Why Enterprise Software is Downturn-Proof

The story of the global tech M&A market in recent times has been a tale of two halves. There was a rise in transactions in 2021, causing many commentators to ponder how long the bump would last. And, just as many expected, 2022 put the brakes on much of the activity – a perhaps inevitable consequence of factors like rising inflation, disrupted supply chains and geopolitical uncertainties. 

Yet, against the backdrop of the downturn, we’ve watched the Enterprise Software space continue to thrive. Our newest M&A report (which you can read here) reveals that M&A activity targeting Enterprise Software firms has seen two record-breaking periods in a row, from 2H2021 to 1H2022. Indeed, the first half of 2022 saw 1,015 deals recorded in the sector. What’s more, 19 transactions closed at over $1 billion in this time period. 

This is very positive news for founders in this space, and it’s worth considering some of the reasons why the Enterprise Software market is remaining remarkably robust despite blustery headwinds.

The ongoing acceleration of digitalisation across virtually all industries has opened up immense opportunities for Enterprise Software companies. Line-of-business managers have increasingly called upon tools such as customer relationship management, enterprise resource planning, project management, accounting and marketing solutions. 

Of course, such tools took on fresh importance when the pandemic disrupted business practices globally, with cloud-based Enterprise Software services allowing companies to coordinate resources between their suddenly dispersed workforces, and prevent siloes from developing. But take-up has continued since then, a fact reflected by the interest which acquirers and investors have continued to show in Enterprise Software firms. 

The bullish nature of the market speaks not just to how vital this kind of tech has become, but also to the downturn-resistant revenue models at play. As our new Enterprise Software market report points out, the fact that cloud-based SaaS platforms generate income through subscriptions in a reliable, recurring way provides a measure of ‘recession-protection’ that is attractive to acquirers. It also marks them out ‘as a haven for investors’ perishing dry powder throughout current inflationary periods’.

A recent article by PitchBook has made an instructive comparison between Enterprise Software firms and the e-commerce companies which have had a more turbulent time in 2022: “Because enterprises purchase software on a subscription basis, revenue from these customers tends to be “sticky.” As for e-commerce, consumers can ditch their online shopping habits at any time.’ 

One important trend has been recently identified by VC platform Fractal Software. According to the firm’s data, ‘vertical SaaS has been relatively resilient in the face of this economic downturn compared to its horizontal peers’. 

For those unfamiliar with the distinction, horizontal SaaS platforms are those which aren’t industry-specific. In other words, they’re highly versatile cloud-based solutions which can be used by a diverse array of businesses. This is a mature model, boasting big names like Salesforce and QuickBooks. 

By contrast, vertical SaaS solutions are those which target particular industries and business types. This side of SaaS encompasses both long-established tech firms and many of the newer startups which are catering to the highly specialised needs of their potential clients. Charting the recent performance of public vertical SaaS stocks, Fractal Software has noted that the market value of such companies has fared particularly well in rocky economic times. 

The highly tailored solutions provided by such SaaS firms are, in the words of Fractal, increasingly non-discretionary and in fact ‘the cost of doing business for any company that hopes to compete’ in 2022 and beyond. Fractal sums the situation up by stating that ‘while most businesses are in for a rough few quarters… vertical SaaS companies are better equipped to weather the storm than perhaps any other technology sector.’ 

Our own analysis of 1H2022 transactions has shown that healthcare Enterprise Software platforms have enjoyed the lion’s share of M&A deals targeting vertical solutions providers. Specifically, such companies have accounted for 22% of the vertical subsector transaction count. 

One standout healthcare tech deal came early in the year. The acquirer was R1 RCM, a Utah-based specialist in revenue cycle management – the process by which healthcare providers handle billings and revenues. The target was Cloudmed, a Georgia-based purveyor of AI-powered revenue solutions for healthcare. 

This $3.2 billion acquisition was described by R1’s CEO as part of his company’s strategy to ‘build the most scalable, flexible and integrated platform for the revenue cycle and consumer engagement in healthcare.’ 

Another key deal we’ve seen in 2022 is the $3 billion acquisition of Vocera Communications by the Michigan-based medical technology manufacturer, Stryker Corporation. Based in Silicon Valley, Vocera provides a platform for clinicians to collaborate, manage workflow and exchange patient-related data such as lab results and vital signs, within hospitals and healthcare facilities. Stryker’s CEO hailed the acquisition as an opportunity to accelerate his company’s digital aspirations. 

Certainly, these hefty deals highlight just how integral cloud-based Enterprise Software has become to health systems in the US and other territories, helping medical professionals do everything from treat patients to get paid for their services. 

Aside from healthcare, other Enterprise Software verticals that have seen sustained interest from acquirers/investors include education and finance. 

As tech research firm Forrester stated in their own recent analysis, the upshot is that ‘software solutions are mission-critical in nature and vital to the day-to-day operations of a modern enterprise’. Not only are they able to withstand headwinds, but, as Forrester has put it, ‘leading software vendors can raise prices consistently without losing demand, resulting in high and stable margins.’

You can explore several other significant acquisitions and trends in Hampleton’s Enterprise Software report, with plenty there for entrepreneurs in this space to cheer.