Many of the themes that dominated the enterprise software sector this year figure to bleed into 2008 as the industry continues to adjust to the demands of customers enamored with Web 2.0 applications and new delivery models.
But is the Web 2.0 bubble about to burst?
One of the more daunting obstacles facing large companies and their software vendors in the coming year will be figuring out how to make use of Web 2.0 and similar developments — and whether such a task is worth it at all.
After all, businesses are already finding that it’s no small task to securely interweave these consumer-based technologies into the enterprise without compromising or watering down the features that make them worthwhile in the first place.
Unified communications is another area key to software vendors’ long-term strategy heading into 2008. The term describes the cobbling together of instant messaging, Web conferencing, e-mail, desk phones, mobile phones, blogs, RSS feeds and all the other tools employees and businesses use to communicate and collaborate.
If vendors’ marketing and public relations departments are to be believed, unified communications offers tools and processes businesses use — in the form of consolidated and secure enterprise-grade platforms.
Of course, that’s the claim of vendors’ marketing and public relations departments, which maintain that “sharing” and “collaborating” are essential to innovation. Anyone with an instant messaging client knows these technologies are disruptive, but are they that kind of disruptive?
Besides the mania surrounding these technologies, here are a few other developments to keep an eye on during the next 12 months:
Is it possible there’s even more consolidation ahead?
In a word: Yes. But figuring out which companies will serve as the next snack for the likes of IBM or Oracle isn’t so obvious anymore.
Following a year of multibillion-dollar deals, Business Objects is gone. IBM gobbled up Cognos. Oracle reeled in Hyperion. Cisco snared WebEx. And BEA… well, we’ll get to BEA in a minute.
With very few exceptions, what remains are bunch of mid-sized companies recording annual sales of between $100 million and $300 million, as well as a herd of even more, far smaller firms. Attractive in many ways, they’re still not the kind of companies that would qualify as blockbuster pickups for the likes of Oracle, IBM or Microsoft in 2008.
Look for smaller, niche-type players to be swallowed up, particularly those with expertise in data management, business intelligence and analytics and security. Top-tier vendors are always on the prowl for companies with tremendous depth in specific verticals like retail, healthcare and financial services.
A couple companies worth watching, according to Cowen & Co. analyst Peter Goldmacher, are Informatica, the data integration and data warehousing provider, and i2 Technologies, a player in supply-chain management software and services.
“Right now there really doesn’t seem to be anyone of real consequence, besides BEA, still out there,” he said. “But there will be more consolidation.”
HP, which is clearly committed to expanding its software business, figures to remain active in 2008.
“I think you’ll see continued industry consolidation and see more and more vertical integration,” HP CEO Mark Hurd said during the Oracle OpenWorld conference in November. “It could accelerate in the next year or two if the right alignment of players were to occur … I think potential M&A opportunities will rise to the top.”
It’s not going too far out on a limb to predict Oracle will continue its own acquisition spree in 2008 to maintain the operating margins and revenue growth Wall Street has come to expect.
Rebuffed in its bid for BEA (at least for now), Oracle CEO Larry Ellison told analysts in November that he’s already identified what he called his “second-favorite” candidates for future acquisitions.
And don’t forget about Google, another company with plenty of cash and aspirations to match. CEO Eric Schmidt went out of his way to let everyone know just Google is serious about stretching its tentacles into new markets.
“We’re seeing a massive move to cloud-based computing,” Schmidt said following Google’s blowout third-quarter earnings report. “We’re on the cusp of a world where people can create content on the cloud anytime and anywhere.”
Next page: What will become of BEA? Will someone try to acquire SAP?
Page 2 of 3
What will become of BEA?
Somehow, BEA Systems exited 2007 as the most significant independent middleware developer still standing. The last pretty girl at the dance, so to speak.
And now that it seems to have its financial house in order and managed to stave off the unfriendliest of “friendly” takeover bids from Oracle, it’s back to business as usual — sort of.
