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    Sector Review: Software as a Service

    In recent years, the software industry has seen a monumental shift in the space it operates in. The rising prominence of Software as a Service (SaaS) has challenged the traditional licencing model, forcing companies to align their service offering with this emerging trend. As a result, more and more companies are looking to acquire SaaS businesses to meet the demands of consumers.


    Despite early reservations from software vendors, SaaS has silenced its critics and become an integral player in the software arena. Vendors were initially concerned that profitability would decrease as a consequence of shifting from the tried and tested method of the licencing model, yet global firms such as KPMG have urged reluctant senior executives to adopt a more flexible and adaptable stance towards the ever-evolving technology landscape, insisting that acceptance of change is transformative for businesses in an incredibly positive way.


    Sid Nag, research director at industry leading research and advisory company, Gartner, Inc, argues: “While some organisations are still figuring out where cloud actually fits in their overall IT strategy, an effort to cost optimize and bring forth the path to transformation holds strong promise and results for IT outsourcing (ITO) buyers. Gartner predicts that through 2020, cloud adoption strategies will influence more than 50% of IT outsourcing deals.”


    The SaaS industry has witnessed impressive growth over the last few years, which is only expected to further increase in 2018 and beyond. According to Betterbuys’ ‘2016 report on the State of SaaS’, 64% of SMEs today rely on cloud-based technology to drive growth and boost workflow efficiency, whilst 78% of companies indicate that they plan to expand the number of SaaS platforms they use over the next few years, raising the average number of applications used from three to seven.

    Spending in the sector is certainly increasing at an exponential rate. In 2015, the industry saw an expenditure of $8bn on SaaS products, with experts forecasting that the industry will continue to grow year-on-year, reaching an estimated expenditure of $55 billion by 2026.


    Betterbuys’ report finds that SaaS is set to become the most disruptive technology by 2020. Information collated in KPMG’s 2015 Global Innovation Survey predicts that cloud computing will comprise 11% of overall technological disruption, enabling “the next indispensable consumer technology.” UK enterprises have adapted well to this change, transforming their enterprise operating models through the implementation of various cloud computing technologies including SaaS, as well as Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).


    In direct correlation with this surge in growth in the industry, is an increased demand in M&A activity. Eagle-eyed investors have been zoning in on this industry, ensuring they attain a ‘piece of the action’. Between 2012 and 2016, acquisitions in the UK market alone increased by 570%. In 2017, a similar level of M&A activity has continued, with 53 deals completed up to the end of November. Notable deals include the acquisition of online utility customer information and billing SaaS provider, Junifer Sytems Ltd by New Zealand-based utilities sector software developer, Gentrack Group Ltd for a consideration of £40m, and the £32m sale of online A2P SMS traffic monetisation SaaS provider, Dialogue Group Ltd to Swedish firm, CLX Communications AB.


    Furthermore, it was recently announced that Montagu Private Equity LLP, via Scarlet Bidco Ltd, has entered into an agreement to acquire the entire share capital of Servelec Group plc, a Sheffield-based online Electronic Patient Record (EPR) and Patient Administration (PA) SaaS provider, for an estimated total value of £223.9m.


    In a recent report compiled by technology M&A advisory firm Hampleton Partners entitled, ‘M&A Market Report 2H 2017: SaaS and Cloud’, the company identified several trends which are driving M&A movement. Private equity firms were found to pay steeper prices than strategic buyers, whilst the UK continues to dominate the European deal share regardless of uncertainty surrounding Brexit. Despite concerns since the referendum, the number of UK deals grew by 37% from the same period last year ahead of the Brexit vote, with the UK accounting for 40% of all deals in Europe. Moreover, an increased presence of cyber threats has underpinned a need for security related acquisitions, with cloud-based data analytics playing a pivotal role in deal-making across the buyer spectrum.

    Taking all of this into account, M&A activity within the SaaS space is incredibly prevalent right now, with buyers keen to take advantage of this fertile industry, ensuring they are one step ahead in the technology sphere. Fast growth and high value are just two of the factors that are proving to be attractive to trade buyers and private equity firms, in addition to the huge potential for profit making. The sector shows no signs of slowing down, with growth firmly expected to continue well into the next few years. These developments mark the dawn of an exciting new in era in technology, which vendors and sellers can be equally excited about.


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