Big Software Groups Buy Into The Cloud

While companies are upgrading their IT infrastructure to take into account megatrends such as the shift to cloud computing and the growing importance of business analytics and "big data", the enterprise software market itself is undergoing something of a metamorphosis.

In the past few months, three premium-priced software acquisitions have highlighted the changes under way in the enterprise software market.

First, Oracle agreed to buy RightNow Technologies, a leading provider of cloud-based call centre automation, sales force automation (SFA) and customer relationship management (CRM) services for $1.43bn.

Then on Saturday, Germany's SAP announced plans to buy SuccessFactors, a cloud-based human resource management service, for $3.4bn – a 52 per cent premium over the previous day's closing price.

Now, International Business Machines has agreed to acquire DemandTec for $440m. DemandTec's flagship product analyses data to help retailers decide how much to charge for their wares. The company has added capabilities to track promotions and work with consumer products companies.

All three deals highlight the trend of established big tech companies paying big premiums for relatively young companies offering web-based software to fill out their cloud-enabled product portfolios.

For their business customers, these deals could be something of a mixed blessing. On the one hand, they should enable the acquirers to provide a more complete "one-stop shop" for cloud-based business applications. On the other hand, some analysts fear they could reduce competition and perhaps even stifle innovation.

Oracle in particular has been scrambling to assemble a full range of cloud solutions, including sales force automation, human resources, talent management and social networking, as part of its Oracle Public Cloud initiative.

Oracle, seen by some as being a latecomer to the cloud party, and RightNow should be able to offer what Oracle describes as "a superior customer experience at every contact and across every channel".

The deal also represents an important counterweight for Oracle in its continuing battle with Salesforce.com, the market leader. RightNow, which has about 2,000 customers, is seen as something of an also-ran to Salesforce.com and will bring some customers into the mix, but more importantly it will bring a mid-market CRM solution to Oracle.

Similarly, SAP's purchase of SuccessFactors should help Europe's biggest software group to expand its offerings of the cloud-based services many of its customers have been clamouring for.

SuccessFactors provides software that helps companies manage their workforce, hosted in remote data centres or "the cloud". With 15m subscriptions at more than 3,500 companies worldwide, it is believed to be the second-largest cloud-based provider of enterprise software after Salesforce.com.

SAP's own cloud-based offering, Business by Design, has taken longer than expected to develop and has seen a relatively slow uptake among customers. "The cloud is a core of SAP's future growth, and the combination of SuccessFactors' leadership team and technology with SAP will create a cloud powerhouse," said Bill McDermott, SAP's co-chief executive, when he announced the deal.

IBM's $13.20-a-share purchase of DemandTec – a 57 per cent premium over DemandTec's closing price on Wednesday – follows a similar logic.

The agreed purchase will help IBM build on its focus of providing its customers with the tools to extract value from the huge volumes of data that they are now able to collect from point-of-sale and other applications.

DemandTec's complex number-crunching applications help customers make business decisions based on near real-time data, and its purchase will extend IBM's own push into cloud-based software and services.

"DemandTec has unprecedented capability to improve customers' price and promotion tactics," Craig Hayman, general manager of industry solutions at IBM, said in a statement.

DemandTec's biggest customers are US retailers trying to make sense of the gargantuan volumes of data they collect from shoppers.

In the fiscal second quarter, 23 per cent of DemandTec's $22m in revenue came from Target. Walmart Stores is another big customer. The company reportedly charges its biggest customers about $2m a year for access to its pricing program, which is primarily designed to help them fine-tune their sales forecasts and predict consumer demand.

The purchase will complement IBM's "smarter commerce" portfolio, which it introduced earlier this year with DemandTec's pricing functionality adding to IBM's existing business analytics tools focused on marketing, mobile devices and other areas. IBM says the portfolio addresses a market opportunity the company that could worth $20bn or more by 2015.

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