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Research firm Gartner regularly brings out their much vaunted four quadrants
where different companies are placed depending on factors ranging from their
business maturity levels to service performances. For the software sector, the
quadrant might soon lose its raison detre; it perhaps becomes meaningless to
track which companies belong where, especially if only a handful of software
vendors remain in the scene. Quibble if you want about the nitty-gritties but
one thing is clear, that software is going the way of the PC, auto, lighting
fixture, consumer goods, and other mature manufacturing industries: ruled by the
giants.
The march toward consolidation by the software industry has been in full
swing for quite a few years now2007 only saw the momentum reaching a crescendo.
Leave aside the multi-billion dollar giants; there remain very few independent
best-of-breed vendors who are holding their own. SAS, Adobe, Autodesk, Dassault,
i2 Technologies, and Ariba could count themselves among these lucky handfuls.
But how long they can maintain their independent status is the moot question.
Many analysts believe that for many of them, and even for a handful of tier-2
software vendors like CA and BMC Software, its just a matter of time. Maybe,
even 2008 could turn out to be the D-Year for many of these vendors.
When it comes to acquisitions, software dominates all technology sectors,
accounting for 40% of the $298 bn in tech M&A deals done in 2006, and half of
the $306 bn in deals in 2005, according to Thomson Financial. The runner-up:
Internet companies, which accounted for just 18% of 2006s tech M&As.
While software always has been an acquisitive industry, the deals are getting
bigger and more complex. In 2006, 1,726 software companies were acquired, the
highest number since 2000, according to investment firm Software Equity Group.
But more impressive was the size of some of those deals: HPs $4.5 bn
acquisition of Mercury Interactive, EMCs $2.1 bn purchase of RSA Security, and
IBMs acquisitions of FileNet and Internet Security Systems, both of which
exceeded $1 bn.
These deals came on the heels of Oracles big-bucks, high-profile
acquisitions of PeopleSoft, Siebel, and Retekas well as forty-one other
companiesover the past four years. IBM is not far behind, with twenty-two
notches on its belt over the same period. Microsoft has bought more than
twenty-five companies in that time, though most of them were tiny startups
acquired under the radar. 2007 proved to be an even more eventful year with top
three global BI firmsCognos, Business Objects, and Hyperiongoing under the
hammer.
Consolidation Drivers
For many analysts, the trend at consolidation in the enterprise software
industry began in right earnest following Oracles acquisition of PeopleSoft.
There have been isolated instances of mergers previously too, especially the
consolidation of a wide range of startups into more moderately-sized companies
following the dotcom bloodbath, but the Oracle-PeopleSoft alliance (accompanied
by all its hostilities) was the landmark; not just did it signal the beginning
of the consolidation frenzy, it also marked Oracle as one of the chief
protagonists in the game.
Incidentally, analysts like Jeff Nolan believe that the enterprise software
industry goes through periods of expansion followed by periods of digestion. The
expansion stage lasts 5-6 years and is marked by significant market growth and
dramatic technology transformations that create new leaders. The digestion
period lasts 5-7 years and is marked by low to moderate overall market growth, a
couple of points above GDP, and declining prices.
| The
Thickening Middle |
| The official
definition of middleware sounds deceptively simple: the software that sits
between application and system software. What makes it complex is the
diversity of architecture on both the sides that it connects: application as
well as systems software. And what makes it so much of a battleground is the
realization that integration is increasingly becoming the most important
challenge for users of IT. Middleware tries to tackle some of that challenge
in software as opposed to leaving everything to the services. So middleware
and services go hand in hand.
That is the reason for the worlds #1 IT
company, IBM, to proclaim that its software business is all middleware.
IBMs approach to middleware is as a facilitator of its services business.
Oracles middleware strategy, on the other hand, is to make its various
acquisitions in application space to work with one another so that it can
present a unifying future to the world. Despite critics claiming that it is
a glorified patchwork, the company has successfully managed to convince
everyone (most importantly, the analysts) that it is succeeding at that
game. Oracle is also responsible for talking loudly about middleware, and,
according to critics, diluting the meaning of the phrase. Microsoft, coming
from the system software side, is the #2 middleware vendor but does not talk
much about it as it sees middleware as more of an enabler than a
differentiator. SAP, coming from the other side, applications, believes in
tightly coupled applications, thus taking a diametrically opposite view of
go middle where you must, as compared to Oracles, middleware where you can.
BEA is the only specialized vendor standing there coming from what was
classically known as middleware, and has already conceded leadership
position to the big vendors.
