Enterprise Software's Dating Game

IBM, the world's largest software vendor, is squaring off against Microsoft(MSFT Quote) to become the company that defines, and thus leads, the emerging Web services business. A company that could help is Borland, a specialist in development tools. Borland has struggled, and its multiple that was greater than 40 at the beginning of the year (based on 2002 earnings) has tumbled to one that is now under 30 and far more attractive.

Some bearish analysts, including Richard Williams of Summit Analytic Partners, believe that tech stocks will move even lower in the second half of the year. Additionally, Williams expects IBM and other major platform companies to offer what he calls "the Web channel," software that provides all the infrastructure a company needs to conduct e-business and automate major business processes.

Put the two trends together, and there's even more reason to expect big players to pull out the checkbook.

All the action won't be at the very top of the food chain. Some specialized sectors, like business intelligence, are a microcosm of the industry as a whole. So segment-leading midsized players like Cognos(COGN Quote) or Business Objects (BOBJ Quote), are likely to look for even smaller companies that could help extend their core capabilities.

That makes a company like Brio, with a market cap of just $54 million, potentially interesting.

Similarly, foundering i2, a provider of solid, supply chain automation software, comes up in many conversations about potential acquisitions. i2 is appealing a delisting notice by Nasdaq, and may move to the Small Cap Market, a switch that would probably drive its share price even lower and make it a good buy for a company hoping to add SCM capabilities to its repertoire.

Major vendors of portals, software that creates tailored views of enterprise business data, often are weak in search and content management software, says Laura Ramos of the Giga Information Group. Stellent, with a market cap of just $97 million, and a string of six money-losing quarters in a row, would add significant value to larger portal vendors. So would Vignette, but that company is sitting on more than $300 million in cash, about five times that of Stellent, and is not likely to let itself be acquired.

And here's a wild card. Williams speculates that Cisco(CSCO Quote) may decide to move into software. "We would not be surprised to hear that CSCO is looking at BEAS as well," he wrote recently. "There is room for at least one more Web Channel entrant, and Cisco certainly understands the networking world, which is a clear precursor of the Web Channel space."

Sound unlikely? Perhaps, but the coming consolidation could be more radical than you expect.