Information-Management.com: Let’s start with the current state of the enterprise software and services market.
Zandy: It’s such an unusual period. There is a lot of activity right now, and the surveys that have been taken are increasingly optimistic. This could turn out to be a good year for software M&A. There is definitely a consolidation going on, but what else is new there? Software has been consolidating for a long period of time, with most of it in attractive, high-value sectors. In terms of advanced analytics, you’ve got the big guys in there. IBM doesn’t seem to be making the mistakes HP made with Autonomy. Big data isn’t going to go away. We’ve got this new name for it, big data, but the proliferation of more data, businesses have to deal with it. You see it in the consumer sector, where the algorithms really work. In the e-Discovery area and in legal circles, it’s really taking hold. It’s a trend that’s unstoppable, in terms of advanced analytics growing and the bigger players consolidating the [market] sector and product areas. ... The companies we see in the analytics area, even the little ones, make a fair profit.
So the M&A deal values dropped in 2012, even though the number of transactions went up a bit. What should we take away from these figures?
Zandy: Well, the values dropped, but I think they’ll come back this year. I don’t think 2012 was an indication of a negative trend. People wax and wane [on M&A values], but in terms of the multiples by sector, these companies are vastly different in terms of recurring revenue. The good ones trade in multiples of revenue. We haven’t seen any narrowing of the range, so to speak.
Berkery: Out of all the markets we’ve covered, if you looked at software going back to 2006, it’s probably the most stable market in terms of revenue multiples. It’s always hung around two-times the value. It fluctuates, but 2012 wasn’t a huge drop. In 2010, there was 11 times the EBITDA and now we’re showing 11.9. Of course, this is the median multiple, and we’re covering every sector including consumer tech, which tends to have some lower multiples unless you count the astronomical price that’s being paid for companies like Instagram. There is a sense with some of these dev ops vendors like those in California that expect to get transaction multiples like Instagram.
Early January ‘tis the season for predictions and forecasts. What are a few you see coming out of enterprise software providers?
Berkery: One of the big trends I’ve seen in software is just getting the software to work. A lot of people would develop a product that has 90 percent unused features in it. Now, there’s this trend with SaaS, or ASP, whatever you want to call it, that they can take that time rather than to make sure it works with every device and put the effort toward making sure everyone’s using 100 percent of their product. With the good business intelligence companies we’re talking with, they’re saying, ‘We know 100 percent of your business isn’t analyzing or even understanding what you can get out of business intelligence, especially when it comes to product analytics or user analytics. We can help you do that, for an extra cost, with a group of guys who can help you with what you’re tracking.’ ... You get the product plus the people running the product behind it to make sure you get everything out of it. And by doing that, they’re actually increasing the value of their own product, because they’re guaranteeing it’s successful, and that’s a huge change being driven by the SaaS model.
According to your 2012 assessment, mobility spending really seems to be coming to a head. What will that mean in terms of vendors, application developers, etcetera as businesses take on more mobile devices and access?
Zandy: It’s extremely disruptive and it’s going to come down to speed-to-market with mobile capability. Some vendors aren’t going to be able to do it, and they’re going out. Like in the education market, the classroom is going tablet and the whiteboards are going the way of the dinosaur.
Berkery: Communications is going to be big. When you have things like hurricanes or storms it really emphasizes the rise of mobility. We’re on the East Coast and when [Hurricane] Sandy came, I was contacted by my township, by our building techs ... what is going on with field service management and workplace mobility is incredible. I think you’ll see a few deals in that space in the coming year. ... If we’re talking about mobile device management, that’s definitely a place to look. And there is definitely some fight back from the HTML5 world and responsive Web design. Based on conversations I have had over the past year with software and Web development firms, there is a big push underway for both Web and SaaS companies alike to "develop responsively.” Until HTML5's "app cache" is refined and accepted, I wouldn't expect native applications that utilize the camera or other device features to begin developing responsively, but I do know that many "mobile" specific versions of sites are going to be switching to this methodology in the near future. This will reinvigorate the IT development industry and could start to pull sales away from dev ops solutions built with mobile only in mind, including iOS and Android developers.