Software M&A activity to pick up, claims HotOrigin report

27 May 2004

The Irish software sector is going to see merger and acquisition (M&A) pick up sharply in the year ahead as Irish software companies realise that they are subscale and need to consolidate if they are to succeed in the international marketplace, according to HotOrigin’s annual review of the Irish software sector, Ireland’s Software Cluster 2004.

“After a long lull in M&A, industry players expect deals to happen in 2004,” said David Dalton, CEO of HotOrigin. “While the sector continues to grow, the majority of companies are still too small to effectively enter international markets. Mergers or acquisitions could help to address this.”

The latest report, HotOrigin’s fourth so far, comprises interviews with 141 indigenous industry CEOs and shows that while more companies entered the ‘over €10m revenue league’ (up to 8pc from 5pc last year), 70pc of indigenous Irish software companies have revenues that are less than €1m per annum.

The report, which was sponsored by IBM, Enterprise Ireland, William Fry Solicitors and ACT Venture Capital, found that while the software cluster of 900 companies in general were cautiously optimistic about the business climate in the year ahead, the need for greater scale through consolidation was apparent.

The report found that new companies continued to form at a rapid rate, with 16pc of companies interviewed formed in the last year.

Financial services and telecommunications software sub-clusters are the largest in the indigenous market, with 53pc and 42pc of companies targeting these sectors respectively.

The spectre of the possible abandonment of the Business Expansion Scheme (BES) pending an EU investigation, could ruin the chances of many firms getting off the ground. The report found that 26pc of firms that raised funding in the past year did so through a BES round.

The report also found that indigenous firms are moving to application services provider (ASP) and revenue share products, with less companies depending on the traditional licensed software model.

Joint research with universities is also being undertaken by more indigenous software players, with 38pc of companies conducting research with third level institutions this year compared with 35pc last year.

By John Kennedy