Q3 2008 Horizontal Application Software Market Overview
The business applications sector saw wide scale and transformational mega deal consolidation in 2007. In 2008, this has been one of the least active overall sectors and most deals that involved the ERP area focused on consultancy and services acquisitions. In September, Gartner forecast that the enterprise software market will grow to more than $324 billion by 2012, averaging annual growth of 10%. Software as a Service (SaaS) is forecast to have a 23.8% compound annual growth rate through 2012 for the aggregate enterprise application markets, far exceeding the total market CAGR.
With the U.S. credit crisis, instability in energy markets and overall uncertainty in the global economy, investment in BI and analytics has been more resilient than many other software sectors. The rapid adoption of these technologies in emerging markets like India, China, Russia and Brazil makes sense since BI and analytics can help organizations deal with above-average growth, increasing quantities of data, and intensifying competition.
As companies become more global, they look to the next generation of software solutions to help them optimize revenue, increase customer loyalty and satisfaction, and enhance competitiveness. BI and analytics increasingly appear to be the answer, whether in mature markets like Western Europe and North America, or rapidly emerging markets like India, China, Russia and Brazil.
The CRM market continues to grow and evolve as vendor consolidation, SaaS, and emerging industry and technology trends shape the market landscape. The next generation of CRM software is leaning away from the older “sales”- centric foundation to one of managing customer interactions.
While Business Intelligence was one of the better performing sectors, Communications, Human Resources and Supply Chain Optimization were three of the most targeted sectors for M&A.
Customer Relationship Management
The need to keep good contact with your customers has been at the heart of successful business since business started. Customer Relationship Management (CRM) in name has been around for just over 10 years. Large companies have been able to use CRM products to allow them to deliver the ‘personal’ touch of a small enterprise, despite the very large number of customers. The early part of this decade saw a rapid consolidation of what was initially a fragmented sector. Today there are 20 or more significant players and the consensus is that consolidation will continue until eventually only five or six dominant players remain. Oracle, SAP, Microsoft and Salesforce.com may be amongst this number, but who else? This will continue to drive deal flow in both areas of platform deals and add-on point solutions, expanding the footprint of CRM.
Competition has driven players in this space to look for customers from small and medium sized businesses (SMBs). SaaS has been a particularly relevant business model for SMB CRM, reducing both the up-front costs and longer term costs of ownership thereby allowing SMBs to justify the investment in a particular CRM solution. A second recent change has been the need to handle the increased complexity of customer communication, as it moves beyond call centers to mobile, email and SMS contact. A successful CRM system will manage customer interaction across many parts of the business, and this requires a high level of integration to other systems. So a third area of change is that modern development platforms must be employed to allow CRM solutions to cope with such technical integration challenges. Finally, the complexity and volume of customer interactions, even in SMBs, is such that analytic tools provide differentiation between competing CRM vendors. SaaS, unified communication, a design able to readily provide cross-system integration, and the adoption of niche analytics drive the need for continued acquisition.
Content Management
Enterprise Content Management (ECM) is a highly fragmented market segment without a clear leader. The players in this market can be divided into four categories:
(a) The large IT infrastructure vendors
They have acquired several of the pure play ECM players some time ago: IBM (Filenet), Oracle (Stellent), EMC (Documentum), HP (Tower Software). ECM has become part of the standard offering of the large IT vendors who continue driving M&A activity due to their strategy to enhance their offerings in this space.
(b) The remaining major pure ECM vendors
Two of them, Open Text and Interwoven, are following a strategy of increasing market share and broadening their offerings by acquisition. Their focus is more on vertical applications than on horizontal extensions. As one M&A manager put it: “We have plenty of technology. The challenge is to integrate the pieces. We are currently looking for applications.” Open Text’s acquisition of Captaris (at 1.2 x revenues) and Interwoven’s acquisition of Discovery Mining are proving that they are in fact implementing their strategy. The third major ECM player, Vignette, seems also to be going this road but to a lesser degree by means of acquisitions.
(c) New ECM players
When most of us already thought the ECM cake has been cut and distributed, several new players entered the scene, some of them offering technology on an open source basis (Alfresco...); others flourish by offering their products on a SaaS basis (Hyland…). Some of them will be take-over candidates, and others will be strong enough to grow by acquisition themselves. An example for the latter is Hyland’s acquisition of Liberty Information Systems. Hyland was bought by private equity firm Thoma Bravo last year and is now in a position to implement their own buy-and-build strategy.
(d) Others, “Strangers or Diversifiers”
Suppliers in other market segments are adding ECM functionality to complete their solution offering. This is the reason why KIT, provider of Internet TV enablement technology, acquired Morpheum, developer of a modular, ease of use web CMS system. And the Swiss Post bought Global Business Services Plus in order to complete its offering in the field of document solutions in Germany and France.
Supply Chain
Activity in the horizontal applications space showed continued consolidation in Q3. Clearly one of the most interesting deals came from the Supply Chain marketplace with JDA Software’s acquisition of i2 technologies. In late 1999, i2 carried a market capitalization in excess of $28 billion dollars. Fast forward to this quarter and we note the deal value of the JDA/i2 acquisition at $346 million. This demonstrates the impact of large ERP players such as SAP and Oracle making many acquisitions in the SCM space and thus providing significant competition for the pure SCM players such as i2.
The i2 acquisition by JDA follows the 2006 acquisition of Manugistics, and provides a combined revenue base of over $600 million for JDA. Will this be a large enough base to compete with SAP and Oracle? Good question, but the real significance is the movement away from “best of breed” targeted solutions to a more robust, full ERP architecture provided by SAP and Oracle that includes integrated SCM functionality.
In the European marketplace we noted that Marlin Equity Partners, LLC, through its portfolio company Solarsoft Business Systems, announced the take-private acquisition of Chelford Group plc (UK), a leading provider of enterprise and supply chain software solutions to customers throughout the UK and Europe. The acquisition of Chelford Group further expands Solarsoft’s commitment to acquiring leading vertical solutions within the supply chain and ERP markets. The combined business has revenue in excess of $100 million and employs over 450 professionals. Marlin has completed nine software acquisitions since 2005 and continues to actively seek platform and add-on acquisitions.
As usual we see this move to consolidation as the by-word for all segments of the horizontal applications space and assume this trend will continue for the foreseeable future.
So, although the excitement of the early part of the decade is history, there is still much to happen in this sector.