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Investing.com -- Global mergers and acquisitions (M&A) activity surged in the first quarter of 2026, but dealmaking in software companies, which have seen their valuations decline recently due to AI disruption fears, has slowed.
Overall transaction volumes topped $1.2 trillion in the quarter, with bankers saying a substantial pipeline of deals remains in progress, according to Reuters, citing LSEG data.
While the number of transactions dropped 17% compared with the same period a year earlier, the deals that did close involved larger companies, pushing total value up 26%. Four of the six biggest transactions involved companies considered to be beneficiaries of the AI boom.
Companies are pressing ahead with strategic acquisitions despite geopolitical tensions, volatile energy prices and the uneven economic effects of AI adoption, and in periods of disruption, M&A has historically served companies well.
AI is increasingly central to that calculus. The rapid growth of the technology across the economy has made it a decisive factor in how acquirers size up targets, rewarding companies seen as AI winners while penalising those perceived as exposed to disruption.
That dynamic is particularly acute in software. The iShares Expanded Tech-Software Sector ETF (NYSE:IGV), which tracks the largest U.S. software companies, has fallen as much as 25% this year, significantly underperforming the broader market. The reset in valuations has cooled dealmaking appetite for companies in the sector that investors consider at risk from AI-driven competition.
To better understand what the shifting landscape means for the software sector outlook, particularly from an M&A perspective, Investing.com spoke with Zach Haarer, Co-Founder and Managing Partner at Kaizen Equity Partners.
Where’s the clearest line between a software business AI disrupts and one it accelerates?
"If your software is a thin layer sitting on top of a generic workflow, like task management or basic CRM, AI agents can replicate that functionality for a fraction of the cost. Those businesses are exposed. But if your software is a vertical system of record embedded in a mission-critical industry workflow, AI is a tailwind. It makes your product more valuable, not less."
"Most vertical software businesses have deep existing moats that make disruption risk limited. Even without AI investment, these companies are performing very well in market. Their customers aren’t switching because the domain expertise, regulatory compliance, and workflow integration took years to build.
"You can’t "vibe code" a replacement for software that manages medical device compliance data or runs payroll for a niche industry."
"One of our clients increased their EBITDA margins from 30% to 80% because AI reduced their development costs while simultaneously enabling them to build new features on top of their proprietary dataset. The software got stickier and more profitable at the same time."
How has AI disruption changed what buyers are actually willing to pay for?
"It’s created a two-speed market. Horizontal SaaS companies are facing more scrutiny from buyers around AI disruption risk. Meanwhile, capital is concentrating into vertical, high retention SaaS with defensible moats."
"We’re seeing upwards of 30 bids on a single process and averaging over 20 bids per deal this quarter. Buyers are competing aggressively for quality vertical assets."
What does a founder actually need to show buyers today to prove AI readiness?
"AI readiness is certainly a bonus, but not a requirement. The foundation is still the same. Strong retention, strong margins, embedded workflows, defensible market position. AI capability is the cherry on top that can add competitive tension to a process, but it’s not what makes or breaks a deal."
Some analysts argue the valuation gap between fast-growing European software and US peers is an inconsistency investors should be exploiting. Do you agree?
"I’d push back on the framing. In our experience, companies with strong fundamentals command strong outcomes regardless of geography. Our experience has been that the strong companies still receive U.S.-like growth multiples."
"The real dynamic isn’t a valuation gap to exploit. It’s that U.S. investors are increasingly thinking globally with their deployment strategy, and they’re finding exceptional vertical software businesses in Europe that check every box. Quality is quality, and buyers are increasingly willing to cross borders for it."