Changing economic sentiments, and diminished IPO market create the perfect storm for the Big 4 MISO - (Microsoft, IBM, SAP, and Oracle)as they see the medium/small sized vendors are beginning to make M&A moves. See this:
-> Adobe acquires Omniture
-> CA buys NetQoS
-> VMware buying SpringSource
-> PE players scooping Skype
-> Intuit buying startup Mint
- >Avaya buys parts of Nortel
Clearly momentum is slowly beginning to hit the M&A circuit - the backdrop has been that this year has seen very few deals compared to last few years averages. Some trends at work that shape the thinking on why the immediate future could see more and more of continued consolidation. Sramana Mitra assesses the prospects of some players. One may ask - why think of enterprise software when consumer technologies and internet infra/app players are getting more attention. As I wrote here, the consumerization of enterprise technology has the potential to open up new powerful combinations. The possibilities of such fusion of different worlds may open up good chances for disruptive innovation - this provides a platform for such an ideal fertile ground that can lead up to a potential business model innovation – so enterprises need to be well prepared to capitalize on such possibilities. What should the CXO’s do in such contexts: Embrace such technologies faster and in innovative ways align them to their business growth plans. Consumer technologies are not a taboo to be shunned - these need to be constantly assessed for their potential for innovative leverage in growing business.
• Strategic acquisitions target vendors with new product presence/ strong recurring revenue streams in well established areas. The cognoscenti keep whispering that large maintenance revenues as an area for potential targets. Look at Oracle’s reported numbers for this quarter: GAAP new software license revenues were down 17%; software license updates and product support was up 6%.Nurturing a profitable and recurring revenue stream will allow many vendors to share overall development and support costs as they weather the next storm. The hunt is on for vendors who fit this bill as megavendors and private equity actively chase after these assets.
• Weaker companies would see much lowered publicly traded vendor valuations. For companies on the prowl for acquisition with a target class, its never been cheaper and easier to acquire a competitor. Most P/E ratio have become quite attractive and fall below the standard 2X to 3X revenue price target.
• International market expansion. the larger vendors express tremendous interest in acquiring new distribution channels, micro industry verticals, and new geographical coverage. Many in the MISO ecosystem see a lot of turbulence and rumors of M&A run fierce as the partners consolidate to gain scale for regional and global delivery.
• Most privately held vendor exit strategies revolve around acquisition not IPO. Many firms with IPO plans have been told by their boards to refocus on revenue growth and partnerships. The intention - use partnership success to both drive revenue growth and attract acquisition by a larger vendor. Many see acquisition by the Big 4 as the best exit strategy at this point in time.
• Newer delivery models get more and more acceptance : If we analyze the standalone new sales numbers we may get to see this trend clearly. MISO on-premise license revenues may keep dropping/stagnating and in some cases record very moderate growth (in specialized areas). The ERP refresh rates may slowly begin to show a downward trend! SaaS and cloud players need to and i would believe will expand their presence beyond FAS,CRM & HCM spaces - this may also include on premise players getting to offer SaaS solutions in niche areas like procurement, PLM etc. Cloud computing models would over time get to become more popular with ease of use, quick implementation times, pay as you go, no infrastructure model a la google or salesforce and are in fact seeing more faster adoptions.
• Net-Net : Despite the expectations of a slow moving economy, end users should assume that the biggest vendors/ faster moving niche vendors will continue their torrid pace of acquisitions. As these acquisitions factor into long term apps strategies and planning for 2010 purchases, users must assume that truly specialized solutions with significant industry footprint will be acquired. Many customers recommend niche vendors that they work with to the megavendors to acquire them so that their investments are deemed to be safe.
Labels: Enterprise Software
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