Profiting from the Social Business Software Boom
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the disappointing to say the least Facebook IPO, investors are rightly wondering whether anyone can make money from the whole social media phenomena. The answer to that question is yes: Just look at the boom occurring right now in the whole social business software space. The sector is flourishing thanks to companies looking for complete social business solutions. That boom has led to a number of takeovers in the sector by large technology companies.
The latest company to join the fray is International Business Machines (NYSE: IBM) with its $1.3 billion purchase of Kenexa (NYSE: KNXA). Kenexa makes cloud-based software that helps firms recruit and manage talent through online social networking, collaboration, and consulting tools. This purchase will allow IBM to offer to its customers tools to build what it calls “end-to-end social business.”
The acquisition should have come as no surprise to investors. A recent global study conducted by IBM itself found that 57% of CEOs it polled said social business was their top priority, and 73% said they are making major investments into analyzing social media data as it pertains to their business. But the Kenexa deal is significant in that it has now positioned IBM with a toe into the applications and SaaS (software as a service) markets.
Speaking of that market, the leaders in that sector have also been busy buying companies which allow businesses to make themselves more social. Enterprise software firms including Oracle (NASDAQ: ORCL) and SAP AG ADR (NYSE: SAP) have made similar purchases to expand their presence in the space. In February, Oracle announced a $1.9 billion deal to acquire Taleo Corporation and in December, SAP made a $3.4 billion purchase offer for SuccessFactors.
Both acquired companies offer cloud-based recruitment and talent management services as well as consulting services. The IBM deal will allow it to compete head-to-head with Oracle and Taleo, and to a lesser extent with SAP and SuccessFactors.
Why all the action in this particular niche of business applications software? Social media has pervaded the lives of many consumers and workers alike, allowing them to communicate with each other in new ways. Businesses, both large and small, need to find ways to generate real value and capitalize on social media through the use of “social technologies” to change their front-line business. This is leading to a boom in business for firms helping companies deal with social media. According to Forrester Research, the market for social enterprise applications is expected to grow at a 61 percent rate through 2016.
This trend of acquisitions in the social business sector by Oracle, IBM, SAP, Salesforce.com, and others is highly likely to continue. As IBM's general manager of the social business division, Alastair Rennie, said “Every company, across every business operation, is looking to tap into the power of social networking to transform the way they work, collaborate and out-innovate their competitors.”
The bottom line for investors is that the actual social network companies like Facebook may not be the way to play the social media phenomena. Like the California gold rush, it's not the gold miners who got rich but the vendors who sold them the tools needed to mine gold. Likewise today, it looks like it will be the social business software firms who will profit the most from social media. So search for companies in that sector. But hurry, not many targets are left.
Companies in the sector such as Netsuite, The Ultimate Software, Saba Software and Cornerstone OnDemand (NASDAQ: CSOD) may be the next to be acquired. Take Cornerstone OnDemand as a takeover candidate, for example. It has a market cap of $1.35 billion and a 3-year average revenue growth rate of 55%. Last quarter its quarterly sales rose 78 percent. Most importantly, it added 120 new clients, bringing its customer base to over 1000 clients.
But for longer-term exposure in the sector stick to Oracle, IBM, SAP or Salesforce.com.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.