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announcement to acquire J.D. Edwards last June -- and


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subsequent hostile takeover bid for the combined company -- spurred some industry observers to predict a feeding frenzy in the software sector.

Oracle's continued fight with PeopleSoft further fed that prediction by exposing a number of possible mergers and acquisitions. That included the surprising disclosure by


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that it held preliminary merger talks with German behemoth


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, as well as Oracle's publicized laundry list of possible targets such as

BEA Systems

( BEAS),

Lawson Software

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( LWSN) and

Siebel Systems

( SEBL).

And in just this month there have been at least four M&A announcements in the software world:

Computer Associates

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said it plans to buy security firm


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Ascential Software


acquired India-based iNuCom,


( COGN) closed its acquisition of Swedish firm Frango and


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completed its acquisition of Venetica.

"We believe that enterprise software is at the beginning of a major consolidation wave that will fundamentally reshape the industry," Banc of America Securities analyst Bob Stimson wrote in a note last month reiterating his neutral stance on the sector's share prices. He went so far as to suggest software vendors would even incur debt on their balance sheets to complete deals.

"Clearly the overall enterprise software industry is maturing and we believe a different investment philosophy is now required for investors," Stimson said.

But despite such talk, software companies have yet to show the enormous appetite for acquisitions that some predicted -- and some say they never will. "I think we'll see some, but I don't think it's going to be this mass wave where the industry contracts by 50%," said Marty Shagrin, a software analyst with Victory Capital Management in Cleveland.

Joe Josephson, co-head of M&A at ThinkEquity Partners in San Francisco, echoed that sentiment, suggesting recent activity is no real change from the past. "The software sector has been consolidating for 15 years," Josephson said. "Since time began, point-solution providers attract funding, get relevant and attract some customers, and someone buys them." The Oracle-PeopleSoft deal doesn't change that dynamic, he added.

In fact, merger activity in the software sector has picked up only modestly since June 2003. The quarter before Oracle announced its bid for PeopleSoft, there were only 117 software acquisitions, according to Thomson Financial. The number of acquisitions peaked at 202 in the first quarter of 2004 and then dropped down to 178 in the third quarter of 2004.

Source: Thomson Financial

Source: Thomson Financial

"The numbers ... don't show any clear-cut direction," said Richard Peterson, a market strategist for Thomson Financial who focuses on mergers and acquisitions.

That lack of a clear direction may reflect in part broader M&A trends. Peterson noted that September 2004 was a particularly weak month for mergers and acquisitions, with only $30 billion worth of deals announced -- the lowest level since May 2003. Overall, this year looks to be stronger than last year, with about $700 billion in deals compared with $530 billion last year. But that's still a far cry from the $1.6 trillion worth of transactions in 2000, although one-tenth of that was the AOL-Time Warner deal, Peterson noted.

The high-tech sector enjoyed the largest number of M&A deals in every quarter this year, but the total overall value of those deals has been surpassed by other sectors such as financials, which has seen some big banking deals.

But Ken Marlin, managing partner of New York-based investment bank Marlin & Associates, said he has seen a pickup in the pace of software deals in the middle market, which he defines as transaction sizes less than $1 billion. (The four deals that have been announced this month fall into that category.) That's also an area where Microsoft, the world's largest software maker, has said it will set its sights, although CFO John Connors recently suggested that Microsoft may make some larger acquisitions. (The company's biggest deals in the past few years have been in the $1 billion range.)

Marlin said he expects the pace of middle-market software M&A activity to continue to increase, though not wildly, for two reasons: First, buyers in the past 12 months have become more confident about their own businesses. "They have cash and they're willing to take a risk," Marlin said.

By contrast, after the market crash in 2000, companies became more inwardly focused and risk-averse, he noted. Back in 2000 and 2001, sellers were willing to sell but then the market dried up, their business prospects slowed and eventually they became less willing to sell because they couldn't get the value they thought they were worth, Marlin said.

The second reason for an expected pickup in activity, Marlin said, is that sellers also have started seeing their businesses doing better and purchase multiples go up. "In that context, there are more people willing to be sellers," he noted.

But Shagrin sees companies' improved health as a reason he doesn't expect to see a big acceleration of M&A, because acquisition targets also are flush with cash and consequently feel little pressure to merge.

Consider, for instance, the balance sheets of some companies that have shown up on Oracle's list of potential targets: BEA still has more than $700 million in cash on its balance sheet; Siebel has more than $2 billion in cash and short-term investments; and Lawson has $112 million in cash and cash equivalents.

ThinkEquity's Josephson agreed that sellers are still suffering plenty of what he called "valuation delusion." "I think the biggest impediment to deals getting done is people being unrealistic about what buyers can do," he said.

Yet buyers, while more optimistic than they were about their businesses, remain far more cautious about acquisitions than during the go-go days.

"What we are finding is that rather than the large companies thinking through growth prospects and revenue enhancements in a deal, we're seeing a lot of analysis go into cost savings," said Karl Will, head of tech M&A at J.P. Morgan Chase in San Francisco. That's a different approach for tech than in the past, said Will, whose firm advised Computer Associates on its

$430 million Netegrity acquisition announced last week.

Still, "in this environment, like most, M&A deals are rare," Will added. "There's little in the way of catalysts forcing people to do transactions -- forcing in a good way."

But companies are pursuing acquisitions for the right reasons and not the wrong ones, Will said, citing the "me, too" attitude a few years ago when deals begat deals. "I'd characterize it as a very healthy M&A environment," he concluded.

This could very well mean that rather than embark on an acquisition binge, software companies are more likely to control their appetites.