In the Justice Department antitrust trial vs.


(ORCL) - Get Report

, often-overlooked

Lawson Software


is emerging as either a formidable player in enterprise software or a small-fry that only deals in middle-market sales.

The wildly disparate views depend, of course, on which side's lawyer is speaking. Not surprisingly, neither portrayal tells the whole story about the St. Paul, Minn.-based Lawson.

The 29-year-old company may get most of its business from mid-sized businesses, but it competes with the big boys on large deals in the handful of industries where it focuses -- public sector, health care, retail and banking and insurance. At the same time, big software vendors like Oracle, German behemoth


(SAP) - Get Report




are increasingly moving into the fast-growing middle market.

The field could be lucrative enough to make Lawson a takeover target itself, one reason some investors are drawn to its richly valued shares.

"I think Lawson is clearly one of the viable ERP

enterprise resource planning vendors in the space, and the court proceedings have really underscored the fact that the market is much more diverse and fragmented than the government would have you believe," said Albert Tang, research director of enterprise applications at IDC.

The heart of the Justice Department's case for blocking Oracle's $7.7 billion bid for rival PeopleSoft is that the deal would weaken competition in the enterprise market for human resources and financial software so much that innovation and customer choices would be stifled, giving Oracle a free hand to raise prices.

Oracle is fiercely disputing the government's narrow market definition, on which

the trial's outcome may hinge. The world's second-largest independent software maker argues that billion-dollar companies have turned to Lawson. Lawson CEO Jay Coughlan, who declined to comment for this story, has been subpoenaed to testify in the case in the second-half of the trial.

A Mid-Market Giant

Analysts are expecting Lawson to post fiscal 2004 earnings per share of 12 cents on $359.4 million in revenue, according to Thomson First Call. That means Lawson is only about 15% of the size of PeopleSoft's and Oracle's respective applications businesses.

The DOJ characterizes Lawson as a mid-market vendor focused on only a few key industries, with software unable to handle the large quantity of data, users, languages and currencies, unlike Oracle, PeopleSoft and SAP. On Tuesday, PeopleSoft Chief Technology Officer Richard Bergquist supported that view in his court testimony.

Lawson "handles the basics well," but "it falls short" outside of its core customer base in retail and health care, Bergquist said.

Domestic sales made up 94% of Lawson's sales in fiscal 2003 and its software supports only five languages. However, it can handle dozens of different currencies, and software experts give the technology high marks.

"The truth of the matter is there are really no differentiations between one set of ERP suites from another," said IDC's Tang. "So the differentiator right now is industry expertise, which Lawson is very good at in those industries."

Lawson is a niche player in that it's focused on certain primarily services-oriented industries. But the size of those markets is not small. IDC has estimated that applications software revenue from retail, public sector, financial services and health care -- Lawson's main markets -- will total $30.4 billion in 2006.

"I do think increasingly Lawson is going to be stealing share from the Oracles or PeopleSofts of the world," Tang added. "Clearly there is a chance that they might be able to sell to adjacent industries."

Indeed, attorneys presented evidence Tuesday showing Lawson is winning deals against PeopleSoft. Lawson beat PeopleSoft 27 times in head-to-head competition during a period when PeopleSoft lost 33 deals to SAP and 38 to Oracle, according to internal PeopleSoft documents.

Some of those Lawson wins, however, were for smaller, less sophisticated software, PeopleSoft's outside attorney Gary Reback said. "No one argues that Lawson isn't a competitor in the mid-market," he said.

But calling Lawson strictly a mid-market player isn't completely accurate either. "I do agree that Lawson tends more toward the mid-market in terms of its customer base," said Joshua Greenbaum, a technology consultant and principal with Enterprise Applications Consulting, in Berkeley, Calif.

But he acknowledged "mid-market is one of the squishier terms in the industry." Some people define it as companies with up to $1 billion in revenue, but outside the U.S. that's a very small number of companies, Greenbaum noted.

And Lawson does already count some billion-dollar companies among its customers. Among them:


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, the largest for-profit health-care provider in the U.S., and oilfield services firm


(SLB) - Get Report


At the same time, enterprise software vendors are increasingly swimming downstream into the higher-growth middle market. Gartner estimates total license application software license sales to small and mid-sized businesses will grow 5% in 2005 -- about twice as fast as sales to large companies.

That growth makes Lawson an attractive acquisition for the likes of Oracle or even

Siebel Systems


, analysts say. But a hostile takeover bid akin to Oracle's strategy with PeopleSoft wouldn't fly with Lawson because its founders and management have a controlling interest, with insiders holding about 45% of shares.

Being acquired is not part of Lawson's strategy, company spokesman Terry Blake said.

The murky takeover possibility aside, the stock has become expensive, said Ian Murray, a portfolio manager with Straus Asset Management, who last owned Lawson shares about a year ago. Following a 16% jump in the past 12 months, Lawson is now trading at about 41 times forward earnings.

Another problem cited by Murray: Lawson's low margins -- a 58% gross margin and a 4% operating margin in the February quarter. That means Lawson has less earnings leverage than other higher-margin companies if sales pick up.

But Piper Jaffray analyst Tad Piper, who has an outperform rating on Lawson, believes the company will benefit from an upgrade cycle in the software sector. This was reflected in a 27% jump in Lawson's license revenue in the first nine months of fiscal 2004 compared to the year-earlier period, he said. (Piper Jaffray has received non-investment banking securities-related compensation from Lawson in the past year.)

Piper said Lawson's low margins stem in part from a greater share of sales coming from lower-margin service revenue ($66.4 million in the February quarter) vs. higher-margin license sales ($25.2 million in the February quarter). However, as license sales climb and become a larger portion of the mix, operating margins should also go up, Piper said.

That could make Lawson an even more attractive buy, depending on the ultimate outcome of Oracle vs. DOJ.

Staff reporter Bill Snyder contributed to this story.