While there are a number of varied thoughts and opinions surrounding software acquisition in general, we now add in factors introduced by a weak global economy and epidemic that may also affect the ERP software M&A market. In other words, nobody without insider information can really answer this question.
Is the Infor acquisition by Koch a good thing?
For starters, consider that having your software vendor acquired is not generally a bad thing. Infor was acquired by Koch Industries, so they now have the funding to break from its recent market slump and potentially gain significant ground. The key point of interest from an Infor user perspective is that Infor will remain a standalone subsidiary of Koch. This means that the software platform, for the most part, should remain intact.
Understand that there are several criteria that may drive software acquisition, including:
- Financial stress/opportunity (bargain shopping)
- Acquisition of a promising technology
- Exploit existing gaps in the software market
- Opportunity to expand or diversify capabilities of a current platform
- Geographic expansion
- Resource acquisition
This video interview with one of the leading Infor resellers provides more thoughts on the Koch acquisition:
The impact of the economy on ERP software industry M&A activity
In regard to the current epidemic and resulting economic recession, all of the above reasons are potentially exaggerated by the first financial opportunity that comes along. This is something we should consider adding to our top predictions for the 2020s in a post-Covid-19 world.
So, let’s look at how the current recession and financial stress could potentially impact software vendors. (To clarify, I am not involved in any M&A activities for software firms currently but have helped run analysis of the potential for software acquisitions in the past.)
Here are some ideas to consider:
The business environment may be changing, but it is not going away
ERP software is a critical aspect of most successful businesses, and therefore the need for ERP will continue. In addition, there are plenty of essential businesses that are embarking on digital transformations to condition their organizations for the future.
If anything, the current epidemic will stimulate future need for better technology, so there will be no long-term shortage in the software market. Software vendors strategizing for the future will certainly be looking for opportunities.
There are significant differences between software-as-a-service (SaaS) models and on-premise licensing that has been purchased up front
It is not clear if single ERP vs. best of breed ERP systems will show signs of stress as a result, but considerations here include:
- SaaS users pay on-going subscription fees for using the software while those companies who have on-premise (or hosted) software have paid heavily up-front. On one hand this could potentially make it easier for companies to let SaaS licensing slide, but on the other hand would allow less upfront investment for new purchases.
- Since on-premise licenses have been paid for, the only remaining stream of income is maintenance. If new license purchases are reduced, this could put additional strain on vendors offering licensing under this model.
Vendor acquisition of point solutions and best of breed ERP systems
Point solutions are always a target of larger ERP vendors, and the current environment may increase the desire for acquisition. Solutions servicing industries facing decline may find increasing financial stress. Point-of-Sale (POS) systems, for example may be especially hard hit, as well as solutions servicing hospitality or travel industries. This scenario could create attractive acquisition valuation.
On the other end of the spectrum, companies offering solutions surrounding things like Human Capital Management systems, Transportation Management, or mobile solutions may be increasing in value, also making them potential targets. While they would not be purchased at a discount, they may be grabbed before reaching the height of valuation.
We need to remember that a percentage of software companies have been created for the sole purpose of acquisition. In the face of a changing business world we may start to see more action.
More reasons for ERP software M&A activity
In addition, here are a few more thoughts regarding M&A activity in the space:
- In terms of declining license subscriptions, while there may be a slowing for new implementations, those currently running ERP and on maintenance programs are not likely to change. These are among the new realities of ERP and HCM implementations in a post-coronavirus world.
- Software companies with large, stable bases of users may feel some financial pressure, but not necessarily to the degree of other business verticals. As stated above, existing license/maintenance subscriptions will probably continue.
- It is likely that PE firms and enterprise organizations with funds available for investment are looking for fire sales. This may open purchase opportunities for smaller software companies that don’t yet have a stable base of existing users and have been resting on future development and functionality.
Key takeaways from M&A activity in the ERP software industry
In summary, there may very well be some more pending acquisitions, but it is not clear that the degree will be far outside the norm for the enterprise software market. If you are heading into a software evaluation or creating a digital roadmap, ask an independent ERP consultant for guidance in evaluating the longer-term viability of potential software vendors.
Please feel free to contact us to brainstorm ideas regarding your ERP implementation – we are happy to be a sounding board as you continue your journey!