Impact of Innovation, Disruption & Consolidation on Business Equity in the Software Sector

New Entrants:

Up until about 5 or 6 years ago, it was easy for us to define our core markets; they were the services

and software vendors in the Capture, Content- and Process management, Output and Web content

related technology sectors. However, over the past 5-7 years, we have seen the rise of many new

technology, applications and service vendors who have developed completely new solutions from

scratch, which are now directly available for Cloud/SaaS/Mobile with no legacy constraints. Another

group of companies is the new infrastructure vendors such as Dropbox, Box and others, which

provide document management or, more precisely, repository based solutions in the Cloud. With

their Web Services (AMS), Microsoft, Google and Amazon have also become strong players in this

area.  

What these online solutions lack is strong process management capabilities with operational

execution in the core business of companies. However, we are already seeing many initiatives of

BPM-like companies, deploying their capabilities in the Cloud for their customers.

If these companies become the winners of tomorrow, this will have a tremendous negative impact

on the more traditional companies in the software sector, which are still carrying the legacy of

decades of customer installations. These new entrants will not be interested in acquiring such

“companies from the past”.

Innovative and Disruptive companies:

If we look at the expanded capabilities of Dropbox for business, the impact of Microsoft Office 365 &

their Azure Cloud platform, together with a growing number of EFSS (Electronic File Synch & Share)

players, we are now witnessing strong document management capabilities, available on demand for

a fraction of the price of what we were used to paying several years ago. Obviously, the strong BPM

capabilities to manage business processes are not there yet. But these are coming soon. It is no

longer acceptable to take two years to get a BPM platform up and running and its first processes

fully operational. Quickly deployable and affordable departmental solutions proved their worth

during the financial crisis and, since then, have greatly improved.

Customers will no longer tolerate inefficient, cumbersome infrastructures which are not available

everywhere, on any device at any time. Look at what companies such as Vienna-based, Braintribe,

are now providing - Not simply managing legacy content, but making data accessible with a relatively

inexpensive infrastructure, thus avoiding high maintenance costs. Over the last 5 years, many new

vendors have developed their solutions from scratch and are now coming to market. Software

vendors, with a long history of developing on premise solutions, are facing an uphill struggle in the

market against these flexible and agile solution providers and the situation is forcing the more

traditional vendors to maintain their existing customer base for as long as they can. Such companies,

which enjoy good maintenance revenues, may still be able to generate high profit margins at the

moment. However, their future growth potential is very limited and, with increasing competition

from the many new players in the marketplace, their equity value is likely to diminish sharply.

Consolidator Market Impact:

Consolidators in a market are important as they bring economies of scale, which stimulate lower

prices whilst still maintaining attractive margins. The question is, how well does this work in the

software industry? The one element typically included in a consolidation deal is an announcement

for existing customers that their software investments will be protected. However, it would be far

better if the acquiring party were to make a bold statement that they will provide a clear migration

path to a better software solution, rather than continuing to maintain the solution from the

purchased party for years to come. For example, Open Text has purchased at least 5 WCM and,

more recently, 4 BPM companies and continues to service these customers, thus inheriting high

maintenance costs.

Consolidation, disruption and innovation can create many synergies in the software industry.

However, for the acquired company, most of their value lies in the quality of their existing customer

base, how well their customers are “tied-in” to their solution as well as the expertise of their key

personnel. The better these inherited customers are “tied-in”, the higher the equity value will be

and the more the market consolidates, the less valuable the remaining vendors will become. They

will simply be valued for the profit generated by their customers, which is basically a financial

performance based valuation and not the best scenario for achieving optimal ROI at exit.