Enterprise Software Acquisitions: Who's Next?

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 |  Includes: EMC, HPQ, IBM, INFA, MSFT, MSTR, NZ, ORCL, SAP, SPSS, TDC
by: Rick Sherman

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The high tech Titans - IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ) , Oracle (NYSE:ORCL) , Microsoft (NASDAQ:MSFT), SAP (NYSE:SAP) and EMC (NYSE:EMC) – have been buying software firms at an amazing pace over the last half decade. According to BusinessWeek the tally is: Oracle $30 billion for 56 companies, Microsoft 79 companies, IBM 60 companies, EMC 40 and HPQ 34. Many of these acquisitions have been “tuck-ins” where the Titans have added the purchased company’s product capabilities into their product portfolio. This is a time honored practice the Titans, and their smaller brethren, have used to expand beyond organic growth and tap the innovative ideas of entrepreneurs.

Titans

Although tuck-ins have been a mainstay of software mergers and acquisitions (M&A) for decades, Oracle in the last decade has raised the bar by being successful in acquiring firms of a much larger size and, very much against software etiquette, even completing hostile takeovers. PeopleSoft and Seibel are the two case studies to validate this new approach.

Whereas tuck-ins add functionality to existing products, larger acquisitions offer two significant benefits. First, they enable the Titan to jumpstart their BI, integration or DW offerings. The right firm may vault the Titan from also ran to contender. Second, the larger acquisition brings a market presence and customers that would take a long time to replicate organically.

A couple of years ago, in a much anticipated M&A spree, the Titans purchased the top public business intelligence firms: SAP bought BusinessObjects, IBM picked up Cognos and Oracle snagged Hyperion. These acquisitions, along with various products the Titans already had in databases, data integration, enterprise resource planning (ERP) or other DW related capabilities vaulted the Titans into the top spots in the BI and DW markets. With businesses across all industries clamoring for ever increasing data and the ability to analyze it, this has been a solid growth area though growth and recession periods.

Two questions arise: Are there any companies left in the BI and DW industries that would have a meaningful* impact for the Titans, and are there any Titans who are interested in buying?

*We will define “meaningful” as a company that has a substantial, stand-alone business (not just a tuck-in capability) in respect to the acquiring company. The potential acquisition, to be meaningful, needs to have an established product with long-standing customers, a software partner network and either their own professional services group or consulting partners to support those customers.

The Potential Targets

The potential targets have been able to thrive in today’s economy without being Titans. These companies have shown that the death of the independents that was heralded when Business Objects, Hyperion and Cognos were acquired was premature. Innovation and value is not locked in the Titans’ engineering staffs.

One common characteristic is these firms are fiercely independent. But money does talk and even though none are dealing from a position of weakest (either in sales, profits or stock price), the Titans have generally been successfully at getting their targets.

The firms that would make significant contributions to the Titans:

SAS (Private)
Informatica (NASDAQ:INFA)
MicroStrategy (NASDAQ:MSTR)
Netezza (NZ)
Teradata (NYSE:TDC)

All are well-run companies with desirable products, customers and engineers from an acquisition perspective. And all have stories of why they are still independent and why they have flourished being so. None are in a position of weakness where they need to sell out but, with maybe one or two exceptions, there is a price that would put these companies in one of the Titan’s hands.

SAS

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IBM’s announcement earlier this year that it was planning on acquiring SPSS (SPSS) for $1.2 billion put a spotlight on the long-time leader in the predictive analytics market SAS. If the Titans are interested in making a splash in this market segment the only game left is SAS, since after SAS and SPSS every other company’s market share is in the low single digits. Although it would make sense from a technology perspective, from a cultural perspective is does not unless SAS wants to be acquired. SAS is a private company tucked away in beautiful North Carolina far away from the Silicon Valley. It keeps growing and earning rave reviews by its customers. Long-standing software firms have a great business model with high profitability and terrific cash flows. SAS says it has no interest in being acquired and there is no reason to think they are being coy. If they were amiable to being acquired the Titans would be outbidding each other.

Informatica

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When IBM several years ago acquired Ascential Software and its DataStage ETL product (data integration) along with BusinessObjects and Oracle acquiring smaller ETL vendors, many pundits stated that Informatica would struggle against the Titans. Instead, Informatica has thrived and become the Switzerland of data integration because the reality is many enterprises have software from several of the Titans and need a data integration suite that they can count on to treat all data sources even handedly. Informatica continues to expand its ETL product to a full-blown data integration suite. It’s consistently ranked one of the top two data integration products along with IBM by Gartner research and Forrester Research. Informatica is the crown jewel of data integration.

MicroStrategy

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Just as Informatica is the last substantial independent data integration firm left, MicroStrategy is the most sizable BI firm left (outside of private SAS.) This company has been around for quite a while with a deep product line and a solid customer base. There has been a little concern about new customer license growth through the recession, but they are not alone with slower sales. The company has recently responded to that issue by offering a free software bundle to support a specific number of users. The intent is to expand in the SMB markets and make it easier to introduce the product into departmental BI projects (both a huge growth area for BI). The company has two classes of stock; the company founder retains the ability to control whether a deal would happen. Even with an aggressive acquirer, the founder would have to find the deal attractive for it to proceed. This might kill a deal or merely drive up the price.

Teradata

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When the company was part of NCR it established the market for data warehousing or BI appliances (although they do not like that term). Teradata is in the high-end DW/BI application space where they always top the analysts’ charts for performance and functionality. Teradata offers its customers solutions including hardware, software and services. It offers its acquirer a quick jump start into this lucrative market with a terrific pedigree of customers and a professional services arm that is skilled and ready to expand. But after they spun off from NCR would they be willing to become part of a Titan?

Netezza

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A BI appliance firm with an innovative product line, successful customer base and excellent growth prospects. Although much smaller than TDC and lacking the services arm, they would be a great candidate for a firm that feels BI appliances are a significant opportunity. IBM, Oracle and HPQ are all current participants in that market but their offerings are dissimilar and may not overlap as much as one would expect.