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Oracle's Bid Hasn't Brought Merger Mania

PeopleSoft's (PSFT) announcement to acquire J.D. Edwards last June -- and Oracle's (ORCL) subsequent hostile takeover bid for the combined company -- spurred some industry observers to predict a feeding frenzy in the software sector.

Oracle's continued fight with PeopleSoft further fed that prediction by exposing a number of possible mergers and acquisitions. That included the surprising disclosure by Microsoft (MSFT) that it held preliminary merger talks with German behemoth SAP (SAP), as well as Oracle's publicized laundry list of possible targets such as BEA Systems (BEAS), Lawson Software (LWSN) and Siebel Systems (SEBL).

And in just this month there have been at least four M&A announcements in the software world: Computer Associates (CA) said it plans to buy security firm Netegrity (NETE), Ascential Software (ASCL) acquired India-based iNuCom, Cognos (COGN) closed its acquisition of Swedish firm Frango and IBM (IBM) completed its acquisition of Venetica.

"We believe that enterprise software is at the beginning of a major consolidation wave that will fundamentally reshape the industry," Banc of America Securities analyst Bob Stimson wrote in a note last month reiterating his neutral stance on the sector's share prices. He went so far as to suggest software vendors would even incur debt on their balance sheets to complete deals.

"Clearly the overall enterprise software industry is maturing and we believe a different investment philosophy is now required for investors," Stimson said.

But despite such talk, software companies have yet to show the enormous appetite for acquisitions that some predicted -- and some say they never will. "I think we'll see some, but I don't think it's going to be this mass wave where the industry contracts by 50%," said Marty Shagrin, a software analyst with Victory Capital Management in Cleveland.

Joe Josephson, co-head of M&A at ThinkEquity Partners in San Francisco, echoed that sentiment, suggesting recent activity is no real change from the past. "The software sector has been consolidating for 15 years," Josephson said. "Since time began, point-solution providers attract funding, get relevant and attract some customers, and someone buys them." The Oracle-PeopleSoft deal doesn't change that dynamic, he added.

In fact, merger activity in the software sector has picked up only modestly since June 2003. The quarter before Oracle announced its bid for PeopleSoft, there were only 117 software acquisitions, according to Thomson Financial. The number of acquisitions peaked at 202 in the first quarter of 2004 and then dropped down to 178 in the third quarter of 2004.

Source: Thomson Financial

Source: Thomson Financial

"The numbers ... don't show any clear-cut direction," said Richard Peterson, a market strategist for Thomson Financial who focuses on mergers and acquisitions.

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