The Next Acquisition Wave: Enterprise Software?

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Includes: DVMT, HPQ, IBM, MSFT, ORCL, SAP
by: Rick Sherman

6a00d8345444f069e200e54f9bcb358834-800wi The high tech titansIBM (IBM), HP (HPQ), Oracle (NYSE: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:

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.