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 under-appreciated 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 …
– IBM (IBM), HP (HPQ), Oracle, 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 hordes 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 under-appreciated 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.
