More Thoughts on Consolidation of the Enterprise Software Industry
As everyone knows the enterprise software industry has been experiencing a wave of consolidation at a pace not seen for many years.
While we have written repeatedly on this topic given its impact on the industry for both software vendors and customers (not to mention investors), we thought it would be worthwhile to revisit it.
What sparked the increased M&A activity? We believe that there were a convergence of factors in the wake of the post 2000 meltdown in technology stocks generally that sparked the fire, albeit rather belatedly.
The difficult IT spending climate post the internet/Y2K induced spending boom shifted the balance of power from vendors to customers, and resulted in very challenging conditions for enterprise software companies large and small.
The ensuing pressures on revenues and profitability at software vendors generally called into increasingly sharper focus the need to rethink their businesses with respect to pricing, distribution and their product portfolios.
Last, but not least, the lack of an active IPO market for enterprise software companies has meant that many younger companies that would have looked to the public markets for capital and liquidity as the most attractive path, now see a buyout or merger as a more competitive alternative. (The much publicized decision by Sevin Rosen to return the money raised for their most recent fund underscores these issues.)
Why now, and not years ago? While some readers may wonder as to why all of this activity seems to be ignited four to five years after tech bubble bursting, we would highlight that it clearly has taken the industry at large quite a bit of time to the realization that the industry is no longer a young growth industry, but rather a maturing (some would say mature) growth industry. Another factor that contributed to what is clearly a delayed reaction is the fact that software companies are often quite profitable (even if they’re not growing) and that many, many companies have balance sheets with big chunks of cash. Consequently, it is fair to say that there was no sense of urgency in terms of major financial pressures to force action. Likewise it is also important to note the difficulty of companies to come to terms with the dramatic reduction in valuations.
Is it good or bad for the industry? The consolidation of the industry has had a number of ramifications vendors, customers and investors, whether they are on balance good or bad remains to be seen. However, our view at this time is that consolidation has generally been good for customers.
Larger software companies have come under increasing pressure for a number of years now to reduce the cost of their software. Not surprisingly these cost pressures have been an outgrowth of the efforts of customers to better manage their corporate IT spending which, as is widely recognized, largely devoted (estimates on the order of 80%) simply to maintaining the existing IT infrastructure, with the small remainder being available to advance the capabilities of the customer. Furthermore the emergence of open-source software and software as a service (SaaS) provided new alternatives for customers looking to better manage their IT spend. Consequently, larger software companies looking to improve their value proposition have needed to build out their product portfolios more aggressively.
Smaller software companies in this same environment found it increasingly difficult to maintain their status within existing customers as well as to develop new customers. In addition, the cost of selling and supporting their customers is comparatively high due to lack of economies of scale, making it that much more difficult to address the increasing pricing pressures the industry has faced.
Will it continue or will it slow down? While it is unlikely that the feverish pace of consolidation seen during the past 24 months or so will continue, we don’t see the basis for a dramatic slow down in activity either. Valuations while somewhat higher than they’ve been are still low by long term historical standards. IT spending will continue to gradually improve but is still not likely to accelerate sharply in the next year or so. The IPO market for enterprise software companies remains lackluster. And while we suspect Oracle is not likely to continue their acquisition binge at the pace of the past year or so, we see evidence to suggest other players could become more active, whether they be large technology companies such as IBM, HP, or EMC, or increased activity from private equity players (we note with interest the growing list of deals – Serena, NetIQ, and Embarcadero).
Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.
While we have written repeatedly on this topic given its impact on the industry for both software vendors and customers (not to mention investors), we thought it would be worthwhile to revisit it.
What sparked the increased M&A activity? We believe that there were a convergence of factors in the wake of the post 2000 meltdown in technology stocks generally that sparked the fire, albeit rather belatedly.
The difficult IT spending climate post the internet/Y2K induced spending boom shifted the balance of power from vendors to customers, and resulted in very challenging conditions for enterprise software companies large and small.
The ensuing pressures on revenues and profitability at software vendors generally called into increasingly sharper focus the need to rethink their businesses with respect to pricing, distribution and their product portfolios.
Last, but not least, the lack of an active IPO market for enterprise software companies has meant that many younger companies that would have looked to the public markets for capital and liquidity as the most attractive path, now see a buyout or merger as a more competitive alternative. (The much publicized decision by Sevin Rosen to return the money raised for their most recent fund underscores these issues.)
Why now, and not years ago? While some readers may wonder as to why all of this activity seems to be ignited four to five years after tech bubble bursting, we would highlight that it clearly has taken the industry at large quite a bit of time to the realization that the industry is no longer a young growth industry, but rather a maturing (some would say mature) growth industry. Another factor that contributed to what is clearly a delayed reaction is the fact that software companies are often quite profitable (even if they’re not growing) and that many, many companies have balance sheets with big chunks of cash. Consequently, it is fair to say that there was no sense of urgency in terms of major financial pressures to force action. Likewise it is also important to note the difficulty of companies to come to terms with the dramatic reduction in valuations.
Is it good or bad for the industry? The consolidation of the industry has had a number of ramifications vendors, customers and investors, whether they are on balance good or bad remains to be seen. However, our view at this time is that consolidation has generally been good for customers.
Larger software companies have come under increasing pressure for a number of years now to reduce the cost of their software. Not surprisingly these cost pressures have been an outgrowth of the efforts of customers to better manage their corporate IT spending which, as is widely recognized, largely devoted (estimates on the order of 80%) simply to maintaining the existing IT infrastructure, with the small remainder being available to advance the capabilities of the customer. Furthermore the emergence of open-source software and software as a service (SaaS) provided new alternatives for customers looking to better manage their IT spend. Consequently, larger software companies looking to improve their value proposition have needed to build out their product portfolios more aggressively.
Smaller software companies in this same environment found it increasingly difficult to maintain their status within existing customers as well as to develop new customers. In addition, the cost of selling and supporting their customers is comparatively high due to lack of economies of scale, making it that much more difficult to address the increasing pricing pressures the industry has faced.
Will it continue or will it slow down? While it is unlikely that the feverish pace of consolidation seen during the past 24 months or so will continue, we don’t see the basis for a dramatic slow down in activity either. Valuations while somewhat higher than they’ve been are still low by long term historical standards. IT spending will continue to gradually improve but is still not likely to accelerate sharply in the next year or so. The IPO market for enterprise software companies remains lackluster. And while we suspect Oracle is not likely to continue their acquisition binge at the pace of the past year or so, we see evidence to suggest other players could become more active, whether they be large technology companies such as IBM, HP, or EMC, or increased activity from private equity players (we note with interest the growing list of deals – Serena, NetIQ, and Embarcadero).
Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.
posted by jcm at 5:51 AM
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