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Big Blues Big Catch?
While Big Blue has not spent as much as Oracle to acquire software companies over the past few years, it has gradually moved into the neighborhood. It still might not be the Great White, but its already a voracious carnivore in the software food chain; its gargantuan services arm provides it almost with a second alimentary system to digest its acquisitions. If Oracle can boast of its forty-one acquisitions in the last forty-five months, IBM has not fared worse; since 2000, it has acquired more than forty software companies.

Besides the $5 bn IBM plunked down for business intelligence vendor Cognos, in 2007 the company spent $1.6 bn on content management vendor FileNet, $1.3 bn on Information Security Systems, $1.1 bn on information integration vendor Ascential, and billions more on many smaller software companies. Until recently, IBM had maintained that it would steer clear of application vendors, but the FileNet and Cognos deals reveal a refined approach. IBM is now saying it is interested in buying apps vendors whose products are extensions of its information management offerings.

According to analysts, this change of heart is an acknowledgement that IBM would, otherwise, be left behind Oracle, Microsoft, and SAP in the software game. More precisely, IBM has little choice but to move into business apps to keep pace with Oracle, SAP, and Microsoft, which are acquiring and developing more and more pieces of the stack. A classic example would be IBMs latest acquisition of privately-held database vendor Solid Information Technology, a deal that is expected to broaden its information on demand portfolio. Going by this logic, it also makes sense for IBM to go for a CA or a BMC Software, given their mainframe roots.

And, though Oracle may have the largest middleware portfolio (it includes almost everything), IBMs middleware plate is definitely more organized and sumptuous. While Oracles acquisitions have been hogging the headlines, IBM has been quietly buying up enterprise software companies to enhance its middleware offerings. Sample these: Isogon (software asset management solutions); Micromuse, Ascential & Cyanea, (performance management solutions of web-based business apps); DWL (Customer Data Integration Middleware); Collation (IT service management software); Bowstreet (portal technologies); Datapower (message-aware networking); CIMS Labs (virtualization of computing resources); and BuildForge (compliance software).

However, Maynard speculates that the #1 sea change deal in the software industry over the next two to four years could be IBM acquiring SAP. IBMs Global Services and vertical industry expertise would introduce SAP into many more accounts, Maynard reasons, and SAP would be freed from focusing on its NetWeaver middleware layer to concentrate on what it does best: core business apps. Now that could be the mother of all acquisitions (even more sensational than HP-Compaq). Impossible, some might say, but it would be prudent to remember that a merger between Microsoft and SAP too seemed unthinkable a few years ago, until Microsoft admitted it had been considering exactly that. In the end it dropped the idea only because it seemed too complicated to acquire a European company.

Enterprise, Or Web 2.0
Microsoft is fighting a multi-front war: on the enterprise front mostly against IBM and Oracle; on the consumer front against Google, Yahoo, and the Web 2.0 barbarians. Microsoft once talked with SAP about merging to create a business apps powerhouse, but it now appears that Microsoft is more concerned about fending off Google. A mega deal to buy Yahoo, however, is still a distinct possibility. That, however, could bolster the Redmond giant not only on the consumer front, but also on a certain section of enterprises too.

That for the moment seemed to be Microsofts strategynot to go the enterprise way head on, but gradually move beyond its consumer face by targeting specific sections like graphists and Web designers. Microsofts enterprise-focused acquisitions will continue to be small scale, to augment its SQL Server, Office, Exchange, Dynamics, and other major lines. And surprisingly, even open source could be a part of this acquisition initiative. The partnership with Novell last year for SuSe was the first signal; strategic partnerships with eBECS and Tyler Technologies could be taking this forward.

Going for these smaller acquisitions also makes sense when considering the fact that Microsoft had a much harder time than expected integrating the business applications it picked up with its $1.1 bn acquisition of Great Plains Software in 2001 and $1.5 bn deal for Navision in 2002. The smaller deals often do not contribute significantly to the bottom line in the short run. But in some cases, their effects have been seen relatively quickly in Microsoft products. Windows Live Writer, a blogging program, was started inside Onfolio, acquired by Microsoft in 2006; Microsoft introduced a new project, called Photosynth, based in part on technology from Seadragon Software, acquired also in 2006; in-game advertising company Massive, another recent Microsoft acquisition, has been integrating its technology with Microsofts online advertising system.

Speaking at the Web 2.0 Summit in San Francisco, Microsoft CEO Steve Ballmer reiterated that the company would continue to invest in buying technology, products and market share. Well buy twenty companies a year consistently for the next five years for anywhere between 50 mn and 1 bn bucks. With Microsoft increasingly under fire from old and nascent competitors and also trailing several steps behind Google in the search business, another possible acquisition for Microsoft could be Facebook, with whom it already has a partnership on the advertising side.

Hunters or the Hunted
The software industry, in its consolidation phase, is gradually assuming Kafka-esque proportions where the hunter does not know when he will be hunted down. In a big pool where the M&A frenzy is gradually reaching its crescendo, for companies like SAP and Symantec there are two clear choices available today; either swim with the sharks and gobble whoever comes on the way, or be ready to be swallowed in whole by bigger predators moving around you.

Historically, the most conservative of large software vendors, SAP is not likely to make any acquisitions near-term of the scale of its $6.8 bn deal to buy Business Objects. And it cannot expect to go on a bidding spree with Oracle in the near future; the memories of the Retek saga still would be quite fresh. SAP cannot sit tight though. Like the shark that has to continue swimming to avoid getting drowned, SAPs likely strategy would be to target companies with vertical industry and narrow technical expertise.

