Enterprise Software in 2008: Consolidation and Chaos Loom - Page 3

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Goldmacher stopped short of calling an IBM-SAP merger a fait accompli, saying "time is on IBM's side" because SAP is "ridiculously overvalued right now and will be much cheaper later."

He added that he thinks the odds of an eventual marriage are "very high" but it probably won't happen in 2008.

Denis Pombriant, an analyst at Beagle Research Group, is less convinced.

"I just don't see it happening," he said in an e-mail to InternetNews.com. "IBM has the cash to make the purchase, though I doubt they'd just plunk down two to three times' revenues to buy SAP."

Pombriant added that the two companies serve the same market and customers and already talk to each on very intimate terms.

"It would be financial and I don't see much advantage for the customer," he said.

Those aren't the only factors that could complicate an IBM-SAP merger.

"One of the big customers of the IBM is the U.S. federal government," Pombriant said. "What would the outcry be if a German company had its hands in the heart of the federal IT? Maybe nothing, but look at what happened when an Arab-owned company tried to buy the company that manages the U.S. ports."

"This might not ever reach that level, but I think it could destabilize some of IBM's oldest and biggest relationships," he said.

Yet if an IBM-SAP merger were somehow to materialize, it could usher in an era of consolidation that even HP's Hurd might never have imagined.

"You can bet Oracle will raise a ruckus," Pombriant said. "I think you could also expect to see other companies like maybe HP and Oracle join forces. I don't think that kind of amalgamation would be good for innovation or anything else."

What lesser-known companies will grab the spotlight in 2008?

Everyone's on the lookout for the next VMware, hoping to find that software company that not only has a great product but knows how to capitalize on an emerging trend well ahead of the pack.

But identifying the next blue-chip software company is at least as hard -- and much more expensive -- than finding a franchise NFL quarterback or a left-handed pitcher who dominates for a decade at the big-league level.

However, that's not going to stop venture capitalists from investing billions in the pursuit during the coming year.

In the third quarter of 2007, VCs gave more than $1.11 billion to privately held software companies, edging out biotechnology for the top spot among sectors favored by venture capitalists.

Industry analysts expect VCs to pour another $5 billion or more into emerging software companies in 2008.

Mark Sherman, general partner at Menlo Park, Calif.-based Battery Ventures, said seminal events like VMware's blockbuster initial public offering in August and BladeLogic's promising debut in July provide both the justification and the motivation VC firms need to loosen their purse strings.

"I think that's one of the reasons are so interested in software right now," Sherman said. "There's a lot of liquidity in those deals and that encourages people to start looking for other investments."

Not surprisingly, venture capitalists are sticking with a proven formula and focusing most of their attention on software, appliances and platforms that address either data management or the datacenter itself.

One reason is that enterprise software companies like SAP, Oracle, Microsoft and IBM have spent more than two decades hawking the proprietary software businesses need to collect and manage their data. And all that data needs to be stored somewhere.

Virtualization software is reducing the size and energy demands of corporate datacenters while SaaS and service-oriented architectures (SOA)  have emerged as the data-management strategies of the future.

Companies providing the software that give companies flexibility in their IT environments and deliver an quick return on investment are the ones getting the lion's share of VC funding right now -- a situation unlikely to change anytime soon.

"Large enterprises are looking at all this data and viewing it as a strategic differentiator," Ravi Mhatre, general partner at Menlo Park, Calif.-based Lightspeed Venture Partners, said in an interview with InternetNews.com. "They need more leading-edge solutions."

"Because of that, they're more open to doing business with startups that have something new to offer to manage and deploy in their datacenters," Mhatre said.

He added that the macroeconomic climate for venture capital is impacted by the innovation taking place within the software startup community. Large enterprise customers, Mhatre said, aren't afraid to invest in startups with fresh, well-thought-out ideas.

"If you have the newest technology that allow customers to be more efficient, you'll get investment from the enterprise customers," he said. "More investment breeds more innovation. Innovation breeds more investment from the venture capitalists."

Not everyone stands to benefit from this trend in 2008, however.

While VMware serves as a harbinger of venture capital to come, Mhatre and Sherman both also said it should be a warning to established software companies: Despite their size and clout, if they don't have something new to offer, you can bet there are startups out there that will.