Information Technology
Market Insight
The past 12 months in the enterprise software industry have been characterized by greater adoption of new business models, including a new distribution paradigm: delivering software applications as a service (SaaS). SaaS is an approximately $3 billion segment of the application software license market, but industry forecasts indicate that it could grow 10x and reach almost $30 billion by the end of 2013.
Traditional licensing is no longer as dominant and subscription software is gaining significant momentum among companies in many industries, although market penetration is still in the early stages for large enterprises, and even earlier stages for SMBs (Small- and Medium-Sized Businesses). The bottom-line, though, is that offering vertically-oriented applications on a subscription basis is an increasingly compelling approach for large enterprises as well as SMBs.
On an over-arching basis, IT is still the largest sector for venture capital investments; and is forecasted to grow, regardless of the economy’s direction. Similarly, we believe the overall M&A markets should remain active in 2008, despite increasing macroeconomic challenges.
Total U.S. venture capital investment in software is trending at about $5.5 billion for 2007, in the same range as the 2006 total. And software equity investment during the first half of 2007 reached nearly $3 billion, tracking with similar volume for 2006. As a result, the industry appears headed for another extraordinary year in 2008.
Overall M&A activity in the United States reached over $8 billion in the third quarter of 2007, versus approximately $11 billion in 2006. Software represented about $1.2 billion and $1.8 billion during the third quarters of 2007 and 2006, respectively.
Trends to Watch
- The SaaS business model will become even more ubiquitous in the enterprise as new technology-enabled products are built around legacy technologies; traditional software vendors will continue to feel the pain.
- Business intelligence and predictive analytics will become more commonplace in both the enterprise and SMB sector as companies strive to leverage decision-making and data analytics more deeply in their organizations.
- "Consumerization" of technology will drive innovation at the enterprise level; Web 2.0 and Web-driven companies will continue to benefit.
- Increasing interest in simplified IT management and demand for better utilization of IT assets will create an increased focus on virtualization; solutions will address demand for server, desktop and operating systems
- The burgeoning market for mobile and wireless applications will continue to gain critical mass.
Financing the Future
We believe that private placements and M&A will remain strong markets; private placement volume for the first three quarters of 2007 hit $5.5 billion while M&A activity for the same period reached $60 billion. We also believe that strategic consolidations will continue within the software industry. Indeed, buyers remain active across the software and services segments. Vertical synergies will continue to be important, and larger companies will still be looking to assemble or complete a broad portfolio of applications for their solution sets. The key take-away is that the flight to quality – not quantity – will be pronounced, particularly as the larger software companies extend their reach in virtually every direction as competitive pressures increase.