FT : Enterprise Software

Tuesday, January 29, 2008

In software, big is beautiful.  Economies of scale work nicely when you have to spend heavily to develop products and distribute them.  Customers want to know that their supplier will still be around in a few years’ time to support the expensive licence they are buying today.  And network effects prompt purchasers to move in herds, providing sellers with a helpful slug of pricing power.  The size advantage means mergers and acquisitions have proved popular.  Software deals signed globally last year totalled $67bn, only a shade lower than the bubble-inspired $70bn spent in 2000, according to Dealogic.  A fifth of that involved the market for “business intelligence” – software that helps with the analysis of data.  All three of the market leaders have been snapped up: Hyperion went to Oracle, SAP is buying Business Objects and IBM bought Cognos.  Consolidation has reached the stage where only mopping up remains to be done.  Between them Oracle and SAP control almost half the global market for big business software.  Aside from Microsoft and IBM, there is only a handful of competitors with more than 2% of the overall market.  In Europe, Autonomy, Temenos, Software and Sage are the only listed software companies left with annual licence revenues of more than $100m.  So where next?  Software as a service or “Saas” is in vogue: Saas provider Netsuite, listed in New York in December, has a $1.8bn enterprise value, implying a multiple of 12 times prospective sales.  Such popularity may not last – a risk is that struggling customers can scale down as easily as they scale up.  But it does highlight the trend from maintenance spending on existing hardware and services towards new software applications with a clearer productivity benefit.  If software companies can continue to increase their share of IT budgets, they will not have to keep shopping for growth.

Reference : http://www.ft.com/cms/s/1/fac8e694-cd88-11dc-9e4e-000077b07658.html

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