In an environment where they forecast IT spending to be down 4% in '09, Goldman anticipates software spending to be flat with '08.
Though spending will be flat, there will be winners as customer spending should consolidate towards larger companies. Expect Suite providers to continue to gain share at the expense of 'best-of-breed'. Moreover, 'must-have' software segments including security, storage, and tangible ROI technologies (e.g. virtualization) should garner increases at the expense of 'nice-to'have applications (e.g. SFA).
They are bullish on CA as they see continued margin expansion due to their leveraging their deep product suite, coupled with 60% of revenues derived from maintenance. In addition, they like Citrix's product suite and cost discipline.
Though concerned about MSFT and the 'anemic' PC environment Goldman expects a MSFT RIF in the 10% range to reign in expenses. The stock is trading at a P/E of 9x '09 earnings...a deep discount to the Software peer group. If the RIF happens, they like the value of the stock at today's prices.
Similarly, they like Oracle, BMC and Symantec as they offer mission critical products and have disciplined management that is showing expense sensitivity (maintenance revenue of 46%, 55% and 47% help too) in a difficult environment.
Goldman has a SELL rating on Salesforce.com as they view their products as not being mission critical. Moreover, an intensifying competitive environment augers potential price erosion that may hinder growth. The other sells are on CommVault (concerned about management discipline) and Akamai (pricing pressure).
My take-aways were:
1. It was revealing that the most innovative, and potentially disruptive, technology discussed was virtualization.
2. An industry average P/E of 12x is at historic lows
3. The reliance these vendors have on maintenance revenues highlights that leading software vendors really are operating SaaS business models. The predictability is great, though it's amazingly difficult, absent large M&A deals (did anyone say Yahoo) to deliver growth above the mid-teens.
Showing posts with label citrix. Show all posts
Showing posts with label citrix. Show all posts
Friday, January 9, 2009
Wednesday, January 7, 2009
Oracle Corporation's M&A strategy, presented at SIIA PE forum
The Software & Information Industry Association sponsored a presentation with Vishal Bhagwati, VP Corporate Development of Oracle, to discuss Oracle's Acquisition and Integration strategy. Given the spotlight on venture exits, the topic, part of an ongoing series of events the SIIA is sponsoring for its Venture Capital members, was especially relevant.
Here are some quick Oracle facts that highlights its scale:
$22.6B Revenue for FY '08
320,000 global customers
20,000 Partners
80,000 employees
They are the second largest Saas vendor in the world where they think of it as yet another deployment option to make their products available via purchase or subscription.
Oracle Strategy:
To offer the most complete industry portfolio around standards-based architectures that are integrated to work together. They view IBM, SAP and MSFT as their key competitors and try to differentiate their position as follows:
IBM is not in applications
SAP is not in the database or in the application management field
MSFT is totally proprietary
M&A background
50+ acquisitions aggregating $45B in value. Now at the pace of completing 3-4 transactions (not including IP based deals) per quarter.
View M&A as a tool for growth, not a strategy in its own right. Post transaction, having someone accountable for the metrics is critical to bringing planned value.
Their focus is on the following value components (note to self...re-read before presenting any portfolio company considering M&A with Oracle):
* Providing customers with broader and better product capabilities
* As a vehicle to meaningfully enter complementary industries
* Accelerate core product innovation
* Lower cost of customer ownership, through pre-packaged integration (drive towards permacheap).
Oracle has seen successes in their vertical industry offerings where markets such as Communications, Retail and Manufacturing have seen multiple transactions to boost organic growth. They have not yet completed any transactions in the Health care or the Public sector but, given these market sizes, it's logical they are looking deeply in these markets.
The current environment is intensifying their interest in transactions as they have currency and see an opportunity to fill in areas of interest at attractive values. Note that he stressed that Oracle deeply discounts prospective synergies in valuing their transactions.
