Sifting for Smaller CRM Gold

Siebel Systems(SEBL) and Salesforce.com may get most of the ink when it comes to customer relationship management (CRM) software, but a few small-cap players have stolen traders' attention.

In particular, Chordiant Software(CHRD) has soared a whopping 182.3% in the past 12 months and E.piphany(EPNY) enjoyed a 68.2% spring. Both outperformed the 59.7% rise in the Goldman Sachs Software Index.

"There has been a renaissance in terms of investor interest in these smaller names," observed RBC Capital Markets analyst Cameron Steele. But "the easy money has been made in a lot of these," he cautioned.

In fact, these smaller CRM companies are only nibbling at a tiny piece of the market. Still, some hold promise if you pick and choose carefully, as many are likely to be gobbled up by larger companies, investors and analysts say. There has been tremendous consolidation in software overall, and merger mania is finding its way to the CRM space as well.

In late 2003, for example, Vancouver-based Pivotal (PVTL) went on a wild ride as an acquisition target. First, venture capital firm Oak Investment Partners made an all-cash offer to buy the firm. Then, rival Onyx Software(ONXS) threw in its own all-stock bid before CDC Software, a subsidiary of China.com(CHINA), trumped both offers. (Pivotal shareholders vote on CDC's offer -- $2 per share in cash or $2.14 in cash and China.com stock -- next month.)

Meanwhile, Onyx is a potential takeover target itself as it fights to remain relevant, a challenge for companies that sell primarily to small- and medium-sized businesses. The firm's cash position has fallen to a precariously low $11.8 million and its stock has plummeted 20.8% in the past year. The company preannounced disappointing quarterly results Jan. 12, and CEO and co-founder Brent Frei said he's stepping aside when a successor is found.

"It's hard for small companies with weak balance sheets to sell software in this environment," said Wedbush Morgan Securities analyst Nathan Schneiderman. "The model that seems to work is selling large deals to big corporations."