Why Enterprise Software is so resilient (and the 6 subsectors attracting acquirers)

A couple of years ago, Gartner forecasted a growth in global business spending on workplace IT infrastructure and software, with the research firm describing the industry as “recession-proof”. An analyst noted “the shift from buying technology to building, composing and assembling technology to meet specific business drivers”, describing this shift as “foundational to the growth of cloud over on-premises” spending.

This was echoed by Forrester Research, which noted that despite soaring inflation and other headwinds, “growth in Enterprise Software spending is expected to plow on”, to the extent that “leading software vendors can raise prices consistently without losing demand, resulting in high and stable margins.”

Cut to today, and these findings have been borne out by the most recent Enterprise Software M&A report from Hampleton Partners, which reveals that deal volumes have remained consistently high in the face of the market turbulence which has impacted other sectors. Indeed, the report notes that 2023 was a banner year for Enterprise Software in terms of transactions, being the second-most active 12-month period on record.

There are a number of attributes at play here. There’s the SaaS business model, whose ability to lock in recurring revenues from clients makes subscription-based software companies especially attractive to investors and acquirers. This is even more the case during a period of market uncertainty, when a sense of caution and a desire for bottom-line returns on investment begin to pervade the thinking of industry players.

Enterprise Software companies are also inherently protected from other effects of macoeconomic and geopolitical strife – for example, while supply chain disruptions can have a costly impact for industries reliant on physical raw materials, firms which specialise in creating software tend to be relatively unscathed. As Forrester put it, “With average software gross margins of 70 percent, software companies can efficiently control their spending and protect margins in downturns; they can then allow these margins to increase with economic growth.”

Perhaps most importantly of all, there’s the fundamental overhaul of how workplaces around the world operate. Mass digitalisation of virtually all processes was already well underway before the pandemic, but enterprise tools took on a truly mission critical status when remote and hybrid working became the norm. They’re now firmly embedded and indispensable for businesses large and small.

So just what makes up Enterprise Software as a sector? The Hampleton Partners report highlights six subsectors where acquirers and investors are seeking out opportunities.

What it covers: The Enterprise Applications segment accounts has been the biggest draw for acquirers and investors, accounting for 37% of transactions taking place over the past 30 months. It encompasses companies specialising in a spectrum of cloud-based suites for optimised workflows, including enterprise resource planning, supply chain management and customer relationship management software.

Notable deal: In April, Madrid-based supply chain risk and compliance management software platform Nalanda was acquired for an undisclosed amount by leading supply chain software company Once For All. Nalanda provides SaaS solutions for contractors who manage sub-contractors in their supply chains, and the acquisition allows Once For All to enter the Spanish market while also folding Nalanda’s technology into its own platform.

What it covers: Accounting for 20% of transactions over the past 30 months, the Vertical Applications segment covers companies providing specialised software tools for specific sectors such as insurance, financial and – most prominently – healthcare. Firms in the latter sub-sub-sector have attracted the highest number of deals in Vertical Applications by a significant margin.

Notable deal: One healthcare vertical developer recently targeted for a blockbuster deal is Paris-based startup Sonio, whose AI-powered software suite optimises how obstetricians and gynaecologists process and evaluate prenatal ultrasound scans. In May, it was acquired by Samsung Medison, a medical device subsidiary of Samsung Electronics, in a $92.7 million deal which will see Sonio continue to operate as an independently-run company.

What it covers: The third-most active segment within Enterprise Software is Business Intelligence & Customer Analytics, which attracted 16% of deals in the last 30 months. The only Enterprise Software segment whose median EV/R and EV/EBITDA multiples have consistently trended upwards, it includes companies which specialise in retail analytics, social media listening and compliance management software.

Notable deal: In February, risk management company Archer acquired Compliance.ai, a Californian developer of AI-powered compliance and risk management solutions. The takeover means Archer’s clients can benefit from Compliance.ai’s machine learning model, which automatically keeps track of changes in industry standards and regulations.

What it covers: 13% of Enterprise Software deals over the past 30 months occurred within the Information Management subsector, which includes companies specialising in document management, data migration and e-discovery.

Notable deal: A major Enterprise Software deal took place in this segment back in October, when software giant Atlassian announced its $975 million acquisition of Loom, the San Francisco-based video messaging company which allows users to record and send video clips to colleagues without having to switch applications

Though this was somewhat less than the $1.53 billion valuation Loom enjoyed at the peak of the pandemic, when remote working tools were in hot demand, Atlassian was happy to reach deep into its pockets for what it hailed as “the next evolution of team collaboration”.

What it covers: This segment, which encompasses companies involved in business process management, app lifecycle management, systems management and enterprise networking, saw 9% of deals struck in the past 30 months.

Notable deal: Last November, the Munich-based business process management vendor Symbioworld was acquired by data processing company Celonis for an undisclosed amount. The deal was thought to have been largely spurred by Symbioworld’s AI capabilities, which will allow Celonis’ users to “design their processes with a modern, AI-assisted process modelling solution.”

What it covers: Finally, we come to the smallest segment in terms of M&A activity. Accounting for 5% of deals in the 30-month period, Design, Testing & Simulation includes firms providing BIM, CAD, modelling, testing and simulation software. While deal activity has markedly dropped since record-breaking highs during the pandemic, it may be the case that the market has simply reverted to the pre-2020 norm.

Notable deal: In April, the real estate analytics and news platform CoStar acquired digital visualisation firm Matterport in a mammoth $1.6 billion deal. The figure reflects the Californian firm’s position as a leading provider of digital twin visualisations of properties, with cutting-edge software and 3D capture devices part of its portfolio. CoStar hailed the move as another step in “digitizing the world’s real estate”.

For more commentary on data and deals, download our newest Enterprise Software report. And, if you’re involved in the industry and would like to know more about our expertise in this field, drop us a line.