Experts say the business software industry will consolidate as companies try to increase their range of products to better compete for tight IT budgets. That pressure is prompting midsize firms and the industry's largest players to consider combinations that might have been dismissed only a few years ago.
Sun Microsystems' chief operating officer and president, Jonathan Schwartz, created a stir earlier this month when he disclosed that Sun has considered buying Novell. Although the notion of a Sun-Novell merger was dismissed as unlikely by many industry analysts, the hint of the discussions in Sun's executive suite demonstrates the dramatic moves that technology suppliers are considering.
Sun is not alone. Two straight quarters of declining licence revenue, along with a string of executive departures and a reorganisation at BEA Systems have rekindled questions about the company's long-term viability as a standalone software maker.
Indeed, during trial testimony involving Oracle's unsolicited offer to buy business application maker Peoplesoft, Oracle disclosed that BEA was a potential takeover target. At the same time, Microsoft and SAP dropped a bombshell by announcing that they had held exploratory merger talks in the wake of Oracle's pursuit of PeopleSoft.
"When you can't grow organically, you look to grow or better position yourself through consolidation," said Paul Crisci, managing director of Broadview, a division of Jeffries, which advises companies on mergers and acquisitions. "The worst job in the world right now is a software salesman -- there are too many software companies fighting for too few dollars in the marketplace."
Swallowing up the minnows
Smaller companies continue to be prey for larger technology suppliers. Hewlett-Packard, IBM, Sun and Veritas have each purchased several smaller companies to fill out their utility computing product portfolios. With limited opportunities to go public on the stock market, the great majority of new start-up companies need to consider an "exit strategy" that involves a close partnership or merger with a larger company, according to market observers.
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