Market Overview

MKM Sees Consolidation In Subscription Software Space


NetSuite Inc (NYSE: N)'s recently announced sales partnership with The Ultimate Software Group, Inc. (NASDAQ: ULTI) suggests that a consolidation wave may hit the subscription software sector, an analyst said Tuesday.

MKM's Kevin Buttigieg said companies with narrowly specialized software will increasingly opt for broader product offerings and lower customer acquisition costs by merging.

Potential take-out targets might include NetSuite and Ultimate, as well as Paycom Software Inc (NYSE: PAYC), Paylocity Holding Corp (NASDAQ: PCTY) and Cornerstone OnDemand, Inc. (NASDAQ: CSOD), Buttigieg said.

NetSuite said last week it will integrate its human resource management software with Ultimate's offerings for business planning. The companies will coordinate their sales and referral procedures.

Buttigieg said the partnership could test whether a merger of the two companies is feasible, although he doesn't believe a deal is under consideration. Inc. (NYSE: CRM) could get motivated by the NetSuite-Ultimate deal to make an acquisition in the human resources segment, Buttigieg said.

Salesforce has dabbled in the field since its 2011 acquisition of Rypple and launched a year later.

Buttigieg said Salesforce, NetSuite and Ultimate each have strong growth opportunities.

"But we expect to see the theme of integration around a broad product suite continue to emerge," Buttigieg said.

NetSuite's partnership with Ultimate highlights the risk to both companies from so-called integrated software companies with broader product offerings like Workday Inc (NYSE: WDAY), Oracle Corporation (NYSE: ORCL) and SAP SE (NYSE: SAP), according to Buttigieg.

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