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Software Firms Face Recession Ripple Effect

Business software competitor SAP (SAP), which just acquired Business Objects, also has built an on-demand subscription product line to reach small and medium-sized businesses.

IBM, which just diversified its software portfolio with Business Objects competitor Cognos and on-demand data-protection services company Arsenal, will offer Lotus software and collaboration services codenamed Bluehouse to small businesses beginning later this year.

The spate of such acquisitions in recent years has cleared the field of many pure-play software vendors that would otherwise be most at risk, such as Business Objects and Cognos.

Companies most at risk are those selling into too few regions or having a limited revenue model. "Tibco (TIBX) would be the first one I'd look at," Correia says. "They're in one market: middleware."

Often mentioned as a buyout candidate, Tibco does sell its infrastructure software worldwide, but nearly 85% goes primarily to North America and Europe. And the company sells to a number of industries, while services account for more than half of its revenue. But Tibco derives a quarter of its business from the beleaguered financial services sector.

Conglomerate software giants may want to add the micro-category data integration to their portfolios, Correia said. Informatica (INFA) is a pure play in that market, making it somewhat vulnerable to market conditions.

JMP Securities analyst Patrick Walravens wrote in a Feb. 5 note that recent amendments to some executive employment agreements suggest that a sale of Informatica may be coming. JMP makes a market in its shares.

While some on-demand software vendors are pure plays, they are the industry's biggest growth category. Tighter IT spending only will help these subscription-based vendors, such as Salesforce.com (CRM), which typically don't ask for upfront fees.

But as pure plays, Web-based software companies may well get snapped up.

"At some point, someone is going to buy them," Correia says.

Unlike the downturn of 2001, which Correia characterizes as V-shaped, indicating that the IT sector continued a long decline, this downturn may bottom out quickly and stay there for a short time. "We think it's U-shaped," Correia said. "The duration of the bottom is what we're debating."

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