In August, 11 Marc Andreessen put forward his thesis on software eating the world. Essentially, his belief is that due to pervasive broadband and the high growth of smart phones (5bn by 2020!) software has reached a tipping point of distribution capacity at minimal startup costs, impacting our economies at large.
Weve seen this prove true across 2011, and in the tradition of making annual forecasts this time of year I predict a continuation in the year 2012. We are in the midst of the most significant transformation across the IT industry. IBM got the first mover advantage several years ago by shedding its low margin consumer hardware business to Lenovo and refocusing on the core, profitable businesses of software and supported services. It has since more than tripled its market cap since its low in 2002. What we saw last year was all of the big hardware vendors following suit, at significantly higher costs, consequentially at lower rewards for being late to the game. HP is the most notable example through its shelling out 25% of its market cap for Autonomy, a major UK player in the data analytics space. Additionally, it killed its TouchPad seven weeks after launch and made statements it would sell off its consumer PC business.
Lets look at the other major traditional hardware vendors and see what their acquisitions last year say about their business transformations to focus on software and services through the buzz-word trends of Big Data, virtualization, and cloud computing:
- Dell acquires SecureWorks (US) and RNA (US), paying $612m at 5.1x revenue for the former. These software acquisitions expand Dells offerings in analytics, security monitoring, and virtualization.
- Xerox acquires NewField (UK), Concept (UK) and WaterWare (US). All three of Xerox acquisitions last year were in software, expanding its offerings in the image management and eHealth sectors.
- Lexmark acquires Pallas Athena (NL) for $50m. Lexmark arose from IBM divesting its printer division in the early 1990s. It paid a premium for a BPM and data analytics provider to expand its markets and products offerings.
- Cisco acquires BNI Video (US) and newScale (US) for $100m and $80m, respectively. The global leader in network infrastructure continues buying up software vendors. These targets enable Cisco to continue in its deployment of video streaming and virtualization management tools.
- NCR acquires Radiant (US) for $1.2bn at 3.2x revenue. Radiants high price was due to its software and SaaS products to the hospitality, retail, sports, entertainment, and energy sectors.
- EMC acquires Zettapoint (US) and NetWitness (US), paying $260m at 5.8x revenue for the latter; both targets operate in the data analytics space.
- Acer acquires iGware (US) for $320m. iGware provides software development services, specializing in cloud-based applications.
- Intel acquires Telmap (IL), CoFluent (FR), and NordicEdge (SE). The global leading chipmaker acquired three software companies to expand its edge in location-based services, design and modeling, and identity management software.
These are just a few examples from some of the largest and most notable players in the hardware space. The story this tells is that software is critical to the strategic growth and fundamental survival of these companies. I look forward to reading the annual reports in the next couple of months of such major leaders in hardware. I can say with measured certainty that the one thing in common across the board is that they will state that Software is a strategic area of focus, and they will continue growing in this area through M&A.