A Software Insider's Point of View

Continued economic slow down, credit crisis, and diminished IPO market create the perfect storm for the Big 4 or as fellow blogger Josh Greenbaum likes to call it, MISO (ie. Microsoft, IBM, SAP, and Oracle).  Here are four trends at work that shape the thinking on why 2009 will be another year of continued consolidation:

• Most privately held vendor exit strategies focus on 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.
• Strategic acquisitions target vendors with strong recurring revenue streams. Chatter from BBQ’s and luncheons highlight vendors with large maintenance revenues as an area for potential targets.  Nurting 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 private equity and vendors chase after these assets.  Case in point - the intention to acquire Epicor by Elliot Associates.
• Economic conditions lowers publicly traded vendor valuations. For companies with a prescribed target list, its never been cheaper to acquire a competitor.  Most P/E ratio have become quite attractive and fall below the standard 2X to 3X revenue price target.
• Pressure remains to grow new markets. the larger vendors express tremendous interest in acquiring new distribution channels, micro industry verticals, and new geographical coverage.  One great example is the movement in the Microsoft Dynamics partner base.  The rumors of M&A run fierce as the partners consolidate to gain scale for regional and global delivery.  The fight for Axon by HCL and Infosys also highlights the consolidation happening around SAP system integrators as they transition into solution providers.

The bottom line.

Despite the gloomy economic outlook, end users should assume that the biggest vendors will continue their torrid pace of acquisitions.  As these acquisitions factor into long term apps strategies and planning for 2009 purchases, users must assume that truly specialized solutions with significant industry footprint will be acquired.  One proactive approach is to suggest acquisitions and tie-ups to key vendors during discussions with their senior management on financial viability as well as long term road map and strategy.

Your POV.

Who do you think will be acquired by whom next?  Look forward to your thoughts.  Post a comment or drop me a line at rwang0@gmail.com.

Copyright © 2008 R Wang. All rights reserved.