In October, Oracle put an end to more than two years of rampant speculation by making an unsolicited $6.7 billion offer for the company. BEA balked at the $17-a-share bid, arguing it was worth much more not only to Oracle, but to other potential bidders.
However, in the weeks immediately following the Oracle offer, no other potential suitors stepped to the fore and Oracle chose not to sweeten its offer.
Apparently unfazed by Oracle’s ambivalence, BEA in November managed to record a third-quarter profit of $56 million, or 13 cents a share, on sales of $384.4 million, up 11 percent from the year-ago quarter. Despite the better-than-expected results, BEA’s stock continues to tumble from the peak of $18.94 a share, which it reach shortly after the Oracle bid, to below $16 a share in mid-December.
While BEA employees, customers and partners have grown accustomed to constant takeover rumors, the fallout from Oracle’s overture clearly took its toll.
“In spite of significant distractions during the quarter, the team did an outstanding job executing to our revenue plan and generating a strong pipeline of business opportunities as we head into our seasonally strong fourth quarter,” CEO Alfred Chuang said following the earnings report. “These results demonstrate not only significant progress in operating profitability, we also believe they will materially impact how investors value BEA.”
Publicly, BEA executives claim the company is worth closer to $8.2 billion, or 21 cents a share — a valuation some analysts and, especially, Ellison dismiss.
“At $17 a share, it was a highly accretive transaction,” Ellison told analysts in November. “Why were we buying them? For the money. If we made another offer, the price would be lower.”
How long BEA remains independent could well hinge on the what billionaire investor Carl Icahn thinks of the company’s long-term prospects. This fall, BEA provided Icahn — who holds roughly 14 percent of the company’s outstanding shares — details of the company’s overall financial position ahead of its third-quarter results.
This highly unusual tactic was surely an attempt by BEA executives to assure Icahn the company was, indeed, worth more than the $6.7 billion Oracle originally offered.
BEA executives continue to talk and act as if they believe the company will remain independent. However, in documents filed with the SEC in November, the company may have suggested otherwise. The documents indicate the company guarantees generous severance packages for employees let go within a year of any future takeover.
Will someone try to acquire SAP this year?
Crazy, you say?
Perhaps not. Hasso Plattner, an SAP co-founder and chief of the company’s supervisory board, told the Financial Times‘ FT Deutschland in May that IBM, Microsoft and Google were the only three companies that could potentially buy the world’s largest business applications vendor.
“I don’t see anyone else,” Plattner said. “If shareholders think that a combination, and not independence, is better, then it will happen.”
Plattner was quick to add that SAP was not in any merger discussions with any of the three companies. But it’s worth noting that SAP executives actually considered a merger with Microsoft several years earlier.
That plan had been abandoned largely because of the enormous antitrust and regulatory issues such a massive union would raise on both sides of the pond. Today, Microsoft looms as a possibility, but most analysts consider it highly unlikely.
You can forget Oracle as another potential suitor. There’s simply been too much animosity between the two companies.
Google could afford SAP, considering its market capitalization is roughly three-and-half times as big as SAP’s $63 billion.
Putting aside the fact that the cultures are about as divergent as one could imagine, Google is enamored with the software-as-a-service (SaaS)
But IBM would seem to make the most sense. This isn’t a new rumor — Plattner and four others left IBM in the early 1970s to start SAP. The two companies are very similar in culture, management structure and, some would say, aversion to change.
“As big as SAP is, they’re becoming a niche vendor and I think Oracle is hurting them and hurting IBM,” said Goldmacher, a vocal Oracle bull, in an interview with InternetNews.com. “Both of these guys need each other. And there’s not a better fit. You’d have the No. 1 applications company and No. 2 database company competing against Oracle, which is No. 2 in applications and No. 1 in database.”
Next page: IBM and SAP, continued. Plus: What types of startups will grab the spotlight in 2008?
Page 3 of 3
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)
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.