Integration strategy
Capture hearts and minds of employees and customers
Rapid back-office integration
Track results on a weekly basis
Role of Bankers
He was asked (by me) where bankers bring the most value, introduction or deal structure. He was polite, but it seemed as if his answer was neither. They have an active industry touch program and tend to know many of the people who would be board members of acquisition targets, so approaches are easy and, if a Company is for sale, they inevitably get a call from someone (whether its a banker or board member). On structuring transactions, while they don't need assistance, a professional can readily assist the target's management team/board.
One area, where I have seen bankers greatly assist, is when the board/shareholders/management do not have aligned interests due to a 'funky' capital structure resulting from multiple funding rounds. In these instances, a professional ostensibly hired for their outside expertise can be invaluable when dealing with insiders.
Final thought
Over the years, we have seen a number of companies (best personified by Computer Associates) embark on aggressive acquisition strategies. Notwithstanding the accounting 'mischief' CA really used M&A as an effective means to emerge as a market leader. Their key flaw was abandoning innovation, therefore, when the company grew so large as to run out of meaningful acquisitions as a means to bolster growth, the deck chairs toppled into the ocean. I am not sure how much of Oracle's growth is tied to its thus far successful M&A integration, though I suspect they have the opportunity, to complement their very public transactions with some potential game changing technology based transactions (like Cisco and Citrix have so successfully done).
Here are some quick Oracle facts that highlights its scale:
$22.6B Revenue for FY '08
320,000 global customers
20,000 Partners
80,000 employees
They are the second largest Saas vendor in the world where they think of it as yet another deployment option to make their products available via purchase or subscription.
Oracle Strategy:
To offer the most complete industry portfolio around standards-based architectures that are integrated to work together. They view IBM, SAP and MSFT as their key competitors and try to differentiate their position as follows:
IBM is not in applications
SAP is not in the database or in the application management field
MSFT is totally proprietary
M&A background
50+ acquisitions aggregating $45B in value. Now at the pace of completing 3-4 transactions (not including IP based deals) per quarter.
View M&A as a tool for growth, not a strategy in its own right. Post transaction, having someone accountable for the metrics is critical to bringing planned value.
Their focus is on the following value components (note to self...re-read before presenting any portfolio company considering M&A with Oracle):
* Providing customers with broader and better product capabilities
* As a vehicle to meaningfully enter complementary industries
* Accelerate core product innovation
* Lower cost of customer ownership, through pre-packaged integration (drive towards permacheap).
Oracle has seen successes in their vertical industry offerings where markets such as Communications, Retail and Manufacturing have seen multiple transactions to boost organic growth. They have not yet completed any transactions in the Health care or the Public sector but, given these market sizes, it's logical they are looking deeply in these markets.
The current environment is intensifying their interest in transactions as they have currency and see an opportunity to fill in areas of interest at attractive values. Note that he stressed that Oracle deeply discounts prospective synergies in valuing their transactions.
Integration strategy
Capture hearts and minds of employees and customers
Rapid back-office integration
Track results on a weekly basis
Role of Bankers
He was asked (by me) where bankers bring the most value, introduction or deal structure. He was polite, but it seemed as if his answer was neither. They have an active industry touch program and tend to know many of the people who would be board members of acquisition targets, so approaches are easy and, if a Company is for sale, they inevitably get a call from someone (whether its a banker or board member). On structuring transactions, while they don't need assistance, a professional can readily assist the target's management team/board.
One area, where I have seen bankers greatly assist, is when the board/shareholders/management do not have aligned interests due to a 'funky' capital structure resulting from multiple funding rounds. In these instances, a professional ostensibly hired for their outside expertise can be invaluable when dealing with insiders.
Final thought
Over the years, we have seen a number of companies (best personified by Computer Associates) embark on aggressive acquisition strategies. Notwithstanding the accounting 'mischief' CA really used M&A as an effective means to emerge as a market leader. Their key flaw was abandoning innovation, therefore, when the company grew so large as to run out of meaningful acquisitions as a means to bolster growth, the deck chairs toppled into the ocean. I am not sure how much of Oracle's growth is tied to its thus far successful M&A integration, though I suspect they have the opportunity, to complement their very public transactions with some potential game changing technology based transactions (like Cisco and Citrix have so successfully done).
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