New Conglomerates: After the Deluge

I found an interesting post on SandHill.com by Ken Bender of the Software Equity Group, entitled After the M&A Frenzy: What’s Next?

One of my recent memes is that the mega-players in enterprise software are becoming new conglomerates. They seem more driven by size for size’s sake than by driving the synergies of integration. When you talk to people in different divisions of Oracle they sound like they work in different companies. The same is true for SAP, despite its much more organic growth. It’s undoubtedly true for people who work with Inxight within Business Objects within SAP.

While everyone seems to think Oracle is on track to become General Motors, maybe they’re actually on track to become ITT.

What happened to the conglomerates? Well, realizing that there were no real synergies to be had by combining such a broad range of businesses, many companies were spun out. The bizno-fashion pendulum swung from size to focus.

I think the same thing is likely to happen in enterprise software, and the recent SandHill blog comes to a similar conclusion. Excerpts from the discussion of large software vendors (bolding mine):

What will be the likely impact of a mild recession on the software industry? Enterprise customers will markedly reduce their IT capital spending, as they have in prior downturns. Consequently, software company growth will slow, and investors will increasingly turn their attention to profitability and net income. It’s almost a law of nature.

Larger software companies, in response, will turn their attention to cost-cutting, re-examining spending priorities, paring headcount, and enhancing the productivity of those who remain … Particular attention will be paid to products acquired during the M&A frenzy of the past few years.

After conducting these product line, operational and financial reviews, we fully expect a good number of public software companies will shed non-performing and incongruent product lines and business units in an effort to cut development, support and marketing costs.

They go on to discuss the impact on private equity (PE) owned software conglomerates as well:

… Private equity-owned platform companies now own a host of acquired assets they’re attempting to understand, manage, integrate and leverage. In good times, when IT budgets are healthy and growing, there’s little impetus to cut costs, especially after the first year following an acquisition.

But when growth slows, private equity firms will be very disciplined in assessing their acquired assets. They’ll really have little choice. The debt leverage on these acquired companies assumes continued economic expansion and continued growth of recurring revenue and operating income …

After taking a very hard look at their portfolio companies, … many PE investors will opt to shed non-core business units that are not providing the strategic leverage, accelerated growth or incremental revenue anticipated at the time of acquisition.

Seems like someone should create a company to buy all these units at fire-sale prices as they’re spun out of the new public mega-player and private equity conglomerates. All I ask is a board seat in return.