Published: April 14, 2020


The knotty path to exit has become outright treacherous for customer experience and commerce (CX&C) software companies. Vendors face a withering hit from coronavirus as consumers pull back spending and marketing budgets follow. Those that emerge intact from the crisis may find that the market dynamics have swung in favor of the incumbents, whose tighter customer relationships position them to thrive in the post-COVID-19 economy.

Even before coronavirus caused an economic upheaval, M&A spending was tightening up for CX&C targets. A parade of 10-figure deals marched through this market in 2018 – however, spending has been light since. According to 451 Research's M&A KnowledgeBase, spending on CX&C targets fell almost in half during 2019 and continued to slow through the first quarter.

Fire Exits

Several of the power players in CX&C software made bold bets in 2018, driving up valuations and M&A spending in this corner of the market. SAP, for example, spent more than $10bn across two deals that year and Adobe printed two $1bn-plus transactions of its own. In 2019, just two CX&C vendors sold for more than $1bn, compared with seven such deals the year before. The falloff in valuations is just as notable as the decline in the number of big-ticket transactions.

According to the M&A KnowledgeBase, buyers paid a median 10.6x trailing revenue in their $1bn-plus CX&C acquisitions in 2018. Last year, neither of the 10-figure deals – Publicis Groupe's purchase of Epsilon, an aging marketing software and data shop, and Platinum Equity's take-private of Cision – hit 4x. Overall valuations have continued to drop since then as the heaviest spenders stepped back from the sector. In the first quarter, the median multiple for all CX&C acquisitions stood at just 1.4x, less than half the median for such transactions across the previous decade, our data shows.

A Spreading Sickness

The chaotic dive of the economy marks the beginning of a painful period for customer experience and commerce application firms (and most of the tech segment). Spending on CX&C software largely comes from marketing budgets and marketing budgets are closely tied to consumer spending, which is falling precipitously. A recent report from S&P Global Ratings projects consumer spending to decline 13.2% in the second quarter and an early March survey from 451 Research's Macroeconomic Monthly, Consumer Spend shows that 33% of people anticipate that they'll spend less in the next 90 days than during the previous period. And that number could deteriorate further as people have lost faith in the economy – the same survey shows that 70% expect the economy to worsen in the next 90 days.

That drop in consumer spending is weighing on marketing budgets. Businesses already are cutting back on digital advertising, a more malleable expense than software. Criteo and Twitter, for example, have already lowered their first-quarter revenue guidance in response to the crisis. While S&P Global Ratings had expected the US ad market to grow 5.3% in 2020, it recently revised its forecast down 14 percentage points. The longer the pandemic and recession continue, the deeper the cuts to marketers' budgets.

The pain from those cuts won't be spread evenly among software vendors. The largest among them have bigger balance sheets and can sustain themselves in a shrinking market. Moreover, many marketers have multiproduct deployments with those same vendors, giving the biggest organizations a greater defense against budget cuts as CX&C applications are often linked via shared data and cross-channel campaign management.

After years of heavy spending for targets in marketing automation, commerce software, customer service and other CX&C applications, the four largest players in this sector – Adobe, Oracle, Salesforce and SAP – have built up substantial market share across multiple CX&C product categories. According to 451 Research's Voice of the Enterprise: Customer Experience & Commerce, Vendor Evaluations, each of those vendors has software deployments inside over 20% of the organizations we surveyed across four or more product categories.

The hundreds of smaller firms in the CX&C sector lack those defenses. Rather than extensive balance sheets, they rely on venture investments and their own cash flow, neither of which is looking reliable in the current environment. After overfunding the CX&C space in the early parts of the past decade, VCs haven't been as eager to support these companies. Of the 31 venture-backed CX&C companies acquired in the first quarter, which had collectively raised $620m, only four had landed any fresh funding since the start of 2018, our data shows.


COVID-19 didn't create online grocery shopping, mobile apps for ordering take out, online banking, customer service delivered via chatbot, or other avenues of digital engagement. But it has pushed many people to try those for the first time – a habit that, for some, will become permanent. For example, according to a survey from Kagan, a media research group within S&P Global Market Intelligence, 38% of respondents said they now shop for some or all of their groceries online as a result of the outbreak.

