This summer has seen a resurgence of M&A activity throughout the software industry: Geac and Comshare. PeopleSoft and J.D. Edwards. Novell and Ximian. Business Objects and Crystal Decisions. Hyperion and Brio. While those deals may not constitute a tidal wave, activity is swelling. And that's true even if the biggest buyout attempt of the recent period,Oracle's hostile $7.3 billion bid for PeopleSoft,goes by the boards.
"The IT business software and services markets are consolidating, going global and looking to develop strategic partnerships to reach new markets and broaden their footprint," said Karen Smith, research director at Boston-based Aberdeen Group.
It's Consolidation time again in the software industry. How will the channel fare as the field of potential vendor partners becomes a smaller group of larger players?
And it may be just the beginning. "In five years, 90-plus percent of the software companies you are aware of today will be gone, and in two years 50 percent will be gone," predicted Martin Wolf, president of Martin Wolf Associates, a boutique investment firm based in San Ramon, Calif.
The net effect of the trend is that there will likely be a lot fewer companies for solution providers to deal with, and that's a good news/bad news proposition. On the upside, it's often easier for solution providers to partner with fewer suppliers since the vendor base is more stable and tighter relationships can be forged. But on the downside, those larger vendors may have their sights set on taking some of the bread-and-butter services business being offered by the channel.
Marlene Brill, president of New York-based solution provider Digitask Consultants, said many of the companies now merging are "looking at all of us little consulting companies and saying, 'These guys are eating my profit, I want all that business.' "
There are many factors contributing to the current flurry of consolidation. For one thing, there's a widespread perception that company valuations are near the bottom, so it's a good time to buy before bargains evaporate. For another, in the continued weak economy some companies may find it easier to buy new customers rather than spend the money to court them.
In some cases, software companies are trying to solidify their product portfolios.
"Vendors are looking for tools to fill in holes in their product set or to complement what they already have," said Andy Kamlet, vice president of marketing at FRx Software, a Denver-based division of Microsoft Business Solutions.
And market conditions are making that possible. "Comshare sold for about one times earnings. That's a good deal," Kamlet said.
In some respects, this consolidation of business software echoes the similar slimming down of the desktop productivity applications market a decade or so ago. Before that shakeout, there were several large contenders in the mainstream desktop applications space, including Lotus Development, Corel, Borland International, WordPerfect and Software Publishing. Borland and Corel are the only two of those that remain independent entities today, but Borland has exited those application markets altogether and Corel is struggling. The rest were acquired or faded away.
In the current consolidation wave, some companies are trying to buy market share rather than technology. Many industry observers put Oracle's proposed PeopleSoft buyout into that category. Oracle CEO Larry Ellison has long maintained that, in enterprise software, the suite players,those that offer the biggest coverage across applications,will ultimately stamp out the "best-of-breed" folks that specialize in a small area. If that's the case, stand-alone companies such as Lawson Software, E.piphany, and perhaps even the once-powerful Siebel Systems, might eventually end up on the block.
Customers that are buying,and vendors say there still aren't enough of them,are buying from companies with perceived longevity, many vendors said. And that means bigger vendors with bigger troves of cash. "This is a flight to stability [by customers]," said Rob Ashe, president and COO of Cognos, an Ottawa-based analytics and tools maker.
"They're looking to vendors who'll be around for a long time and who can [continue to] finance development." Cognos made its own presence felt in the M&A realm with its acquisition early this year of Adaytum, an enterprise performance planning (EPP) company.
Dan Volitich, president of John Daniel, a large Pittsburgh-based Cognos partner, said Adaytum's EPP expertise augments and expands Cognos' prior capabilities.
"This is complimentary. It helps with [Cognos'] breadth," he said. However, he characterized Business Objects' recent move to purchase reporting software vendor Crystal Decisions as less commonsensical. "If you look at [that deal], that's a market-share acquisition. If you're a Business Objects or a Crystal customer, you've got to be wondering which products will survive," he said.
The business intelligence (BI) and analytics software segment has been a hotbed of activity this summer, with Hyperion agreeing to buy Brio in addition to the Business Objects/Crystal deal. But no area was immune.
Novell bought Ximian, a Linux desktop and tools player. Because it signaled a return to a head-on confrontation with Microsoft at the desktop and server level, that move shocked many longtime observers who remember past skirmishes between those companies,scuffles that didn't end up benefitting Novell in the end.
Novell Vice Chairman Chris Stone said Novell's Ximian purchase wasn't intended to put Novell on a collision course with Microsoft on the desktop. In his view, Linux desktops augment Windows desktops rather than replace them. "Some people use Office. That's fine. But there's an entire class of users out there who don't need all that functionality, they want just mail, calendaring maybe some slides: very simple [stuff] at a much cheaper price."
Speaking to overall consolidation, Stone said corporations today want to buy from fewer vendors. "If you were to ask a CIO or CXO today what their concerns are going into 2004, they'd probably tell you that too many vendors are doing the same thing. People are looking for their vendors to do a lot more, to have the wherewithal to offer more consulting along with a full stack of deliverables," he said.
Customers want a vendor with depth and breadth,size, in other words, Stone said. "The issue is risk. Because of the economic squeeze, most [customers] don't have budget increases yet for 2004 %85 and they'd much rather get more from one company, maybe one they're already doing business with, rather than a startup," he said.
Smaller vendors realize that the onus is on them to prove they can survive among the behemoths. Motive, an Austin, Texas-based maker of service management software, is privately held and claims a $100 million run rate. Even while acknowledging the perception that the "haves" are companies with annual revenue greater than $500 million and the "have nots" are those with less than $120 million, company executives like its chances.
"You can succeed at our size %85 but first you have to show that you can solve a critical business problem that the incumbents cannot," said co-founder and Chief Strategist Mike Maples.
Motive recently inked a $15 million licensing deal to provide "ecosystem" modeling software to Mercury Interactive, a Sunnyvale, Calif., maker of application testing and management software. Motive technology will be embedded in next-generation software from Mercury, which had some acquisition activity of its own in early July with its $225 buyout of privately held Kintana, a maker of IT governance software.
Wolf said too many companies have made a business developing and marketing features and functions rather than real full-fledged products. "Take BI [and business process management] %85 these need to be part of something larger," he said.
There will always be a market for some high-end, best-of-breed applications,just as there is still demand for pricey cars and clothing labels, said Aberdeen's Smith. But the number of companies supplying them will, out of necessity, be finite, she said.
The question when it comes to business software is whether there will be room in the market for an independent Lawson Software or an E.piphany in a world where even gigantic players like Oracle and PeopleSoft feel compelled to spend billions to stay competitive.
STEVEN BURKE contributed to this story.