NetSuite cuddles up with OpenAir buy

NetSuite made its first ever acquisition today, buying Boston-based professional services automation vendor OpenAir, which I once described as "one of the most consistent performers of the on-demand applications sector." I had a joint call this morning with OpenAir CEO Morris Panner and NetSuite CEO Zach Nelson, both of whom I've known for the best part of a decade now. Here are my takeaways about why this deal was done and what it means for NetSuite.

There will be more acquisitions. Nelson made the expected noises about how "we're going to have our hands full now" and how "very unique" the OpenAir deal is. But at the same time he admitted it had "opened our eyes to the opportunity" for growth through acquisition. I'm not expecting a sudden flurry of M&A activity, but I'm certain that NetSuite is keeping a watchful eye for other potential candidates.

NetSuite needs more than organic growth. On-demand financials are a tough sell, the cost of which is reflected in NetSuite's consistently high spend on sales and marketing. Adding OpenAir allows it to have something else to sell instead, benefitting from what Panner describes as "the rising trend for services businesses." Then, when those customers reach a point where they're ready to upgrade their financials or their CRM system, NetSuite will be in the right place at the right time. "This enables us to get toeholds in accounts that aren't ready to change their ERP system yet," explained Nelson. This is at the core of why I believe there will be more acquisitions. Sure, there are some unique reasons for buying OpenAir, such as acquiring a substantive East Coast presence, but there are plenty of other potential targets that could further expand NetSuite's customer footprint.

NetSuite's strategy is pure Ellison. I say this on two counts. First of all, Nelson stated flat out that the OpenAir acquisition follows the Oracle playbook: "Our approach is very much like the Oracle approach across every front." For example, the OpenAir codebase will continue to be developed for another decade, giving customers a free choice whether to stay with what they know and trust or move across to a newly developed alternative offering on the NetSuite codebase. In the meantime, there will be web services integration for those who want to add NetSuite CRM or financials to the OpenAir core. The second count is the strength of the verticalization play. NetSuite already has a services industry edition, but with OpenAir it's going much more deeply into the service industry vertical, adding a string of OpenAir functions around proposal management, service delivery and revenue management that NetSuite doesn't currently have. This is an exact copy of Oracle's current acquisition strategy. It's also an interesting reflection on the market's demand for business solutions rather than technology toolkits: "Every business application sale becomes vertical very quickly," said Nelson.

OpenAir's owners pocket a decent, but not huge, return. NetSuite is paying $26 million in cash plus the value of OpenAir's cash reserves, which are not stated but could be quite substantial as they'll include any prepaid revenues. That compares to total venture funding of about $16 million. In addition, NetSuite is assuming a further $5 million in stock that will vest to OpenAir's employees over the next couple of years, which sounds like a sweet deal for staff.

Watch out for a cuddlier NetSuite image. OpenAir has always been a good partner to other SaaS vendors, and has strong relationships with NetSuite rivals such as Salesforce.com and Intacct. "We're going to do everything we can to maintain those integrations with other vendors," Panner told me. That's an interesting statement given that one of the avowed motivations for the acquisition is the opportunity to steal those customers away to NetSuite's software when the time is ripe. But I have a hunch that one side-effect of bringing Panner's company on board is that NetSuite may soften up its image as something of a lone figure and start to be seen as more of an industry player.

PS: See also coverage from fellow Enterprise Irregular Brian Sommer and from fellow SaaS analyst Jeff Kaplan.