Microsoft In Spotlight Over Rumored Borland Or Rational Deal

Published reports surfaced Friday morning that Microsoft might buy Borland Software, a Scotts Valley, Calif.-based development tool vendor. The speculation drove Borland shares up 6.6 percent, or 81 cents, at one point. That followed similar events on Wednesday, when talk about a Microsoft counterbid for Rational boosted that company's shares 2.4 percent, or 25 cents, to $10.54.

Whatever the outcome, Microsoft should be worried about IBM's ownership of Rational, solution providers say. Despite a tough year, Rational remains the leader in life-cycle and change management and other enterprise tools, and Microsoft knows those tools could earn it the credibility it seeks from big corporations, they say.

"Microsoft hasn't listened to advice given to it over the past year that they acquire Rational. ... I'm not sure that the [IBM deal will go unchallenged," said Richard Warren, chief software architect at Internosis, an Arlington, Va.-based Microsoft solution provider. "Rational is Microsoft's first, best bet."

George Brown, president of Database Solutions, a Cherry Hill, N.J.-based solution provider, agreed. "I'm not sure that Borland makes sense [for Microsoft, though I could see a bid for Rational," he said. "Borland would give them some Java expertise, but they're not big in the enterprise."

Rational straddles Microsoft's .Net and the Java world with its toolset. Some Microsoft partisans expressed concerns that an IBM buyout would lessen Rational's .Net focus.

But Microsoft painted the IBM/Rational move in the most positive light. "We've partnered with Rational and IBM for many years, and we expect that to continue," Dan Hay, product manager for Visual Studio.Net at Microsoft, said earlier this week. "We see this as a pretty big investment on IBM's part for customers using .Net."

Microsoft might have been disinclined to pursue Rational--a clear leader in its space--because of regulatory concerns, according to industry analysts. Ironically, IBM's proposed buyout of Rational might make a Microsoft bid for Borland more palatable, just as Borland's buyout of Ashton-Tate 11 years ago cleared the deck for Microsoft to buy Fox Software, analysts said.

"Borland would be a heck of a lot cheaper than Rational," said Shawn Willett, an analyst at research firm Current Analysis. "Both have strong Microsoft tie-ins, [but Rational probably has more respect as a high-end modeling/design tool. But Borland just bought Starbase to bolster that."

For those familiar with Borland's and Microsoft's history, a buyout would be ironic. Borland founder and former chairman Philippe Kahn waged a prolonged battle with Microsoft in the tools and languages space, frequently outmaneuvering his huge rival and managing to get under Microsoft's skin. At one point, Microsoft even hired a Kahn impersonator to perform at an industry party. There also reportedly was huge personal animus between Microsoft Chairman Bill Gates and Kahn.

If Borland OKs a sale to Microsoft, "it would be like Luke Skywalker selling out to Darth Vader," said Jeff Matthews, general manager at Ram Partners, a Greenwich, Conn.-based hedge fund. "On a serious note, IBM's deal for Rational probably puts pressure on Borland to do something. There were rumors that BEA [Systems would buy Borland because they're partners. Anytime you have an event like this [the IBM deal, it can force decisions that people might not otherwise make."

Reached via e-mail, Kahn, now CEO and chairman of LightSurf, said he has been gone from Borland for many years and so wouldn't know about current deals. But, "would the anti-trust guys let the number one in Windows development tools buy the number two in Windows development tools? Hmmm....."

Many solution providers say Rational should be tops on Microsoft's list.

"I'm not sure that an outright buy would be best. But Microsoft could take a substantial minority stake in Rational, and Rational would be well-advised to stay closer to the middle of the road and retain some independence," Internosis' Warren said.

"Rational has an accelerator build in XDE for [IBM WebSphere and a similar one for .Net," he explained. "Rational already has an entire Java machine for Windows that they built in a clean room. A Microsoft investment would give them a Java that works in Windows and take away the snowballing momentum that WebSphere has."

Indeed, toolmaker independence was a recurring theme after the IBM-Rational news. At the time, Borland executives stressed the need for toolmakers to remain unfettered and free to develop for all camps. Borland last week claimed that it was the only remaining independent toolmaker. Should it be acquired, it it would presumably have to eat those words.

Still, some Microsoft partners think the software giant can go it alone in tools, noting that Microsoft has been strengthening its tools lineup with Visual Studio.Net, Visio and BizTalk.

"Microsoft will continue to expand their enterprise capabilities," said Alicia Ford, regional vice president at Extreme Logic, Atlanta. "Even with BizTalk, the orchestration tool and mapper let you see all of the business processes laid out. The big problem with enterprises is they don't have [processes well-documented. But we'll continue to see software companies helping people develop the right way."

Never one to stand on its laurels, Microsoft has the Everett version of Visual Studio.Net in beta and is prepping another upgrade, code-named Whidbey, for 2004. That release is slated to include a new set of design tools and frameworks, code-named Whitehorse, and use Microsoft's Visio technology to simplify development, sources said.

"It allows developers to drag and drop blocks of code to create Web applications and services," said one developer familiar with the Whitehorse plans.

Microsoft and Rational couldn't be reached for comment. Borland would not comment on "rumors." But in a statement, Borland officials said that it would likely hurt Microsoft if the IBM/Rational deal goes through.

"Microsoft has been looking to Rational to fill the "modeling" gap it has in

its development tools," officials said in a statement. "However, it's unlikely that Rational will continue to support Microsoft's development technologies as part of IBM's shop."

Borland officials also stressed Borland's position as an independent tools vendor without ties to large proprietary software or hardware interests.

ELIZABETH MONTALBANO contributed to this story.