Size Matters in Software Merger Derby

Not playing at the low end, which refers more to the size of the deployment than to the size of the business, is probably not an option.

Coping with IBM's move in middleware is especially critical for BEA. Last year, IBM's share of the market increased to 37.2% from 36.3% the year before, while BEA's slipped a full point to 7.2%, according to IT researcher and consultancy Gartner. The shift in share is far more significant for BEA since applications servers are the heart of its business, while much-larger IBM is highly diversified.

"Competition in the application server market continues to intensify," Goldman Sachs analyst Sarah Friar wrote in a note to clients published Tuesday. "Our feedback continues to be that BEA's best-of-breed value proposition is often not enough to win against IBM WebSphere's significantly lower total cost of ownership in many competitive situations." Goldman has a banking relationship with BEA and IBM.

Similarly, IBM's $1.1 billion acquisition of Ascential pressures vendors who sell software that integrates and cleanses data.

There's some disagreement about how Informatica(INFA - Cramer's Take - Stockpickr), the largest remaining publicly traded competitor, will fair. Independent tech analyst Rob Tholemeier, who has followed the space for years, believes the stand-alone company is not in trouble. "Customers will have trouble trusting IBM. Data integration needs to be done by someone independent," he said.

Other analysts disagree, saying customers want to reduce cost and eliminate complexity by dealing with as few vendors as possible.

"A broad information integration system will become more appealing over time, which suggests that pure-play integration vendors will have difficulty convincing customers to buy their technology," said AMR's Austvold. Customers, he said, want a single set of technologies that address the problem of data integration (making disparate data sources accessible to other applications).

Large as it was, the Ascential deal was hardly a blockbuster, at least not when compared with recent software acquisitions like the $10.3 billion takeover of PeopleSoft by Oracle, the $13.5 billion merger of Symantec(SYMC - Cramer's Take - Stockpickr) and Veritas(VRTS - Cramer's Take - Stockpickr), or the $3.4 billion purchase of Macromedia(MACR - Cramer's Take - Stockpickr) by Adobe(ADBE - Cramer's Take - Stockpickr).

And those were just the most-publicized deals.

Between Jan. 1, 2004, and March 31, 2005, the enterprise applications market saw at least 191 reported buyout deals worth more than $30 billion among 2,500 enterprise applications vendors, according to a study by IDC.

IDC research director Albert Pang calls it an arms race that software companies cannot afford to lose. "The new generation of industry leaders are gaining powerful tools, such as substantial recurring revenue, global reach and combined customer lists, forcing rivals to compete on new, more demanding terms.

"Many vendors who remain stagnant during this period of rapid consolidation may find themselves cornered in the middle of an industry niche, segment or product category without any upward mobility," he says.