With sales of web-based business software soaring, companies that focus on cloud computing are slipping into a sweet spot as technology giants look to bolster their presence in this fast-growing segment.
Cloud computing, or software as a service, allows businesses to cut back on hardware and space by having their software hosted in remote datacenters they access over the Web.
Deep-pocketed technology firms like IBM (IBM.N) or Oracle Corp (ORCL.O) might be looking to snag deals in this area to complement their own traditional, mostly on-premise services.
Human resource management software makers SuccessFactors Inc (SFSF.O) and Taleo Corp (TLEO.O) and retail-focused software firm DemandTec Inc (DMAN.O) could be the early targets, according to analysts.
"The themes of cloud computing and software as service (SaaS) are so real, and it's still so early, that I think there should be lot of activity," said Raymond James analyst Terry Tillman.
Janney Montgomery Scott analyst Sasa Zorovic believes companies like NetSuite Inc (N.N), Rightnow Inc (RNOW.O), Kenexa Corp (KNXA.O) and Constant Contact (CTCT.O) could all be attractive takeover targets.
Most big players delayed entering the cloud space and now want the scalable platforms provided by these SaaS companies to build efficient applications.
"With the growth of software as a service, companies have an increasing need to integrate data and business processes across on-premise and cloud systems," IBM said in a recent statement.
Customer relationship management (CRM) software provider Salesforce.com Inc (CRM.N), which helped pioneer software as a service and is one of the fastest-growing software stocks, might also be considered as a takeout target. However, its size and rich valuation might not make for an easily digestible deal.
Since these companies deliver their software products over the Internet, it saves clients the cost of buying licenses in advance and running programs on their own computers.
The adoption of software as a service is expected to far outpace market growth through 2013, a Gartner report shows.
Currently, Salesforce.com accounts for about half of overall web-based CRM software sales, according to the report.
NICHE SELLS
However, firms with niche products like SuccessFactors and Taleo are also seeing explosive growth, as smaller companies queue up to vie for a share of the pie.
"SuccessFactors is adding a lot of potential total addressable market to the mix with all the stuff they are getting into," said Tillman.
The company, which makes software that helps firms manage staff performance, posted a 37 percent jump in 2009 revenue. Revenue for 2010 is expected to grow 18 percent to 19 percent.
The company trades at a whopping multiple of 1,138 times forward earnings -- 25 times the sector average. Its shares have risen more than two and a half times in the last one year.
In contrast, Oracle trades at 14 times forward earnings and SAP at 17.
DemanTec, another possible target, provides pricing and merchandise optimization for retailers. Its largest customer is Wal-Mart Stores Inc (WMT.N).
"For DemandTec, it was initially about fitting large global retailers like Target Corp (TGT.N) or Walmart to buy the best buy, but then they started selling software to their suppliers," Tillman said.
The company's products manage the same stores sales environment and help improve gross margins, he said, which could make it a valuable addition to large systems integrators that these retailers rely on, or even large enterprise companies.
Shares of the company have, however, dropped about 40 percent in the last one year.
more information :-http://www.reuters.com/article/idUSTRE6525EQ20100603
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