So while the middleware battle seems intense,
the driver of the middleware strategies of each large vendor is different:
for IBM, it is services; for Oracle, it is making its inorganic strategy
work; and for Microsoft, it is making itself ready for the next challenge:
the web 2.0 and Google! |
In this environment, in which the industry has been for almost four full
years, the scenario is ripe for vendor consolidation... declining prices in a
low growth market is not exactly an exciting condition for new entrants or weak
players. So, in effect, this period of consolidation is very predictable, and
indeed desirable. With the consolidation wave that has started for sometime now,
it looks like independent software vendors would soon become a relic of the
past.
Theories typically center on industry maturity, vendors in search of new
growth and market opportunities, or a combination of the two. Some view
consolidation as the natural progression of an aging industry, invariably
dredging up a comparison to the global auto industry. But consider that both
software suppliers and buyers have more cash to spend than in years past.
IT budgets have increased steadily since bottoming out five or six years ago,
and its universally forecast that spending on software will continue to rise
this year, as long as something unexpected does not derail the economy.
Meanwhile, software companies, which were under pressure from the bourses to
focus on profitability several years ago, have shifted back to revenue-growth
strategies to capture more of those rising IT budgets. So, they are buying
companies with technologies that either complement their own or drive their
businesses into new areas.
Another interesting trend often visible during this period of consolidation
is that many vendors want to claim the platform vendor title, and with it the
underlying assumption that in order to be a platform player you need to have
account control. Many enterprise software vendors believe that they have to own
an account in order to reap future rewards from it, so consolidation is a
natural strategy to employ in order to accomplish this goal, asserts Nolan.
Its not just about acquiring an all encompassing account, most of the big
platform vendors like IBM, SAP, and Oracle need to take over new markets as
growth in their own businessesdatabases and applicationsdries up. Buying
companies with mature products and a lot of customers gives them a fast and safe
way to do that. Oracle, with forty-one acquisitions in the last forty-five
months, has been the master of this trend. However, IBM and to a lesser extent
Microsoft and SAP too have learnt the tricks of the trade.
| And
then, There is Google |
| Google, with
its search, AdSense, Orkut, and YouTube may well not be in the radar of
Larry Ellison who calls it yellow pages on the Internet. His not-so-good
friend Bill Gates would definitely have a different view.
Google is a consumer company. Software or online
is too restrictive a word for it. But Google, through its loyal users, is
soon making a strong inroad to the corporate world. Gmail is already the
default mail of many users in SMBs who see it as the best bet against
eternally struggling enterprise mail system. Google Docs, though yet to make
a dent into Microsofts Word or Excel is increasingly being used by SMB
users when there is need to collaborate. Collaboration and social networking
could well be the next area of action for enterprises, and Google would
score there too. |
A host of acquisitions during the year, like Pilot Software and OutlookSoft
by SAP, Telelogic by IBM, and Agile Software by Oracle, were aimed toward this
platform expansion. And its not just software giants, even storage vendors like
EMC (acquisitions like VMware and RSA Security) and networking vendors like
Cisco (acquisition of Webex) have joined the consolidation bandwagon with an eye
on expanding their platform.
The commoditization of key software sectors, including middleware and
business intelligence, has also started driving this wave of consolidation. This
has been especially true for the business intelligence segment in 2007; this was
a domain where products that once were distinct and innovative started to look
remarkably the same. The year saw the takeovers of Hyperion by Oracle, Business
Objects by SAP, and Cognos by IBM. With these constituting three of the top four
BI vendors, it leaves SAS as the lone independent entity. Maybe the fact that
SAS is the largest privately held software vendor in the world and hence
relatively less vulnerable to investor pressure had more to do with its
independence.
Analyzing the Future
According to former Oracle president Ray Lane, there is a large no mans
land of smaller software makers trapped between Microsoft, IBM, Oracle, and
SAP, which consume nearly 90% of the available revenue, and start-ups such as
Salesforce.com that carry no baggage. Such software makers may seem strong with,
say, $300 mn or so in market capitalization, but they are really just waiting in
line at the chopping block. They do not have the might to compete against the
big three or the cost structures capable of defeating new stars like Salesforce.
According to analyst Bill Burnham of Inductive Capital, it is the relatively
ageing middleware crowd that is ripe for preys by the hunters in this
consolidation frenzy. More so, considering that both Oracle and IBM are going
the full hog in expanding their middleware portfolio; notwithstanding, Oracles
abortive bid for BEA Systems (the premier middleware vendor still independent),
the latters ultimate capitulation sometime in 2008 looks to be a fait accompli.
And keeping in mind Oracle chairman Larry Ellisons never-say-die predatory
instincts (rewind to the PeopleSoft saga), Oracle looks likely to be BEAs final
destination.
BEA and Tibco Systems could be the likely takeover targets in the middleware
space; even CA (a re-branded Computer Associates) might prove to be vulnerable.
