How's fastest growers got to where they are

By Baselinemag  |  Posted 2007-06-11 Print this article Print

The software industry has matured, but M&A is still letting stalwarts like Oracle, Adobe and Symantec post top-line growth in excess of 20%.

How software's fastest growers got to where they are

The biggest public software companies are increasingly relying on acquisitions for growth, as they pick off weaker competitors or startup companies that have decided not to go it alone.

Most software companies that grew more than 20% last year were helped by an acquisition, a Baseline survey shows. The acquisition trend is putting more control, and power, in the hands of a few relatively well-known companies.

For instance, Oracle has spent well in excess of $20 billion making acquisitions over the last few years, from its $11.1 billion buyout of PeopleSoft to its $6.1 billion pickup of customer relationship management giant Siebel Systems. Oracle has continued its acquisition binge this year, buying Hyperion, a maker of business intelligence software, for more than $3 billion in April.

"You've got some 800-pound gorillas out there that are growing by acquisitions and consolidating their markets," says Mark Lotke, who runs the software investment group at venture capital firm FT Ventures in New York. "It's a natural maturity of the industry."

To some extent, the trend is being dictated by the software industry's customers. Chief information officers are looking to work with fewer software vendors and get more out of them. "Corporate America got indigestion buying best-of-breed point solutions from smaller companies," says Eric Shealy, an investment banker at Innovation Advisors in Boston. "They said, we've got too much stuff. We want to buy from fewer folks, who can put it all together for us."

Baseline's survey which began as an attempt to rank the 40 biggest software companies by revenue growth amounts to a health check on the enterprise software industry. We started by eliminating companies that aren't purely in software. That's why you won't see IBM or Sun here their revenue is too diversified. We also disqualified companies (Google, for instance) that derive most of their revenue from consumer services, since those companies aren't as relevant to Baseline's readers.

Finally, we ruled out any company that didn't have sales of at least $150 million in 2005. That, too, was an attempt to focus attention on the companies most likely to be of interest to an audience of enterprise technology managers. The weeding-out process left us with 49 companies.

As our list shows, most software companies are in pretty good shape. The 49 largest had $110 billion in revenue in 2006, 13% above their 2005 levels. The median company grew 11%. (For simplicity's sake, we used the companies' fiscal years, not their calendar years.)

From a profit perspective, too, the industry looks healthy. Aggregate profit at the 49 biggest software companies last year was $22.4 billion, for a profit margin of 20%. But the profitability was concentrated in the three biggest companies, Microsoft, Oracle and SAP.

Microsoft alone which has typically emphasized organic growth over acquisitions accounted for 40% of the revenue and 56% of the profits among the companies we considered.

Next page: Hungry for growth


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