Enterprise Software's Dating Game

With tech multiples drifting south and enterprise software vendors hoping to woo IT managers with more comprehensive offerings, analysts are expecting a new wave of consolidation to ripple through the industry.

Smallish application and tool vendors, including Borland (BORL), Brio (BRIO), i2 Technologies (ITWO), Stellent(STEL) and Retek(RETK), are potential targets -- at the right price.

But large companies like BEA Systems (BEAS) and Siebel Systems(SEBL) also could be attractive if their multiples go down. After all, IBM(IBM) spent $2.1 billion to buy Rational Software late last year, its largest acquisition since purchasing Lotus Development in 1995.

And Oracle(ORCL) CEO Larry Ellison, whose company generally prefers to build its own technology, raised eyebrows last month when he said, "At the right price, we would buy BEA."

Not long afterward, the board of Siebel Systems approved a shareholder rights plan, or "poison pill," a strategy used by companies to fend off hostile takeovers.

Nevertheless, Siebel, with its market cap of $4.1 billion, is a lot more likely to be the buyer then the seller.

As the bear market grinds on and valuations shrink, some companies become attractive bargains. But consolidation talk now seems to be driven as much by the need to flesh out product lines as it is by earnings reports.

"Siebel is interested in filling horizontal gaps and developing more presence in vertical markets," said analyst Cameron Steele, of RBC Capital Markets.

What kind of gaps does a company that dominates the CRM space need to fill? More mobile connectivity. Or retail, an enormous market that few CRM vendors have penetrated, Steele said.

That leads Steele and others to speculate that Retek, a small ($184 million market cap) vendor of CRM solutions tailored for the retail market, might fit the bill. Other potential buyers include Oracle, PeopleSoft(PSFT) or SAP(SAP), which is moving aggressively in the CRM space.