Tech ‘capitulation’: BofA top banker Rick Sherlund predicts breakthrough in mergers due to troubled economy

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Mergers in software are about to break out.

Top investment banker Rick Sherlund of Bank of America sees a wave of struggling companies putting themselves up for sale at lower prices due to the economic downturn.

“You need to see more capitulation,” the vice chairman of the company’s technology investment bank told CNBC’s “Fast Money” on Thursday. “Companies will ease their valuation expectations, and that will be combined with more fully functional financial markets. I think it will accelerate the pace of M&A [mergers and acquisitions].”

His broad analysis comes on the heels of Adobe’s $20 billion dollar deal Thursday for design platform Figma. Adobe failed to generate excitement on Wall Street. The stock plunged 17% on questions about the price tag.

Sherlund, a former software analyst who reached No. 1 on the Institutional Investor’s list of all-star analysts 17 times in a row, worked at Goldman Sachs during the technology bubble of 2000. He believes the Street is now in the early stages of a difficult market cycle.

“You need to go through the third quarter earnings reports to make sure the bad news may be mostly hitting the market as companies will report longer sales cycles,” he said. “We need to adjust 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 as leverage to close deals,” Sherlund noted. “They are looking very eagerly and actively at this sector… It suggests that [for] M&A, if there’s no IPO market, we’ll see a lot more consolidation in the industry.”

He notes that demand for IPOs has been hurt by rising interest rate headwinds and inflation.

“[The IPO market] is not open. But when the window opens again, you will see a lot of companies going public,” he added.

The long-term prospects for software are extremely attractive, according to Sherlund.

“You have to be very optimistic about the long-term fundamentals of the industry,” Sherlund said. “Every business becomes a digital enterprise.”

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