The irony of the consolidation frenzy in the middleware space could be gauged
from a couple of acquisitions in 2006. Business Objects acquisition of
Firstlogic for approximately $69 mn and Informaticas acquisition of Similarity
Systems for approximately $48 mn added information quality pieces to the
acquiring vendors middleware puzzle. However, within a year, Business Objects
is all set to become history (acquired by SAP) while most industry observers
believe Informatica to be on the chopping block too.
|
 |
Lawrence J Ellison, CEO,
Oracle |
Another votary for consolidation, in fact a dark horse, could be HP.
Traditionally, in the software game, especially the middleware space, HP has
lagged behind not just the software giants like Oracle, Microsoft, and SAP, but
even IBM. However, as recent quarters showed, HP is betting big on software and
services in devising a turnaround in its fortunes. And the acquisitions of
Mercury Interactive and Opsware leave no doubt that HP, too, has thrown its hat
into the consolidation ring, especially the middleware muddle.
In fact, HP CEO Mark Hurd also believes that the software industry is in the
cusp of another consolidation wave. In the end, math wins, he said during a
keynote address at Oracles recent OpenWorld conference in San Francisco. If
you look at the math right now in the tech industry ... only a handful of
players have more than $100 bn in cash. Hurd said those reserves are likely to
go toward just a few different things: dividends, stock buybacks, or
acquisitions. In many cases, potential merger and acquisition cases will rise
to the top of that list, he argued.
Hurd also said that there is pressure for enterprises to conduct business in
a more standardized manner, dealing with fewer suppliers. The eternal debate
between single vendor and best of breed seems to be currently going in favor of
the former and that could possibly be another reason to accelerate the
consolidation wave.
A Great White Shark
The worlds second largest software vendor and its charismatic chairman
Larry Ellison have been bestowed with colorful epithets ranging from
predatory, to rapacious not for nothing though. Any debate on consolidation
of the software industry you participate in, Oracle is bound to be the first
name up for discussion. Its forty-one acquisitions over the past forty-five
months, including high profile names like PeopleSoft, Siebel, and Hyperion, had
only helped in enhancing its reputation as the biggest shark out in the pool
looking for small fish to feed its insatiable hunger for growth.
Though during the recent OpenWorld conference, Oracle announced new database,
application, and virtualization products, as well as integration products that
ostensibly will help glue together the wares from some of its acquisitions,
Jason Maynard, a software analyst with Credit Suisse Worldwide, feels no reason
to believe that Oracles acquisition frenzy is slowing down. The abortive
attempt to acquire BEA is an example, and most likely we would soon be hearing
more on the matter in the near future. After all, BEA could provide that elusive
glue to bond together all the disparate elements that constitute Oracles
middleware portfolio.
|
 |
Bill Gates, Chairman,
Microsoft |
After the BEA saga plays out, Oracle may foray into services: perhaps a deal
along the lines of IBMs $3.5 bn acquisition of PWC Consulting, believes one
industry insider. Most analysts, however, are not buying that one. Oracle is not
interested in the relationship business, they feel, and system integration
profit margins are not nearly as juicy and sustainable as software margins. More
interestingly, it might be SaaS where Oracles next big-ticket acquisition could
be headed for.
Though Ellison and other senior Oracle officials are publicly maintaining
that SaaS does not fit into Oracles strategy (they are adding value for big
customers and SaaS is for smaller businesses) and does not look a very
profitable business currently, the fact remains that Ellison owns a big piece of
NetSuite, the SaaS vendor that is working toward a near term IPO. A piece of
insurance for the future maybe?
According to observers, Oracle is waiting to see how SAP fares on the SaaS
front; SAP has already bet big there with its ByDesign initiative. If SAP
succeeds and SaaS proves to be a sound business even for a large software
vendor, Oracle could simply buy NetSuite and stay with its core business and not
face the pain of SaaS cannibalization otherwise. Meanwhile, it has covered this
bet, and if SAP stumbles, it can rub their noses in it.
Some analysts, however, feel that a carnivore like Oracle cannot be satisfied
only with NetSuite. If SaaS is working out and needs to imminently join Oracles
arsenal, the company would just buy Salesforce.com. After all, Salesforce is the
one that had brought the SaaS paradigm into the software equation. And,
surprise, surprise, Ellison owns a piece of Salesforce too. Thats the SaaS
put-away shot, it makes a heck of a statement, and it further cements Oracles
hegemony over CRM (they already bought Siebel). NetSuite can come along for the
ride too, but the Oracle shark has to find acquisition prey relentlessly, and it
must be of a certain scale to satisfy their appetite. Page(s) 1 2
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