Clear skies forecast for enterprise SaaS businesses
Market overview: SaaS sector will be one of the hottest M&A sectors in 2020
The number of M&A deals in the space has more than doubled in the last four years, and reached an all-time high in 2019. In Q3 2019, a new quarterly record was set with 326 transactions. The SaaS sector is experiencing a strong wave of consolidation, and acquisitions in the market aim to boost growth, obtain new technologies to complement existing, and acquire suitable talent. Valuations of SaaS businesses are expected to remain extremely high in 2020, median M&A EV/ Revenue multiples having reached 4.9x in Q4 2019.
Giants control the horizontal space through acquisitions
The SaaS market is almost oligopolistic in nature — the larger businesses are very strong in their own areas and they constantly acquire smaller companies to boost their product portfolio. Scaling a small business against the larger SaaS players is very difficult and consumes a lot of resources, which is why many such companies prefer to be acquired. Juggernauts in the horizontal space, such as Salesforce, are acquiring an increasing number of newcomers. Staying specialized in order to achieve scalability can be the best option for smaller companies that want to sustain competitiveness.
Niche vertical SaaS businesses escape consolidation wave
Recently, many interesting niche players have emerged with unique SaaS products that are solving specific problems for their customers, making these companies relevant through differentiation based on vertical market expertise. While strategic buyers are continuing to consolidate the market with horizontal deals, the M&A trend follows financial buyers racing towards typically highly profitable vertical SaaS businesses.
Companies developing vertical SaaS solutions are better positioned to scale compared to horizontal SaaS companies, and the solutions can often provide substantially more benefits to clients than horizontal SaaS. A greater ability to adapt to industry nuances with pre-defined metrics, KPIs and analytics provide businesses with the capability to assess and address daily and long-term processes and performance. Vertical SaaS can provide significant value for clients especially in industries with strict legislation, unusual production cycles and other specific requirements in the industry.
Strong consolidation activities from large SaaS players, as well as tremendous global interest from financial investors, has led to high recent valuations for SaaS companies. Due to the growth and strict competition in the market, we expect these trends to continue in the upcoming quarters.ALPO LUOSTARINEN, ENTERPRISE SAAS SPECIALIST
Large players look to grow through consolidation
Together, the top five SaaS players account for 51% of total SaaS market revenue, while the top 15 account for over 77% (a market is generally considered to be an oligopoly if the top five firms account for a share of more than 60%, and a competitive market if the top five account for less than 50%). All the top companies are growing at over 20% a year. These large players have also been very active in the M&A market trying to expand their market share and product portfolio. The key strategy with strong consolidation is not only to increase market share, but also to diversify the SaaS offering so that larger players can serve all of their clients’ needs. Large corporations, such as Salesforce and Microsoft, are looking to acquire smaller horizontal players to cover as many tasks as possible with their SaaS solution portfolio.
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Get our free Enterprise SaaS sector report, where we review recent private M&A transactions across the world along with public company valuations. The spotlight feature focuses on Finland-based company RELEX Solutions, a leading provider of retail optimization software, which recently received an investment of US$200 million from US investment firm TCV. CMO and co-founder Johanna Småros talks to us about acquisitions, corporate social responsibility and women in technology.
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