Software Firms Feel Urge to Merge

SAN FRANCISCO -- Rackspace's(RAX Quote) recent IPO turned out to be a cautionary tale for tech companies that will keep buyout deals flowing.

Rackspace, the second significant tech IPO of 2008, fell 20% on its first trading day. The sour reception effectively put a detour sign over the IPO exit for private firms and their venture investors.

We won't see more tech IPOs this year because of the way Rackspace was "roughed up," predicts Brenon Daly, mergers analyst with The 451 Group.

As a result of the chilly IPO market, companies like Compuware(CPWR Quote), which has delayed the public spinoff of its Covisint division, will have to find buyers or sit on their hands until the IPO market picks up.

Merger activity, meanwhile, has picked up, despite the sluggishness of private equity players who a year ago were engineering big mergers.

For instance, on-demand software host Salesforce.com(CRM Quote) said Wednesday it bought privately held developer InStranet in early August for $31.5 million.

InStranet supplies call centers with information-management software at companies such as Comcast (CMCSA Quote) and Verizon(VZ Quote).

Halfway through the third quarter of 2008, the M&A market in software is running slightly ahead of last year with 379 deals since July 1, compared with 373 mergers for the same six weeks of 2007, according to the Software Equity Group, an investment bank specializing in software-industry mergers. The bank tracks all software mergers quarterly.

Allen Cinzori, managing director of Software Equity Group, predicts that the merger environment for software companies will be strong through the remainder of this year, with an average of 380 to 400 buyouts a quarter. The sector will continue to see acquisitions of developers of security, Web analytics and corporate performance-management software, he says.