October 14, 2014 INTERNET OF THINGS HELPS DRIVE SOFTWARE M&A ACTIVITY

According to the Berkery Noyes’ third quarter Software report, transaction volume declined 12 percent over the prior quarter, from 496 to 437 deals. This followed a 16 percent increase from first to second quarter 2014, which was the industry’s peak for volume throughout the past seven quarters. The number of deals year-to-date also rose 15 percent compared to the corresponding timeframe in 2013. Aggregate transaction value nearly doubled relative to the previous quarter, from $19.7 billion to $38.8 billion. Of note, six of the highest value software transactions year-to-date occurred in September.

Deal flow in the Consumer Software segment decreased nine percent over the past three months. This was the same amount of activity in the segment as in first quarter 2014. An emerging trend generating interest from acquirers involves the Internet of Things. One such example in third quarter 2014 was Samsung’s acquisition of SmartThings for a reported $200 million. SmartThings’ open platform enables home control and automation devices to be connected in the cloud through a single mobile application.

Samsung has been placing more of an emphasis on its mobile offerings as of late. In addition to SmartThings, this notion was demonstrated in the Business Software segment through Samsung’s acquisition of PrinterOn, an enterprise mobile printing platform, during third quarter 2014.

Deal volume in the Infrastructure Software segment improved nine percent, making it the segment with the largest rise in deal activity. One associated trend has been strong demand in the identity and access management space. Examples in third quarter 2014 included Gemalto’s acquisition of SafeNet for $890 million as well as IBM’s acquisitions of Lighthouse Security Group and CrossIdeas.

Regarding other notable acquirers in the segment, HP made a move to better compete against Amazon in the cloud market with the acquisition of Eucalyptus Systems, a provider of open source software for building private and hybrid enterprise clouds. Eucalyptus’ CEO Marten Mickos, who also sold open source company MySQL to Sun Microsystems in 2008 for $1 billion, will manage HP’s cloud business following the transaction.

“In the highly fragmented software market, which is populated by many niche focused companies that provide specialized solutions, the need to build scale will drive consolidation,” said James Berkery, Chief Investment Officer at Berkery Noyes. “There are several reasons why scale matters. With little or no marginal expense for each incremental unit sold, software companies need scale to be profitable. Scale also equals brand strength and gives customers confidence that the company will endure and thrive.”