Surging Web Software Market Presages New Mergers - TheStreet

SAN FRANCISCO -- A highflying group of software developers is chasing its version of the Internet's Holy Grail: a set of applications that would enable corporations to run their entire businesses on the Web, from processing transactions to customer support.

But to succeed, analysts say, some companies will have to gobble up others in order to fill key product gaps.

Old-guard software developers like

Oracle

(ORCL) - Get Report

and

Siebel

(SEBL)

, as well as highflying upstarts like content-management company

Vignette

(VIGN)

, online marketing firm

E.piphany

(EPNY)

and customer-support company

Silknet

(SILK) - Get Report

are all chasing after this giant opportunity.

These companies and others were some of Wall Street's biggest winners last year, and analysts expect robust demand to propel Net software developers to another banner year.

TSC

highlighted some of the companies, focusing on customer-relationship-management software, in a

previous article. Despite their success, however, such companies are often missing key parts of the puzzle. And it's these holes that are sparking an emerging wave of consolidation.

"Over time, Net software will have to move into a more integrated solution," says Greg Vogel, a senior analyst with

Banc of America Securities

who covers Internet software. "If you start losing business to someone who has more features than you, then you have to fill those holes."

The action is just starting to heat up. Last October, Silknet acquired Web-based marketer

InSite Marketing

for $32 million. On Jan. 10, Vignette scooped up online marketing firm

DataSage

for $500 million. And on Jan. 26,

BroadVision

(BVSN) - Get Report

purchased content manager

Interleaf

(LEAF) - Get Report

for about $852 million. Consolidation is not just a way to stay ahead of the pack -- it's a matter of survival, say some analysts.

"You don't survive as a large software company by being a one-trick pony," says Drew Cupps, portfolio manager of the

Strong Enterprise Fund

, which is long Vignette,

BMC Software

(BMCS)

and

Rational Software

(RATL)

. Corporations, say analysts, would much rather deal with one software company that handles the whole e-business enchilada.

It's the Software, Stupid

Investors hear a lot of hype about Internet infrastructure and business-to-business e-commerce. But beneath that hype lies a simple truth: Much of the Internet's guts is plain old software. Even

Microsoft

(MSFT) - Get Report

is coming around to this fact. During his coronation as chief executive officer,

Steve Ballmer

remarked that "the fundamental value of the Net will be in developing software."

Corporate America seems to agree. With year 2000 conversion out of the way, corporate geeks are turning their guns and budgets to the challenge of electronic business. According to

Forrester Research

, 68% of corporations are more than doubling their information-technology spending on e-business. The software will help them improve customer service, streamline business processes and create marketing advantages, among other benefits. All told, Banc of America estimates that e-business software will grow into an $18 billion market by 2003, up from nearly $6 billion this year.

"I think it's going to be a very hot space in terms of the growth of these companies," says Cupps. "Corporate America needs to spend more on this area."

Finding the Action

So where's the next round of action? The Internet software market is so fragmented that mergers and acquisitions are likely to pop up from a number of directions. Like other industries, analysts expect the leaders in each individual market segment to be the aggressors. "The guys with the big valuations are going to provide the best suite of products," predicts Cupps.

BroadVision, for example, could use an online customer-relationship-management device. Web-tool developer

Allaire

(ALLR)

has a few holes, including a lack of order-processing and e-marketing software. And Vignette still needs a back-end transaction engine and customer-support mechanism to round out its suite. At a presentation during the

Banc of America Securities Technology Week 2000

conference, Vignette CEO and President Greg Peters told investors the company was mulling more acquisitions to meet its needs. "We're continuing to broaden the capabilities inside the platform," said Peters to a packed room.

The most likely candidate in the near term seems to be

Inso

(INSO)

, a Boston-based maker of content-management software that just blew up. After warning investors of a revenue shortfall, Inso said it had retained

Morgan Stanley Dean Witter

to "explore strategic alternatives," including the sale of the company. The day after the warning, on Feb. 2, Inso's shares fell a brutal 58% to 14 3/4 from 35 1/4. Even though most analysts say the company has a good content-management product, Inso won't be able to meet its numbers.

"If you're ever going to shine, now's the time," says John Seabern, an analyst with

RS Investment Management

. "I think there are some serious management issues. These guys don't know what the hell they're doing."

One powerhouse you can never count out is Microsoft. Although the world's most powerful software company has yet to make any significant inroads in the Internet software market, it intends to extend its dominance of PC software on to the Net. The focus of its effort in this area is the development of a new set of applications and software, dubbed "Next-Generation Windows Services." Still, some analysts are skeptical about whether the giant will be able to seize the opportunity.

"Microsoft is nowhere in enterprise applications," says Banc of America's Vogel. "It doesn't mean they can't be, but they've been trying for the last five years. I take threats from Siebel and Oracle more seriously than those from Microsoft," says Vogel, who doesn't cover Microsoft, Siebel or Oracle.