The business applications sector saw widescale 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 Enterprise arena 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%. 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. Communications, Human Resources and Supply Chain Optimization were three of the most targeted sectors for M&A.
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.
Human resources (HR) departments are viewed as service centers providing critical, but nonstrategic, services to the business. In a turbulent economy where workforce reductions are contemplated daily, it is clear that HR needs to become more strategic. Human resource management (HRM) will be a key area of focus in 2009 as companies and government organizations put in place strategies to cope with the economic crisis and recovery. The focus has shifted to hiring freezes, benefits and compensation cost management, and workforce reductions in the hardest hit segments. We saw many deals in and around the HR space in 2008 and look to more in 2009 that center on managing and developing talent, embracing HRM analytics, and Web 2.0 adoption. It is important to note, however, that like other companies that make business software, Oracle reported a drop in the amount of money its customers are prepared to spend on tools such as financial and personnel management applications. Executives said on a conference call that they had seen a reduction in large, multi-year contracts, and that they had significantly dropped their assumptions on the number of deals which would close in the next reporting quarter.
The CRM market continued to grow and evolve in 2008 as vendor consolidation, Software as a Service, 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.
Customer Relationship Management
The big players in the CRM space continue to capture market share. SAP, Oracle (Siebel), SalesForce.com, Microsoft (with the new 4.0 version) all continue to really own CRM in the larger companies and even Government as they get into the “customer” game. Open Source solutions are becoming more popular with the smaller companies who will likely migrate to one of the bigger players as they grow.
The reality now is that every real company has a CRM of some sort and as these systems are hard to swap out, most companies are unlikely to change systems lightly, particularly in a rough economy where major capital expenditures for this sort of thing would be difficult to get support for. Having said that, companies are putting pressure on their CRM providers to deliver ever-increasing accuracy and customer intimacy from their CRM. Companies are demanding integrated solutions that can not only provide client- by-client analysis, but the ability to do this in real time and to proactively send targeted messages to the right buyer at the right time and with the right media.
Acquisitions we see in this space have had less to do with consolidation but more to do with new capabilities and some verticalization. The ability to provide cross platform information will be critical as CRM providers want to be able to provide marketing information across all media, print, email and more recently mobile.
Small software companies looking to become attractive acquisition targets in this market should consider ways to uniquely target specific buyers in specific verticals with pin point precision and provide the data in a way that can be rolled up into actionable, real-time information for use by the larger systems. The other end of the transaction is the creative distribution of this information, and mobile opportunities seems to be the most virgin territory.
Supply Chain Management
In Q1 we forecasted SCM to become one of the areas with above average M&A activity in 2008, but as the quarter progressed, the total number stayed somewhat below our expectations. That said, the dynamics in this market segment are still intact. The drivers of M&A activity, like the high demand for complete SCM solutions, integration of emerging technologies such as RFID, etc. are still as valid as before. This was proven by the comparably small number of transactions in the fourth quarter: Tyco International’s acquisition of Vue Technology, a provider of item-level RFID software and infrastructure solutions was interesting, as will be watching HighJump in the coming year. HighJump, a leader in the supply chain execution software market, bought by Battery Ventures from 3M in Q2, is back on the scene as an active buyer as their acquisition of BelTek Systems Design shows.
But the general economic slowdown does not leave the SCM market untouched. The impact is not necessarily reflected in the numbers of transactions by quarter yet. Although the small number of acquisitions in Q4 after a better performance a year ago is certainly a signal, the real warning message gets communicates via an aborted SCM flagship transaction:
On August 11, JDA Software Group announced the acquisition of i2, global provider of supply chain solutions, for $346 million in cash (representing a factor of 1.35 x on i2’s TTM revenues). Making real sense from a strategic point of view, the deal was approved by i2 shareholders on Nov 6 - 80% of the total shares outstanding voted for it. The same day, however, JDA lowered the price per share they were intending to pay and i2’s board of directors saw this proposal as “not in the best interest of the shareholders to pursue it.” The deal seems to be off the table.
Since JDA has to pay a $20 million termination fee, there must have been a number of quite serious reasons which made them pull back from the conditions laid down in the merger agreement. Among those quoted are concerns as to how successful the deal would actually be, at least in the short run; discussions about the strategic direction JDA should be taking, i.e., focus on retail vs. manufacturing, heavy investments needed to satisfy the high expectation of the i2 customer base, significant switching costs, etc. Understandable concerns - but would they have resulted in a collapse of the deal if there were not uncertainties, if not disastrous expectations, behind the development of the world economy?
As far as the latter is concerned, according to the Institute for Supply Chain Management, the manufacturing and non-manufacturing SCM market segments have to be prepared for a decline in capital spending of at least 7-8% in 2009. We are still moderately optimistic with regard to the M&A market though: “Supply Chain Management Review” reminds management that particularly at difficult times one should begin introducing new technology to prepare for a very different economic environment in which to operate. It would certainly stimulate the demand for innovative, integrated SCM solutions if decision makers were to adopt a respective mindset. Since also most of the strategic buyers still have sufficient cash on their balance sheets, we think that M&A activity in the SCM market will continue throughout 2009 – but at a somewhat lower activity level and at valuations below those we experienced earlier this year.