Enterprises also have been forced to change in the crisis. Airlines, hotels, banks and other businesses whose call centers have been crushed in the pandemic are now more likely to invest in technology projects that can scale customer service. Although the market for CX&C software will dip initially, it could emerge with a higher growth rate than before the crisis amid an increase in demand for the software to build, manage and analyze digital customer engagement.

This ordeal will have businesses reevaluating investments in their CX&C stacks and likely fuel investments in emerging categories that were already getting attention. As we noted in a recent report on that topic, CX&C technologies such as modernizing digital experience platforms, embracing virtual assistants and unifying customer data could accelerate their growth rates. Those emerging segments are largely populated with startups that will struggle to survive the pandemic, providing larger firms with grist for bargain-priced acquisitions.

The desire to enhance customer experience was already fueling investments in digital transformation projects. In 451 Research's Voice of the Enterprise: Customer Experience & Commerce, Digital Transformation survey, nearly two in three (61%) respondents told us that 'improving customer experience' was among the top justifications for their digital transformation initiatives. Budgets for such CX projects could well increase, and new ones be funded, in a post-coronavirus economy.

Like the pain from the downturn, don't expect those budgets to flow evenly to all CX&C companies. That same survey shows that enterprises rely on relationships with application vendors to execute their digital transformation projects, as 65% said software vendors are 'essential' to their digital transformation efforts. The broad deployments of the largest CX&C providers give them an inside track to capture future spending on these projects. The combination of shifting priorities and a boost in new digital transformation projects could drive the large CX&C firms to increase their pace of small acquisitions.

M&A Outlook

In much the same way that the recession will exacerbate trends that were already in place before the crisis, it will have a similar impact on the market for CX&C deals. Premium valuations (10x and above) were already reserved for those few companies growing sales in a segment where the biggest vendors had little or no footprint. For example, in 2018, Adobe paid an uncharacteristic 11x revenue to acquire Magento ($1.7bn) and enter the e-commerce software space following Salesforce's $2.8bn purchase of Demandware at the same multiple.

Today there are fewer categories of CX&C software where the largest players don't have an extensive presence, but in those that remain, we could see sizable prints. For example, none of the big four have yet to follow SAP's $8bn move into voice of the customer analytics (via Qualtrics), although an eventual acquisition there will likely carry a high price – Medallia and SurveyMonkey, both publicly traded companies with market caps above $1.5bn, are the two largest targets there.

For the many middling businesses and categories in this market, exits – especially at premium valuations – will be tougher to find. The midmarket buyers (smaller public companies and private equity-backed firms, for example) that are responsible for most of the deal volume in this sector are likely to see their purchasing power hampered by the pandemic. And while the largest acquirers aren't likely to see their ability to do deals decline, they weren't putting premiums on smaller acquisition targets before the outbreak. For an illustration, look at the exits we've seen among marketing personalization specialists before the crisis.

Although the large companies all talk up the need for personalized customer engagement, none have been willing to spend much on purchasing the technology. Among the recent targets in that subsegment, few have fetched north of 4x. Many struggled to expand their toplines selling innovations within categories where the biggest vendors have substantial market share. Paying top dollar for businesses struggling to grow sales with innovative products in mature segments isn't likely to become a priority if the recession pushes more market share toward the largest players.
Scott Denne
Senior Analyst

Scott Denne is a Senior Analyst with 451 Research, where he helps direct the firm's coverage of technology mergers and acquisitions. He also contributes to 451 Research's Customer Experience & Commerce Channel with coverage of the advertising technology industry.

Sheryl Kingstone
Research Vice President & General Manager - VOCUL

Sheryl Kingstone leads 451 Research’s coverage for Customer Experience & Commerce, which covers the many aspects of how customer experience is a catalyst for digital transformation. She oversees the company’s coverage of a variety of customer experience software markets spanning ad tech, marketing, sales, commerce and service.

Keith Dawson
Principal Analyst

Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.

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