Software Synergy Rides Second Wave

It would only be a small exaggeration to say they laughed when EMC(EMC) CEO Joe Tucci sat down to buy Documentum in late 2003. Much of Wall Street didn't understand why an enterprise storage vendor would spend $1.7 billion to purchase a company that managed documents and other forms of content.

"Fit is the big question," said Omar Al-Midani, then an analyst with Soundview Technology.

Nearly two years after the deal closed, that question hasn't been fully answered. But it does appear that Documentum is proving to be an asset to EMC in ways that aren't immediately apparent on the income statement. And even more importantly, the takeout has become something of a template for a wave of top line-driven acquisitions in the software industry that are presenting new opportunities for investors.

The highly publicized purchases of PeopleSoft and Siebel Systems(SEBL) by Oracle(ORCL) featured competing companies with significant overlap and the opportunity to bolster the bottom line by cutting billions of dollars in redundant costs. The new wave of consolidation is moving major players into new markets by acquiring companies with complementary technologies and customers.

Two sectors to watch: supply chain management and enterprise content management software.

Indeed, Oracle's latest purchase of privately held G-Log gives the database giant entry into transportation logistics, a fast-growing subset of the $5.8 billion market for supply chain management software -- and could well force rival SAP(SAP) to make its own purchase. One possibility is the resurgent i2 Technologies(ITWO). However, the German software vendor could decide it's cheaper to build its own products, says analyst Stuart Williams of Technology Business Research.

"Supply chain is a key technology for companies that want to present a complete software stack," says Richard Williams of Garban Institutional Equities. "So going forward, a deal to acquire i2, Manugistics, (MANU) or Aspen Technology(AZPN) seems likely." Garban does not have a banking relationship with any of the companies mentioned.