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03/03/2005

Software's Top 10 2005 Trends: #10 Consolidation

2004 saw some significant consolidation in the Software industry.  In the public markets there were only 4 Software related IPOs (BBBB, CRM, MOTV, RNOW) but there were 19 public companies acquired which reduced the net number of public software companies to 237.  The biggest deal of the year was Oracle’s now infamous acquisition of PeopleSoft. 

2005 looks like more of the same.  The year should start off with strongly if Symantec’s acquisition of Veritas closes (which it looks like it will) and more big deals are possible (perhaps from the combined SYMC/VRTS itself).  I speculated last year about some potential blockbuster software M&A deals, none of which have come to pass, but I think it’s fair to say that more big deals are likely.  I look for several companies to be particularly active this year including CA, who’s new CEO was acquisitive at IBM, and IBM itself, which has been a pretty steady acquirer in the software space for the last few years.  Some smaller firms with rich currencies that are likely to be on the prowl include Mercury Interactive, Salesforce.com, and Websense.  Two big wild cards this year: BEA and HP.  BEA looks vulnerable to a takeover from either HP or CA, and HP will need to figure out if it really wants to be a player in enterprise software or not.   If it does it is going to have to make some major moves to build a stack that can compete with Oracle and IBM (such as buying BEA).

From a VC perspective, I believe consolidation in the public arena is actually a good thing for three main reasons:  1.  It is creating more companies with very large market caps and very large cash positions for which $50M-$100M acquisitions (the bread and butter of Software VC) are relatively immaterial.  2.  Large companies are typically very poor at innovating making it more likely that they will try to emulate IBM’s strategy of acquiring promising software companies and then using their sales and marketing networks to generate financial leverage.  Of course these trends may also make it harder for private software companies to become “break-out” VC hits (such as Oracle or Microsoft), but the break-outs tend to happen in new areas that established firms ignore, only to have the market move to fast to catch up (a la Microsoft vs. IBM)

For a complete list of Software's Top 10 2005 trends click here.

March 3, 2005 in Stocks, Venture Capital | Permalink

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