Shrink Rap

Larry Ellison isn’t the only person predicting widespread consolidation for the software industry—he’s just the most colorful. “We are now going through this stage of consolidation where Silicon Valley will resemble Detroit more than Silicon Valley of old,” Oracle Corp.’s CEO said at a company conference last year. More recently, he told a financial analyst newsletter that “the idea that we need all these different software companies is a very bizarre idea.”

Others take a more measured tone, but still see fewer independent vendors in the future. “I expect that we will continue to see consolidation, especially from Oracle and Microsoft,” says Brendan Barnicle, an analyst with Pacific Crest Securities in Portland, Ore. Yet many public software companies are too expensive to make sense as acquisitions. The result, says Barnicle: “We are likely to see many companies that survive off their installed bases and large cash positions for years, which will be welcome news to their customers.”

Some of the names bandied about as acquisition candidates by Ellison and others: BEA Systems Inc., Siebel Systems Inc., Commerce One Inc., Ariba Inc. and Sybase Inc. But truth can be more dramatic than speculation, as shown when Microsoft and SAP AG revealed this summer that they had discussed a merger. And in early December, Oracle Co-President Charles Phillips told Reuters the company is in merger talks with several other companies.

For Jamie Lewis, chief executive of the Burton Group, consolidation makes more sense in some sectors than in others. “In enterprise resource planning and customer relationship management, yes, the industry is moving into a mature phase,” he says. “But there are always areas of innovation, seen now in things like identity management, where the typical cycle still applies: Startups enter a hot new area, innovate to a degree and at a pace the big, established players can’t match, and then that market matures, too, with fewer, more stable companies.”

One deal that has people shaking their heads is Oracle’s bid for PeopleSoft. “We expected ERP consolidation among tier-two companies,” says META Group Inc. Senior Vice President Michael Doane. “There are so many players there that it would make sense to see an IFS buying QAD, or vice versa, and it would be welcomed by the clientele, who have too much choice and not enough critical mass. But none of that has taken place.”

Doane expects Microsoft to be a major driver of mid-market consolidation, both as a buyer and as a threat that forces other companies together. “If smaller companies are arrogant and don’t create larger, more defensible entities, they will be subsumed.”

Or as Ellison put it way back in 2002 at an Oracle meeting in Europe, “I think it’s going to be utterly brutal. Most of the small companies are going to disappear.”

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