Hungry For Growth
EUC with HCI: Why It Matters
Mergers and acquisitions may not be helping Microsoft much, but they were a major source of growth for many of the companies on our list. Nuance Communications and Ansys, No. 1 and No. 2, used M&A to propel them in their respective areas of speech software and simulation software. Nuance paid $357 million for Dictaphone, and Ansys paid some $600 million for Fluent. Adobe (No. 6) added hundreds of millions of dollars in revenue from its late-2005 purchase of Macromedia for $3.5 billion.
No. 8 Symantec has also shown its predilection for acquisitions, especially in what technology vice president Rob Clyde calls "adjacent spaces." In April, the Cupertino, Calif.-based security company bought Altiris, a systems management vendor, for some $800 million, and it is still seeing a benefit from having acquired backup giant Veritas for $13.5 billion two years ago.
Acquisitions are "not the only way" for established software companies to come up with innovative new products, Clyde says. But they're important, alongside internal research and development.
Indeed, some established companies regard their acquisitions as another way of doing R&D of continuing to offer innovative products to a customer base that may be happy to consolidate vendors but doesn't want the pipeline of new ideas to dry up. This is especially true of smaller acquisitions, which often don't add much in the way of revenue or customers but can add a lot in terms of potential.
"There are a lot of venture-backed companies out there that are doing work in all these interesting areas," says Charlie Peters, chief financial officer of Red Hat Software, No. 4 on Baseline's list with a growth rate of 44%. "In many cases, it's easier to do an acquisition than try to start something greenfield."
An established software company hungry for growth may buy a company with scant or nonexistent revenue, thinking it may eventually have the potential to generate tens or even hundreds of millions in business. Or it may buy the small company with the idea of integrating the smaller company's product into an already established suite. While such "tuck-in" acquisitions rarely allow buyers to charge more for their software, over time they can translate into getting a larger share of chief information officers' I.T. budgets.
For their part, when they are working with small companies, CIOs understand the need to proceed with caution. For instance, while Royal Caribbean, the $5 billion cruise company, doesn't shy away from working with startup companies whose products it considers promising, it makes sure the startup company's products aren't too deep in the infrastructure.
"We have on a number of occasions invested in products from small and midsize software firms that did not have large or even positive income," Mike Sutton, CIO of Royal, says in an e-mail. "In almost all cases, they ended up being acquired and assimilated into larger companies such as IBM or Oracle, which managed a fair and timely transition to the more enterprise support model."
For CIOs, there may be some security in knowing that no startup with promise is likely to remain independent for long. But the acquisition trend and the almost complete familiarity of the names on the Baseline list raise the question of whether the window has shut for young enterprise software companies that want to grow and remain independent.
Despite the strength in the stock market, relatively few enterprise software startups are planning to go public. One exception is BladeLogic, a virtualization company that helps CIOs save money by automating the configuration of servers in data centers. BladeLogic doubled its sales to $12 million in its December quarter, according to its prospectus.
But even in hot areas like virtualization, there is as much money being poured into M&A as into new-product development or new-company formation. In December, Citrix, the No. 9 company on our list with growth just below 25%, bought virtualization company Ardence for an undisclosed sum.
Citrix had a secondary reason for buying Ardence the Fort Lauderdale, Fla.-based company wanted to increase its geographic presence in the Boston area, where Ardence is based.
That pragmatic goal bolstering geographic presence also informs the acquisition strategy of Red Hat. Of the five acquisitions that Red Hat made last year, four (in Brazil, Argentina, India and the Czech Republic) were designed to bolster the vendor's geographic presence. A fifth, of middleware maker JBoss, was about new technology. Still, CFO Peters says most of Red Hat's growth remains organic. The company expects its sales to rise another 29% this year, to $515 million.
Along with the companies whose organic growth has slowed, Baseline's research into how quickly big software companies are growing also shed a light on nine that are shrinking. Novell is the worst case, with its revenue dropping 19.2% last year because of a decline in the company's legacy NetWare business. But Novell's two newer businesses, Linux and systems management, are growing, and executives are promising a steady increase in profitability as the 28-year-old company struggles to right itself.
Is it possible for an enterprise software company to turn things around and become a growth story again? Novell chief marketing officer John Dragoon says it is, though probably only for companies that manage to do some thoughtful acquisitions including tuck-ins and divestitures. Novell, he says, starts with a couple of inherent advantages a $1.2 billion war chest and the 52,000 global customers that still use Novell products.
"We do a lot of research on how Novell is perceived in the marketplace," Dragoon says. "Novell is a brand that has a lot of people rooting for it. There are companies that would pay a lot of money to be in that situation."
9 Software Companies That Shrank in 2006
Sources: Yahoo Finance, company reports
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