The Next Acquisition Wave: Enterprise Software?

The high tech titans – IBM (IBM), HP (HPQ), Oracle (ORCL), Microsoft (MSFT), SAP (SAP) and EMC (EMC) – and their smaller software brethren have been nibbling at tuck-in acquisitions. Still, they have been building their cash hoards and watching on the sidelines to determine the extent of the recession (it did not turn out to be the 2nd coming of the Great Depression) and IT spending cutbacks.

Some have speculated that they were waiting for the valuations of their acquisitions to bottom out before they pounced. If that was the primary factor, the buying binge would be in full swing since software valuations have rebounded significantly since the market lows.

Instead, the reason for their restraint is probably their conservative financial management - one of their underappreciated characteristics. They have virtually no debt (the credit crisis does not affect their operations as it does their customers) and they generate cash flow from software maintenance fees. This means the titans can wait until they feel the time is right to start up their acquisition machines. That time is when they have some confidence that IT spending will pick up or when one of their rivals starts the acquisition engines.

IBM's announcement yesterday that it will be acquiring SPSS (SPSS) for $1.2 billion in cash is likely to be the trigger event for its rivals to jump back into the M&A waters with both feet. Just as dozens of software acquisitions a few years ago culminated in business intelligence (BI) powerhouses Business Objects, Hyperion and Cognos being bought by SAP, Oracle and IBM respectively, the IBM acquisition is going to trigger purchase of enterprise software companies.

The categories that are holding their own through the recession and will grow significantly when IT spending rebounds are the most desirable acquisitions. These categories include BI (including business/predictive, data mining), data integration or middleware, SaaS (software-as-a-service) or on-demand software and enterprise application vendors oriented towards specific industries or business processes.

We follow these software categories in our two indexes:

• BI/DW Index
• On-Demand Software Index or SaaS (software-as-a-service) Index

These indexes track both the potential buyers and sellers in the enterprise software M&A activity.

Open source software (OSS) will be in play IF the titans can figure out how they can create a profitable business model to justify the investment or if they feel they can leverage the software to hurt rivals. (This is not a great business strategy, but egos sometimes supersedes business sense.) Emerging technologies such as columnar databases will continue to tuck-in purchases.

In our next post on acquisitions, we will look at the crystal ball and match buyers with sellers. In our match making we will speculate on the likely match-ups and who we feel should walk down the aisle together.

Comments

[Frank Xavier:]

I agree. I also expect further acquisitions in the enterprise software market. However, in the data mining arena, there are no similarly sized equivalents to SPSS.

SAS is five times as large in terms of revenues, privately owned, and much stronger in terms of market position and quality of service and solutions. Hence it is no easy target for take-overs.

All other players in the data mining and predictive analytics market are much smaller and hence much less attractive for the big IT players like IBM, HP, SAP, Oracle, and the like.

Anyway, the data mining and predictive analytics market is quite an interesting one moving at a very fast pace. Open source vendors are also worth a look. Their market shares are growing quickly.

The R project and RapidMiner are quickly gaining ground getting a larger share of the analytics market.

Look at the results of the yearly KDnuggets poll among data mining experts in 2007, 2008, and 2009, and you know what I mean:

www.kdnuggets.com/poll...
www.kdnuggets.com/news...
www.pressebox.de/press...

Rapid-I ( rapid-i.com ), the open source company behind the open source data mining software RapidMiner ( RapidMiner.com ) has doubled its team, revenue, and profit every year and Rapid-I has a profit margin most closed source companies would like to have.

Cheers,
Frank

Jul 30 02:06 PM

[Robert0713:]

>> (it did not turn out to be the 2nd coming of the Great Depression)

All we have so far is a Sucker's Rally. Note that (from what I've read so far) the vast majority of earnings show:
- lower revenue, qtr/2008 - qtr/2009 and sequential 1 - 2
- where earnings have not cratered, the reason was draconian firings

Watch out 3rd qtr. earnings. I plan to be in cash by 9/15. I expect that there will be no more firings to be done, revenue will crater, unemployment will be 15%, and the capitalist dream will finally be at an end.


>> IBM's announcement yesterday that it will be acquiring SPSS (SPSS) for $1.2 billion in cash is likely to be the trigger event for its rivals to jump back into the M&A waters with both feet.

Not in the slightest. SPSS has nothing to do with IBM systemically. Statistical Program for the Social Sciences, in case you don't know. SAS would make a bit more sense, but I can't believe that Goodnight would give up independence at this stage; certainly not to anything like IBM (or its kin).
There is less to SPSS than meets the eye; it's not a mini-SAS.

Jul 30 11:08 PM