.8% YOY to $14.6 billion in YTD 2024. In addition, the number of financing transactions to-date has increased 53.6% YOY to 1,267 deals. Contrary to the broader Venture Capital market, investors in the space have not shied away from early-stage rounds, which have accounted for 50.2% of deals YTD. Although these rounds are typically higher risk with a longer holding period, investors in the sector have continued to prioritize innovation and long-term growth prospects over short-term exit potential. Driven by healthy spending forecasts and a growing total addressable market, AI has attracted elevated investment in the AppDev & Deployment sector. Capital invested in AI-focused startups has increased 58.7% YOY through YTD to comprise 33.9% of total sector deal value. The number of financing rounds for AI startups in the space has risen 61.8% YOY, accounting for 36.4% of total deals to-date.

AI investors in the AppDev market have primarily focused on software businesses as opposed to services companies. Of note, AI-enabled coding platform providers have drawn significant investments at premium valuations as developers have looked for more efficient programming methods. These tools, which are often low-code/no-code, can also serve a broader market of IT professionals with varying programming skills. Several notable AI financing rounds in the AppDev market are outlined below.

• Anysphere Secures $60 Million in Series A Financing (July 2024) – In July 2024, Anysphere secured $60 million in Series A financing for a post-money valuation of $400 million. The round was led by new investors Andreessen Horowitz and Thrive Capital. Anysphere offers an AI-powered development tool for software engineers, enabling them to write code more efficiently. The company was founded in 2022, secured its seed funding from OpenAI Startup Fund in July 2023, and has raised $71 million total to-date. Anysphere plans to utilize the capital to expand its client base and further enhance its primary software tool, Cursor.
• Fireworks AI Raises $52 Million in Series B Funding (July 2024) – Fireworks AI raised $52 million in Series B funding for a post-money valuation of $552 million (July 2024). Returning investor Sequoia Capital led the round, joined by NVIDIA (Nasdaq:NVDA), Databricks Ventures, and others. Fireworks AI provides an AI platform to run, fine-tune, and deploy LLMs, enabling developers and businesses to scale at a faster rate through rapid product iteration. With the additional capital, the company plans to accelerate the development of compound AI systems, team growth, and platform enhancements. “Fireworks AI is perfectly positioned to lead this industry shift. Their team’s expertise in building high-performance inference stacks and innovative approach to enabling compound AI systems will empower developers with scalable AI solutions that were previously accessible only to technology giants,” said Sonya Huang, General Partner at Sequoia Capital, in a press release.⁷
• Poolside Secures $400 Million in Early-Stage Financing (June 2024) – In June 2024, Poolside secured $400 million in early-stage financing for a post-money valuation of $2 billion. Existing investor Bain Capital Ventures and new investor DST Global co-led the round. Poolside offers an AI-based platform designed to write software code. The company’s platform provides concepts and infrastructure that utilize a LLM to generate code from natural language queries, enabling developers to automatically program applications. The funding will be utilized to scale the platform’s low-code/no-code capabilities and democratize the programming process.

To discuss the widespread impacts of AI in AppDev & Deployment, provide an update on your business, or learn about Capstone's wide range of advisory services and AppDev market knowledge, please contact us.

Max Morrissey, Vice President, was the lead Market Intelligence contributor to this article.

Endnotes

1. International Data Corporation, “Worldwide Spending on AI-Centric Systems Forecast to Reach $154 Billion in 2023,“ https://www.idc.com/getdoc.jsp?containerId=prUS50454123, accessed August 9, 2024.

2. Allied Market Research, “AIOps Market Statistics: 2030,” https://www.alliedmarketresearch.com/aiops-market-A12506, accessed August 9, 2024.

3. ServiceNow, “Q2 2024 Earnings Release,” https://www.servicenow.com/company/media/press-room/second-quarter-2024-earnings.html, accessed August 9, 2024.

4. Cloudera, “Cloudera Makes Bold Bet on Strategic Acquisition of Verta’s Operational AI Platform,” https://www.cloudera.com/about/news-and-blogs/press-releases/2024-06-03-cloudera-acquires-verta.html, accessed August 12, 2024.

5. Accenture, “Fiscal Year Q3 2024 Earnings Release,” https://investor.accenture.com/~/media/Files/A/Accenture-IR-V3/quarterly-earnings/2024/q3fy24/accenture-reports-third-quarter-fiscal-2024-results-.pdf, accessed August 12, 2024.

6. Accenture, “Accenture to Expand Public Service Digital Transformation Capabilities Across Europe with Acquisition of ARHS Group,” https://newsroom.accenture.com/news/2024/accenture-to-expand-public-service-digital-transformation-capabilities-across-europe-with-acquisition-of-arhs-group, accessed August 12, 2024.

7. Fireworks AI, “Fireworks AI Raises $52M Series B…,” https://fireworks.ai/blog/fireworks-ai-series-b-compound-ai, accessed August 12, 2024.