Eternal optimists and hardcore Oracle baiters would like to see SAP go after Salesforce.com, which would make it more of a player in CRM while thrusting it full-bore into software as a service. But that is as likely to happen as India beating Australia in the Test series Down Under. However, the big question is: should IBM come knocking, SAP would be interested?

Symantec is still digesting its $13.5 bn acquisition of storage and backup vendor, Veritasand that came three years ago. Still, the company has made about a dozen acquisitions since 2005, mostly in security and compliance. However, the blockbuster of 2008 could see a Microsoft or HP picking up the worlds largest security vendor. While for HP, the storage management offerings from the erstwhile Veritas stable would be a logical extension of OpenView suite, for Microsoft the security bit has always served as lucrative bait. Will 2008 see someone biting it?

Potential Gatecrashers
Who could be the potential gatecrashers into the software party? HP, for one, and EMC could be the other. Looking at the BTO (Business Technology Optimization) division, the biggest of HPs three software units, which would generate only about $2 bn in revenue this year, one feels HP is still not ready to tango. For a company with close to $100 bn in total revenue, software still looks small change for the worlds largest IT vendor. However, with sterling performances in software and services in recent quarters, HP could finally buckle the feeling that it lacks the passion to be a first-tier software vendor.

The OpenView system management platform is the centerpiece of HPs Business Technology Optimization software unit, augmented by the $425 mn acquisition of Peregrine Systems in 2005, the $4.5 bn acquisition of Mercury Interactive in 2006, and the $1.6 bn acquisition of data center automation specialist, Opsware in 2007. HP is just starting to move aggressively into what it labels as Business Information Optimization with its internally developed Neoview data warehouse platform, based on the Tandem NonStop operating system. A third software group, called OpenCall, dabbles in software for delivering voice, video, and data services.

Total value of mergers and aquisitions in 2005, $306 billion; in 2006, $298 bn. Software dominates the scene by a long way

So, while HP has albeit started consolidating its middleware portfolio, it still lacks adequate credibility in the enterprise business applications space in the absence of any ERP, CRM, SCM, or BI suites. Clearly, if HP wants to compete in software on a scale with IBM and Oracle, it will have to spend its appreciated stock and cash on bigger acquisitions. Data warehouse leader Teradata, recently spun off from NCR, is one possibility, especially given HP CEO Mark Hurds and CIO Randy Motts historical ties with the company. Not to rule out a blockbuster deal like one to buy security vendor Symantec, especially for its Veritas storage management holdings, or McAfee as a purer security player.

The HP story might have its ifs and buts but only sky seems to be the limit for EMC. No major industry player has reinvented itself through acquisitions quite like EMC has over the past several years. Since 2000, EMC has spent more than $7 bn on a couple of dozen acquisitions, transforming itself from a supplier of increasingly commoditized storage hardware to a purveyor of information infrastructure, including software for storage management (Legato), data encryption and identify authentication (RSA), security event management (Network Intelligence), content management (Documentum), digital rights management (Authentica), and virtualization (VMware).

Where would EMC go from here? Difficult to say, as senior executives like Chuck Norris are keeping their 2008 cards close to the chest. There might be some big-ticket acquisition in the personalized spacethat could mean anyone from Sandisk to an Imation. Broadly, however, EMC would probably stick to information infrastructure; perhaps even straying into data management by going after a Teradata or Netezza.

Not all Gloom
Notwithstanding the general perception that software consolidation will ultimately stifle innovation, the reality might be slightly different. Software consolidation is not the voracious monster some people perceive it to be. True, it is driven by big vendors desperate for growth. But technology managers need not fear that consolidation will eat away at competition or innovation in the software industry. There are still plenty of new ideas and novel approaches seeping in. And plenty of old companies that do not operate in middleware, mainstream business applications, or vertical focused software are likely to remain untouched in the near future. Companies like Adobe, Autodesk, Amdocs, or Dassault would be the best examples.

Joseph M Tucci, Chairman of the Board, president & CEO, EMC	Mark Hurd, Chairman of the Board, CEO & president, HP

Acquisition by a larger company can put a struggling software supplier on more solid financial footing and allow it to scale its architecture. And consolidation can actually increase a customers influence with a vendor. Premier customer status can mean better volume licensing deals, better access to vendor executives, and inclusion on customer advisory boards to influence the vendors technology road map and strategic direction. Despite rising budgets, the dictate to run a lean IT department for most enterprises has not changed. Working with fewer vendors means for many CIOs spending less money managing relationships.

There is no getting around the fact that the largest software companies like IBM, Microsoft, Oracle, and SAP are getting bigger. HP, EMC, and Symantec could remain the perennial bridesmaids without ever actually joining the big gang. Some insist that a weak IPO market, acquisitive IT vendors, and buyers desire to work with fewer vendors will make it impossible for a sizable fifth or sixth rival to emerge. The dark horse could be Google; at a financial analyst meet at Oracle OpenWorld, Larry Ellison derided Google as the yellow pages on the Internet. But the new age Net champion does have the potential to fill up that fifth gap, though whether it would also come up as a traditional enterprise software company is open to conjecture.

Rajneesh De
rajneeshd@cybermedia.co.in

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