From my handwritten notes (attributions lost), some highlights of the session on ERP sector consolidation at the Enterprise Software Summit.
M&A was flat in 2003, except in the self-service category, which surged in the second half with 16 deals representing $2.4B. Key deals were EMC/Documentum and Siebel/Upshot, both strategic. Total was 46% cash, 41% stock and 13% mix. Next year expect higher use of stock in the mix. A number of companies raising war chests because interests rates are low and commercial paper markets are open. Typical comments for enterprise software that there are too many players and point solutions will be acquired.
IPOs not expected (aside from Salesforce) as there isn't a critical mass of candidates and other sectors are more attractive. Good companies were pulled ahead to go public too early during the boom. Some exceptions like Calidus. Its easier to get bought than go public and going public isn't a liquidity event for founders and early investors because of the lock up restrictions (180 days). Companies in the 20-40M revenue range are pursuing a dual track option, making the IPO the strategy, but retaining acquisition as an option.
On VCs, a lagging indicator of IPOs, things are picking up but due for some pain. The venture industry is due for a crash in about a year when they have to report the writedowns, bad news and no liquidity to limited partners. Even General Partners of brand firms are admiting privately they are due.
Seibel CIO Mark Sunday explained the strategic nature of the Upshot acquisition and the virtues of their hybrid model. With Upshot, they gained 103 people who learned the lessons of the market primarily, but also good email integration technology and 100 customers. With Motiva, it was a technology buy (incentive compensation), but also gained some great engineers and product managers.
Altiris founder Jan Newman described capital formation as "a value journey, not about liquidity events." They did 5 acquisitions, 3 when private (difficult to value). He pointed out the very structure of the enterprise software industry limits acqusition dynamics:
- 5 companies > $5 billion revenue
- 28 companies > $1 billion revenue
- 128 companies > $500 million revenue
- 1000s of companies >$50 milion revenue
This power law distribution limits the potential moves and suggests the action (beyond the headlines) may be in acquiring point solutions
Their acquisition criteria includes: accretive deals to help expand addressible markets (e.g. moving from service management into security, where multiples are good and it complements platform), similar architecture, compatible salesforce, partner/channel interest. Hot markets include App Server testing and management, virtualization of the data center as it shifts to blade architecture, auto-provisioning, managing email and managing migration.
Comments: its interesting that the hot areas are tools and systems to help manage change rather than provide new functions or scale. The session was consistent with what I pick up on broadly from tech vendors at a previous conference, but a greater interest in strategic moves and acquiring proven teams. Somehow, the value of human capital in these equations seems to run counter to the offshoring trend.