Why mergers and acquisitions are shaping the software industry


Jul. 7 2014, Published 1:00 p.m. ET

Software industry shaped by mergers and acquisitions

The global software industry has seen phenomenal growth in past few decades. It has undergone tremendous changes in its structure. Over time, it has matured into a market where price and not features dominate buying decisions. Most of the companies use standard software packages with little scope of differentiation. Low growth rate, consolidation of leading players, and emergence of alternatives, like cloud computing and open source software to the conventional software products, indicates that the industry is maturing.

In 2013, the total number of acquisitions (transactions volume) increased to 1598, compared to 1526 in 2011, registering a 4.7 % increase. The deal size of acquisitions also increased in 2013 to $88 billion, compared to $82 billion in 2011.

Acquisitions leading to consolidation

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Consolidation is happening as leading players command a huge market share. To become leaders, they’re following the acquisitions route. Acquisitions are playing a major role in shaping the industry. Small companies are targeted and acquired by large players to fill the gaps in emerging technologies. Lately, there have been numerous acquisitions by leading players like IBM (IBM), Microsoft (MSFT), Cisco Systems (CSCO), SAP AG (SAP), and Oracle (ORCL) to maintain their competitiveness and increase their  presence in emerging technologies.

Standardization paving way for innovation

In the software industry, organizations strive to deliver powerful and innovative software, which leads to standardization of the product (software). In this standardization process, the value of the software decreases as time passes, which makes the industry players look for new ways to add value through innovation.

Business model transition

A significant shift is observed as the revenue generation from traditional software products and license fees has moved to services. Reduction in technology spending has led many organizations to explore current options rather than paying high price and fees for standardized software product. As a result, new business and pricing models are coming into the industry. “Software as a service,” “cloud computing,” and “free and open source software” are clear evidence of this. Open source software is so widespread now that there isn’t a software product category, particularly in the enterprise computing area, which isn’t being challenged by them.

The introduction of new business models—web-based (cloud computing) to free software models—has opened the market for new entrepreneurial activities. The software industry has seen an increasing number of start-ups. The emergence of new players and new technologies is contributing to the dynamics and flexibility of software industry. The nature of the information technology (or IT) industry creates a competitive landscape, which is constantly evolving as firms are acquired, emerge, and expand.


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