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SaaS valuations: off the charts and staying that way

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Legacy software companies get no respect — or market valuation — compared to Software-as-a-Service (SaaS) players. New research shows that over the past year, SaaS company valuations grew twice as much as valuations of legacy software companies rooted in the client-server world. And that SaaS valuation trend will continue for the next 12 to 24 months, according to new research from Martin Wolf M&A Advisors.

For an old-line company it makes sense to freshen up with a SaaS purchase, even paying top dollar in anticipation that the target’s value will rise as more companies get comfortable offloading tasks from on-premises to a service model. At the same time, existing SaaS players want to broaden their services portfolio with more vertical SaaS options, said Martin Wolf, president and founder of the company.

Wolf’s numbers show that a select group of SaaS companies saw their values grow 313 percent from January 2009 to October 2011, compared to 154 percent growth for other software companies over the same period.

No wonder Oracle (s ORCL) shelled out $1.5 billion for RightNow Technologies and Salesforce.com (s CRM) keeps snapping up smaller SaaS players every month.

“With Saas, the more vertical the better,” Wolf said in interview. SaaS companies offering financial services, healthcare services or employee benefits outsourcing services, are all hot now, he added.

So who’ll be buying? The usual suspects: IBM (s IBM), Oracle, SAP (s SAP), Microsoft (s MSFT).

The only potential hurdle Wolf sees to these up-and-coming SaaS companies are macro factors, external economic events.

SaaS as a category is also clearly vibrant compared to mature IT supply chain service providers like distributors Ingram Micro, Arrow Electronics and resellers. Valuations in that category grew 142 percent for the period tracked. Business process outsourcing (BPO) companies, on the other hand, will see better valuations driven by demand and the availability of more targeted point products and inexpensive outsourcing for human resources, legal and other vertical tasks. The IT services and BPO category saw its values rise 150 percent over the two years.

“These companies may be cheap, but they’re also very good at what they do,” Wolf said.

Wolf’s market-weighted-value index takes the market value of 120 companies grouped into four technology categories: IT services and BPO; IT supply chain services; software; and SaaS. The index assigned a value of 1,000 to each composite group on Dec. 31, 2008, and has tracked the category performance since then.

As you can see from the chart, SaaS valuations (the index tracks 20 SaaS companies including Salesforce.com, Open Table (s OPEN) and Taleo (s TLEO))  tower head-and-shoulders over the other three categories.
The software category comprises 45 companies including SAP, Citrix (s CTXS) and Tibco (s TIBX); CA (s CA), Symantec (s SYMC) and Adobe (s ADBE). The IT services group includes professional service providers/integrators like Accenture and Sapient; financial services companies like Equifax (s EFX); IT outsourcing experts like Computer Sciences Corp., (s CSC) and BPO players like ADP (s ADP).

Of course, as Oracle, SAP, IBM, Microsoft et al. keep buying more SaaS talent, the line between SaaS and these legacy software companies will blur, making such comparisons more difficult.

46 Responses to “SaaS valuations: off the charts and staying that way”

  1. I’ve worked for enterprise software companies since ’94, and now for NetSuite. The big guys just don’t get it. That’s why it’s “the usual suspects” trying to buy up SaaS companies instead of having successfully created their own. NS has been around for a while, and has grabbed market share away from the enterprise size guys when the economy went south due to pricing and the integration hairbal.

  2. Dave Loesch

    I’m waiting for Michael J. Fox to weigh in so I know I’m in Back to the Future. In the meantime, I think we should swap out “SaaS” for “ASP” (applications service provider) and I’d bet we’d read the same hyperbole 10 years ago. (Corio, usInternetworking, Interliant anyone?). The real reason SaaS is here to stay is it’s been around for 30 years (just called it timeshare then). Sure, bandwidth has improved and more ‘cloud’ may be possible (is a mainframe with dumb terminals a private ‘cloud’?) but it doesn’t change the laws of physics as it relates to software development and delivery. Especially for enterprise applications. So, before you write the obituary on Oracle and SAP, you might want to think about how that standalone labor tracking app is going to integrate to the billing system, GL, supply chain etc. Sorry to be an old cranky naysayer, but all these ‘revolutionary’ application ideas–which from a software perspective aren’t new at all–will never succeed without application-level standards for plug and play integration. (I’m talking about the vendor ID format; not the transport protocol.) Which is neither practical (too many industries, company sizes etc.) nor commercially viable. (If I commoditize my application, how do I make money?)

    • Anonymous coward

      How about something like SAP online, subscription-based, pay-per-use? Hosted in the cloud, with your own custom extensions developed by certified and expensive SAP consultants. Only without the overhead of managing and maintaining your own HW and OS SW, power, cololing and network infrastructure.

      My bet is that once SaaS takes off, standards about business interfaces will evolve, making integration of solutions from different vendors a snap – this would be extremely interesting especially for small shops, which can’t afford to provide a comprehensive, all-encompassing solution themselves.

      • Dave Loesch

        The only problem is it is a commercial unviable. A vendor cannot charge for their software, add in the DBAs, HW et al AND make it cheaper for the customer. That’s why ASPs failed. Customers were not willing to pay a premium for hosted sw.

        I do think you might be on to something for “small” places. But not enterprise deals.