A spate of initial public offering (IPOs) has resulted in billions of investment dollars being poured into JFrog, Snowflake and Sumo Logic and is likely to fuel of wave of merger and acquisition activity in the months ahead.
While each of these software companies addresses fundamentally different IT requirements, they are all tapping into a massive amount of liquidity now available, as investors dump the stocks of companies in other sectors that have been adversely impacted by the economic downturn brought on by the COVID-19 pandemic.
In fact, the reason all these IPOs appear to be occurring all at once now is the plans to go public that many software companies had earlier this year were delayed by the onset of the pandemic. The backlog for potential IPOs is already staggering. Currently there are more than 400 private startup companies with valuations in excess of $1 billion, which according to the financial research firm CB Insights officially makes them “unicorns.” Familiar names of software companies on that list include GitLab, Docker Inc., HashiCorp, Snyk, Postman, OutSystems, Digital Ocean, Auth0, Redis Labs, Databricks, Collabra, Cohesity, Tanium, Rubrik, SentinelOne, Illumio, Netskope and Kaseya.
The reasons IT organizations should pay attention to these IPOs are twofold. The first is that it signals the company now has ready access to a stream of investment dollars required to fund ongoing innovation, said Scott Bickley, principal research director at Info-Tech Research Group.
The second, he noted, is that many enterprise IT organizations tend to limit their amount of reliance on a startup company. Venture capitalists that fund these companies often sell them to other companies to recoup their investment as an alternative to launching an IPO. Most enterprise IT organizations don’t want to wake up one morning to discover a key vendor has been acquired by a vendor they would prefer to not do business with, said Bickley.
That issue can be especially problematic when cloud service providers such as Amazon, which has operations that reach well beyond IT, are involved, he added.
In fact, one of the reasons many organizations prefer to rely on IT vendors that are public companies is they have a lot more visibility into the overall viability of the vendor, said Bickley.
“Assessing risk is part of the due diligence process,” he said. “With public companies, there’s a lot more data available.”
Of course, public companies do get acquired. The fact that they are public companies usually makes the effort a comparatively expensive proposition, depending on the stock price and the number of shares outstanding.
However, one of the first things many companies do once they go public is to look to acquire other companies that enable them to expand their overall portfolio, said Mitch Ashley, CEO and managing analyst at Accelerated Strategies Group, a market research firm.
The DevOps sector in particular has seen a wave of acquisitions of late that have been funded in part by IPOs, noted Ashley.
“We’re in a bit of a roll-up period right now,” he said.
Many enterprise IT organizations tend to welcome those acquisitions because it allows them to deal with fewer vendors, Ashley noted, adding support also tends to improve because the larger vendor typically has more resources.
On the downside, he said, large vendors tend to raise prices after acquiring smaller vendors in part to help cover the cost of the acquisition.
Like it or not, however, mergers and acquisitions are now a fact of IT life that organizations just need to accept, Ashley said.
Based on the amount of capital available at the moment, IT leaders should also assume the pace of merger and acquisition activity is about to accelerate, even more as more fuel in the form of capital is added to the fire.