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BofA predicts breakout in mergers attributable to downcycle

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Mergers in software could also be about to interrupt out.

Top investment banker Rick Sherlund of Bank of America sees a wave of struggling firms putting themselves up on the market at cheaper prices attributable to the economic downturn.

“You do have to see greater capitulation,” the firm’s vice chair of technology investment banking told CNBC’s “Fast Money” on Thursday. “Corporations could have their valuation expectations soften, and that may mix with more fully functional financial markets. I believe it should speed up the pace of M&A [mergers and acquisitions].”

His broad evaluation comes on the heels of Adobe’s $20 billion dollar deal Thursday for design platform Figma. Adobe didn’t generate excitement on Wall Street. Its shares plunged 17% attributable to questions on the worth tag.

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

“You have to get through third quarter earnings reports to feel confident that perhaps the bad news is essentially out into the market because firms can be reporting lengthening of sales cycles,” he said. “We’d like to reset expectations for 2023.”

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Sherlund and his team are very energetic within the M&A market.

“You’ve private equity with a boatload of money, and so they need functioning debt markets for leverage to do deals,” Sherlund noted. “They’re very eager and actively this sector … It suggests that [for] M&A, in absence of an IPO market, we’re just going to see loads more consolidation coming within the sector.”

He notes IPO demand has been hurt in reference to rising rate of interest headwinds and inflation.

“[The IPO market] will not be open. But when the window does open back up, you’ll see quite a lot of firms going public,” he added.

The long-term prospects for software are extremely attractive, in line with Sherlund.

“You have to be very bullish on the long-term fundamentals of the sector,” Sherlund said. “Every company is becoming a digital enterprise.”

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