The software market has been rife with M&A in recent years, and the trend could continue next year, particularly if President-elect Donald Trump does extend a tax repatriation holiday to companies with offshore cash. Microsoft, which is in the process of acquiring LinkedIn, and Oracle, which has been especially acquisitive this year, are positioned to be leaders in software mergers and acquisitions, believe analysts at Morgan Stanley.

This year brought increase in software M&A

Analyst Keith Weiss wrote the Software section of his firm’s “Key Investor Debates Likely to Drive Stocks in the Coming Year” report dated Dec. 13. He observed that this year brought an increase in software M&A and gave three reasons why this happened. One reason is because software companies had plenty of liquidity on their balance sheets. Also legacy software companies have been seeking new areas of growth, and rationale for more “consolidation of functionality in core software segments” was strong this year.

The analyst noted that chief information officers named areas such as cloud computing, analytics and cyber-security as their most important focuses this year. As these areas gained larger and larger shares of software spending among enterprise customers, strategic acquirers and financial groups such as private-equity firms wanted to cash in.

Strong software M&A trend to continue

Weiss feels that the main drivers of the strength in software M&A this year will continue into next year, so he sees no reason for the acquisitive nature of the market to change in 2017. In fact, he notes that in the event of a cash repatriation holiday, the trend could get even stronger next year, with big names taking advantage of the opportunity to bring offshore cash back to the U.S. and then using it for M&A.

Legacy software vendors in particularly may be more likely to do this, he suggests. He also notes that Microsoft has about $111 billion in offshore cash, while Oracle has about $51 billion, making them likely acquirers in 2017 in the event of a cash repatriation holiday. He explains that in 2014, software M&A deal volume surged 44% year over year following the last tax holiday on repatriated cash.

However, Weiss also notes that software M&A usually follows broader trends, and his firm’s Equity Strategy team expects the S&P 500 to continue posting positive performance next year. Their base case price target is 2,300.

Which companies may become software M&A targets?

Weiss sees a wide array of possible candidates in the software field, as trading valuations stand within the range of past average acquisition prices. He explains that approximately two-thirds of the names on his list are trading lower than the 4.6x average NTM EV/ Sales software M&A acquisition multiple. Further, the enterprise value of half of those names currently stands lower than the $3.5 billion average transaction price.