Large technology companies are buying enterprise-software makers in record numbers, even as prices continue to climb.
Most buyers are shrugging off higher valuations for these ventures and striking deals for a chance to capitalize on a booming market for business software, industry analysts say.
The upturn in deal making is being driven by strong demand across the corporate world for software tools that promise better data-driven insights, said
Jonathan Simnett,
a director at Hampleton Partners, a tech-sector mergers-and-acquisitions consulting firm based in London.
Hampleton estimates the enterprise-software sector saw a record 651 M&A deals between January and June, up from 522 over the comparable period last year. Deal volume this year is on pace to beat the full-year tally for 2018 of 1,241, which was up from 1,050 in 2017, Hampleton said in a report Wednesday.
Deals struck in the first six months of 2019 had a combined value of $71 billion, the report said. They include
Salesforce.com Inc.
’s roughly $15 billion acquisition of data-analytics platform Tableau Software Inc. and
Dassault Systemes SE’s
$5.8 billion purchase of
Medidata Solutions Inc.,
a cloud-based software maker for life-science companies. Both deals were announced in June.
Hampleton said 66% of enterprise-software M&A deals this year were strategic moves by companies looking to use the technology, while 34% were carried out by private-equity firms or financial holding companies.
Most acquisition targets are ventures that develop software tools for big-data analytics, business intelligence and data visualization, the report said.
Mr. Simnett said corporate customers of these tech providers are in the market for software tools designed to learn more about global markets and customers, enabling them to get more out of their existing enterprise information-technology systems.
Business-software vendors are under increasing pressure to provide these and other digital capabilities in an integrated way for their customers, said
J. Neely,
managing director and global M&A lead at consulting firm
Accenture
PLC.
“Oftentimes it is more efficient to acquire these capabilities than to develop them in-house,” he said.
Mr. Neely said large enterprise-tech providers are pursuing M&A deals to rapidly build capabilities in analytics, blockchain and robotic process automation, among other areas.
Speed is a key factor in tech-sector deal making, according to
Chris Murphy,
a managing director at ThoughtWorks Inc., a software consultancy.
Many buyers are approaching acquisitions as a way to quickly gain access to key talent, intellectual property and other assets before their competitors snap them up, Mr. Murphy said.
In addition to tech giants, companies outside the tech sector are acquiring smaller enterprise-software ventures in a bid to expand in-house capabilities in areas such as business intelligence and artificial intelligence, analysts said.
James Anderson,
a research director at Gartner Inc., said nontech companies are seeking out applications that can tie together multiple functions across IT plus the finance and business sides of daily operations as a way to make more informed spending decisions.
But as demand for enterprise-software makers increases, so does the cost of acquiring them. Some industry watchers worry about a market bubble. Hampleton estimates that this year, business-software firms are selling for an average of 3.8 times their annual sales, compared with roughly 3.4 in 2018 and 3.3 in 2017.
“It does raise some danger and caution for CIOs,” said
Melissa Di Donato,
CEO of SUSE GmbH, a Germany-based open-source software company. As valuations rise, she said, senior IT managers face the risk of getting locked into a debt-laden supplier when a bubble bursts, Ms. Di Donato said.
Jeffrey Hammond,
an analyst at Forrester Research Inc., said he is less concerned about the impact on CIOs of inflated valuations for enterprise-software ventures, so long as it doesn’t affect the prices they charge for technology.
Mr. Neely of Accenture said CIOs need to ensure their companies have a playbook for software-maker acquisitions that factors in a target’s annual recurring revenue, potential revenue and the expected costs of integrating it into the rest of the company.
They need to make sure acquirers have identified risks to existing revenue streams and any “big rocks” ahead that could disrupt services, he said.
Write to Angus Loten at angus.loten@wsj.com
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