If the Holy Grail can't be built, maybe it still can be bought.
That's what today's merger announcements between
have in common, even if shellacked tech investors didn't care to let the Holy Grail be bought.
What both deals illustrate is the surging race by business-to-business software companies to come up with an all-in-one sofware package, or "integrated solution," to get firms onto the Internet. For business processes ranging from supply-chain management to supplier-vendor procurement to customer-data management, an all-in-one package is the golden ring many software firms are reaching for now.
The market, however, didn't see much gold in today's merger announcements; webMethods lost 17% and Vignette lost 20%, to end the regular session at 72 and 34 7/8, respectively.
Active Software closed down 15/16, or 3%, to end the regular session at 32 1/16. The only member of the foursome to see a gain on the deals was OnDisplay, which ended the regular session up 7/8, or 1.64%, at 54 1/8. But it traded as low as 48 3/8, and all the stocks traded lower before participating in the
The market reaction to these deals suggests investors couldn't care less about these firms' techno-quests. What they want now are obvious stories that make sense -- and money -- now.
"If you don't explain the rationale, if you don't say explicitly that one plus one equals three, the market says, 'OK, I'm going to sell now and figure out what it means later,' " says Todd Weller, a technology analyst at investment firm
Legg Mason Wood Walker
. He points to negative market reaction immediately following recent deals between
In this volatile technology market, with a tremendous whiff of consolidation in the air, analysts see the quick-finger reaction of investors at odds with the long-term business strategies of firms that are being pressed by ever-fiercer competition.
"Of course they have to manage the stock," says Brent Thill, a B2B analyst at
Credit Suisse First Boston
, who rates Vignette a strong buy and whose firm hasn't performed underwriting for the company. "But they also have to manage how they do business, and they
Vignette view this as a very critical addition."
Traditional investor psychology, which usually punishes acquiring companies' stock while bidding up the targets of acquisitions, hasn't applied to recent deals. But with the Nasdaq hitting its intraday lows for the year-to-date Monday before rallying to close down just 24 points, or 0.8%, investor schizophrenia might be a more applicable term.
"The patterns here are all out of whack," says Stephen Sigmund, an analyst at
Dain Rauscher Wessels
, who rates webMethods a strong buy, and whose firm co-managed webMethods' initial public offering in February. "This is the craziest market any investor has ever seen. So all the traditional reactions are off. I personally wouldn't read too much into it."
From many analysts' perspectives, the technology rationale of both deals makes perfect sense, though. In Active Software, for example, webMethods will get technology to streamline intracompany systems, a nice match with the intercompany integration software it now builds.
With OnDisplay, Vignette will get technology to take its content-management systems -- which it has used mainly for business-to-consumer Web sites -- to the business-to-business world.
The problem with both deals, though, is the high price of technology.
At $1.3 billion in stock, webMethods is paying a 39% premium over the Friday close of Active Software, or 12 times its 2001 revenue projections. Vignette will pay even more -- about 25 times 2001 revenue for OnDisplay -- through its $1.7 billion stock deal for that company.
The webMethods-Active Software deal is "certainly not cheap," says David Hilal, an analyst with
Friedman Billings Ramsey
in Arlington, Va. "But relative to the industry peers, I don't think it's excessive." He says Active's peers, which include companies like
, trade at an average price of 20 times 2001 sales. Currently, Vitria is trading at around 60 times trailing-year sales.
As for Vignette and OnDisplay, Credit Suisse's Thill questioned how much technology Vignette was getting for the price it paid.
"What's interesting is that all the vendors continue to tell the Street that 80% of the
B2B functionality was embedded already. So the 20% fill had to be a $1.7 billion acquisition? People might question that."
A Vignette spokesman did not immediately return phone calls.
"If you look at other deals that have been going down, we're right in line with those," says David Mitchell, chief operating office of webMethods. "We ended up paying a 40% premium for Active, so we thought that was right in line with the market. At the end of the day, we have created a powerhouse integration company with a combined growth rate of 306% annually."
Valuations aside, there's still the question of how easily these high-tech firms will be able to integrate their technologies with each other after linking up. It might be easier to buy the different technologies needed for an end-to-end solution than it is to build one, but a cobbled-together, piecemeal software package may have its disadvantages as well. That's a drum
has been beating loudly lately, as it touts its own, soon-to-be released software that it says has been built from the ground up.
"You're looking at integration risks any time a software vendor takes this big a bite," says Thill, speaking to the Vignette-OnDisplay deal. "Can they actually swallow it? That's something to really keep an eye on."
That said, consolidation is clearly the way the industry is going, as scores of niche software players are quickly finding that capital markets aren't throwing cash at them freely anymore, and dominant, established companies try to win the end-to-end software race.
"The market is cleansing itself," Thill says. "Instead of having a thousand niche vendors out in the market, you're going to have a broad platform offered by a few companies. There will be a hit to shareholder value in the short term, but these companies aren't just focusing on the next two or three months."
No, they're focusing on the big picture, or at least that's how their investor relations departments will inevitably pitch it. Only problem is, with markets and tech stocks in their stomach-churning volatility mode, it probably will take some time for that big picture to come into focus.