I attended a “Merge Briefing” workshop today offered by the Corum Group Ltd. on the status of software acquisitions. I had learned a lot from a workshop that Ward Carter, Corum’s CEO, gave at the Software Business 2007 conference and felt that this would be informative. It turned out to be much more. It was given by Nat Burgess, and it was quite sobering.
Burgess characterized merger and acquisition activity as either driven strategic considerations or by consolidation. Strategic software acquisitions are driven by major changes in the business environment caused new technologies, new or rapidly growing markets, or new regulation requiring IT infrastructure upgrades. Consolidation is driven by general financial uncertainty, IT purchasing slowdown, or regulation creating additional expense.
Burgess offered the perspective that, with the exception of a few highly strategic market sectors, we have moved from a market driven by strategic acquisitions to a consolidating market. Consolidation driven acquisitions tend to be done at lower multiples than strategic ones, and as mergers or acquisitions have historically accounted for 90 to 95% of the dollars in a software company exit this means that firms need to focus on recurring revenue models, clear ownership of all relevant intellectual property, and attacking a customer’s deteriorating cost or risk situation.
Corum offers a free weekly newsletter that tracks software merger and acquisition activity as well as quarterly briefings on-line. It was a sobering assessment but one that seems thoroughly grounded in the current realities. I was glad to be able to meet Nate Burgess and to hear the presentation. One thing that became clear as I was reading through the briefing book afterward was that acquisitions are going to be the overwhelming majority of exits for the foreseeable future, and I need to pay more attention to software M&A activity if our firm is going to be able to assist our clients in getting the best value for their technology and business.
Update: Nate Burgess blogged about the event and posted photos including this one that shows me sitting next to Craig Sirnio of the Angel’s Forum.