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JULY 9, 2004
By Steve Rosenbush Software Makers: Soon They'll Be Fewer [Page 2 of 2] "LIKE AUTOS." These trends could portend a long drought for software spending and could make it more difficult for smaller companies to drum up business and expand their way to profitability. Two kinds of consolidation are under way. One might be called the Oracle-PeopleSoft model. "In maturing areas, we'll see more consolidation, like [Oracle's bid for] PeopleSoft (PSFT ). That's the way industries work in mature areas like autos, and we'll see the same thing in IT," Oracle Chief Financial Officer Jeff Henley says. Oracle's plan is to buy PeopleSoft for its customers and sell them a broader range of products and services. Another obvious target in the maturing software infrastructure market is BEA Systems (BEAS ), which was on a list of nine possible targets that Oracle considered, according to documents made public during the Oracle-PeopleSoft antitrust trial. ANOTHER APPROACH. BEA, which makes software for application servers, could be a target for a company like Sun Microsystems (SUNW ), which is trying to move beyond the hardware business. And Lawson Software (LWSN ), in the maturing application sector, could be a logical target for Microsoft. While the Colossus of Redmond has considered a blockbuster deal with German applications giant SAP (SAP ), it gave up on that idea because it was too cumbersome to pull off. Lawson has an advantage because it's based on Microsoft technology. A second type of consolidation will develop in the few growth markets that remain, industry watchers believe. The demand for security software is very high, and revenues are growing at a compound rate of 15% to 17% over the next five years, according to Sarah Friar, a security software analyst at Goldman Sachs. That's about twice as fast as the industry average. Internet router make Juniper Networks (JNPR ) kicked off consolidation in the sector by acquiring security-software developer Net Screen. Now speculation is swirling that router giant Cisco Systems (CSCO ) could acquire a software security company like Check Point Software (CHKP ). "HORRIBLE TRACK RECORD." Beyond the security sector, business-intelligence software is also in great demand. A tool for culling and analyzing information in vast databases, business-intelligence specialists like Business Objects (BOBJ ) or Hyperion Solutions (HYSL ) would make sense paired with a broader application provider like Microsoft, SAP, or Oracle, investment bankers say. Software companies will have to work hard to make sure deals don't create more problems than they solve. "The track record for such deals in the IT sector is horrible," warns Heap, the Bain merger consultant. These deals are difficult to execute because they often force the acquiring company to enter a new and unfamiliar market. Acquirers have one thing working in their favor this time around, however: The price of target companies has fallen since the '90s boom, reducing the risk of overpaying. And given the passage of time, it's easier to evaluate the strength of a company that's being acquired. Consolidation won't be a panacea for software's woes, but it's bound to help the industry adjust to the realities of a maturing market.
 Rosenbush covers finance and technology for BusinessWeek Online in New York Edited by Douglas Harbrecht
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