As much of the business world was packing up for a little August R&R, software CEOs and their bankers clearly weren't among them. In the last three weeks, Hewlett-Packard (HPQ) bought Mercury Interactive for $4.5 billion, and IBM (IBM) bought Webify for an undisclosed amount, MRO Software (MROI) for $740 million, and, on Aug. 10, disclosed that it will acquire FileNet (FILE) for $1.6 billion.
IBM's three deals already leapfrog the $2 billion it spent last year on sixteen smaller companies. The FileNet deal alone was IBM's largest in three years and fourth-largest to date. FileNet makes content management software that allows companies to more easily route, organize, and store reams of text, e-mails, and audio and video files, the bulk of which aren't stored in easily searchable databases.
MOVING UP A NOTCH. The FileNet acquisition diverges from IBM's recent buying spree. The bulk of its software acquisitions to date have plugged technology gaps in the computer giant's vast product line. But this deal brings IBM key customers and market share, according to Jim Murphy of AMR Research. IBM was the No. 3 player in the document management market, frequently competing against FileNet or EMC's Documentum division for deals. With one $1.6 billion move, IBM gobbles up the No. 2 player to jump ahead of EMC. According to IDC Research, last year EMC had 11.3% of the $3.2 billion market. FileNet and IBM combined make up some 18% (see BusinessWeek.com, 7/10/06, "The Fine Art of Tech Mergers").
That alone isn't going to move the needle for a company like IBM that generates nearly $100 billion in annual revenues. Its $47 billion service business has been under pressure because megadeals are slowing and competition from Indian outsourcing companies has been growing. IBM is hoping that combining parts of its once-disparate software and services businesses will give it more of an edge and a reason for corporate customers to bring it in for projects.
The FileNet offerings will become part of IBM's so-called Information on Demand strategy. Announced in February, it refers to a suite of products and services that help companies get a handle on all of their data—e-mails, word files, pictures, charts, and, of course, everything residing within corporate databases. It's a big problem that lots of software companies are trying to solve from different angles. IBM is hoping to build something with more breadth than competitors, to best rivals in the document management field like EMC, but to become a more valuable software provider than its competitors Microsoft (MSFT) and Oracle (ORCL). IBM says the market for products and services that serve information on demand to corporate customers will be a $69 billion business by 2009. It hopes that doubling the size of its content management business will put it on the path to owning a significant portion of that business.
CONSOLIDATION MANIA. IBM isn't alone in gobbling up software companies. Indeed, the software business has been going through waves of consolidation over the last few years. The biggest vendors like Oracle, Microsoft, and IBM are all vying for the biggest chunk of the corporate IT budget. Corporate customers already have the basic software programs like databases or accounting systems. Today the battle is over providing the software that can manage all the corporate data throughout a company (see BusinessWeek.com, 9/12/05, "Now, Oracle May Finally Rest").
It's a crucial time to jockey for most-valuable-software-provider status, because companies want to buy more from fewer players, and they're tired of buying stand-alone pieces of software like customer-relationship management that don't fix real-world business problems. The new message to software vendors: Fix my call centers, don't just sell me a product. As a result, the lines are starting to blur between software companies that offer, say, Internet security, databases, and tools to manage nearly every part of the business. So, too, are the lines between service companies and software companies.
Add it up and it's a good time to be a software investment banker. Joining the ranks of Oracle, Symantec (SYMC), and EMC are new big spenders like IBM and Hewlett-Packard. Some analysts expect Microsoft or even SAP (SAP)—which typically eschews big deals—could join in too. "A lot of this is: We need to grow aggressively and we need to find new ways to do that," Mann says. Most deals to continue to be under $1 billion, with many under $100 million, as companies like IBM and Hewlett-Packard augment the software side of their business and Microsoft, SAP, Symantec, and others fill in holes around existing products (see BusinessWeek.com, 7/26/06, "Mercury's Star Rises").
NEXT ON THE BLOCK. But expect more big deals too. Candidates include BEA Systems (BEAS), which makes so-called "middleware" connecting much of the software bigger companies peddle, and the three big business intelligence players: Hyperion (HYSL), Business Objects (BOBJ), and Cognos (COGN). Business intelligence companies help corporations mine the information stored in databases and other software programs to get detailed snapshots of how the business is running.
It's not a stretch to see business intelligence offerings fitting in with IBM's push toward bundling software and services to help companies use their internal data more wisely. Several analysts expect that Cognos could be the next big IBM buy. The two already have a strong partnership. "The question is: Are they dating now to get married later?" says John Haggerty of AMR Research. If IBM does make the long-anticipated move, don't expect its rivals to sit on the sidelines.
Lacy is a reporter for BusinessWeek.com in Silicon Valley
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