It's been a heck of a week for the software industry. First there was Oracle Corp.'s (ORCL) Dec. 13 long-sought-after deal to acquire rival PeopleSoft Inc. (PSFT) for $10.3 billion. Then word leaked out that Symantec Corp. (SYMC), the top seller of computer security software, and storage-software maker Veritas Software Corp. (VRTS) entered into talks over a merger that could be worth $13 billion. It heralded, according to Oracle CEO Lawrence J. Ellison, a new era of dealmaking. "When the No. 2 buys the No. 4, it reshapes the industry," he said. "It kicks off consolidation in Silicon Valley."
He may well be right. And there's plenty to suggest that a wave of deals is coming. Consumer and business spending on software, which saw double-digit annual growth through the 1990s, isn't coming back soon. Worldwide software sales are expected to increase 6% next year, according to market researchers at Gartner Inc. (IT), barely higher than the growth rates in each of the last three years. That means new customers are getting harder to come by, and pressure on prices remains fierce; for most, mergers may be the only route to hefty growth. Ellison is already scouting ahead for his next deal. After the PeopleSoft merger is digested in a year or so, he wants to look at other targets such as BEA Systems Inc., a San Jose (Calif.) software company that helps companies run their businesses over the Internet.
Yet before all the investment bankers start licking their chops, it's worth remembering that mergers in software and other tech sectors are notoriously problematic. Remember Microsoft's aborted merger talks with SAP (SAP) earlier this year? And once a deal is done, lots can go wrong. For proof of that look no further than PeopleSoft's 2003 acquisition of J.D. Edwards. The deal has disappointed investors because it has proven far more difficult to realize cost savings than PeopleSoft had expected. As Ellison has often pointed out himself, a software company's biggest asset is its programmers, and the best of them can find another job if they don't like the new employer. What's more, it can take months, even years, to make different software packages work together.
Of the two latest deals, it appears Oracle will have the tougher job integrating its new assets. Indeed, Ellison could quickly discover that bringing PeopleSoft -- or any other companies he may yet go after -- into the fold won't be easy. He'll have to keep PeopleSoft's customers happy to maintain the hefty stream of maintenance revenues they now pay. That means keeping the bulk of PeopleSoft's development group, as well as enough sales and service staff to work with those customers. At the same time, Ellison has committed to aggressive cost-cutting. He promises the deal could boost Oracle's earnings as early as the quarter that ends in May.
Ellison has already begun the process of soothing PeopleSoft customers who were dead set against the merger, assuring them that Oracle will continue to support their software. But many are taking a wait-and-see attitude. Says Ken Meidell, chief information officer at Cascade Designs Inc. in Seattle: "I don't know how they will be able to satisfy their Wall Street friends and the PeopleSoft customers and their own customers."
Symantec is in a stronger position. Since CEO John W. Thompson took over the Cupertino (Calif.) company four years ago, Symantec's sales have grown at better than 40% per year, while the rest of the software industry has sputtered. The company now has more than $2.4 billion in annual sales and a $17.4 billion market cap. Yet it's also on the acquisition trail because security software is attracting new, tough competitors. If Microsoft Corp. (MSFT) enters the market for antivirus software, for instance, Symantec's fastest-growing and largest segment will be imperiled.
Yet its deal is no sure bet, either. Symantec and Veritas, which combined would have about $4.4 billion in annual sales, operate in different markets, leaving far fewer opportunities for cost-cutting than Oracle has. Sure, there may be more deals like these coming. But don't expect them to go smoothly.
By Jim Kerstetter with Steve Hamm in New York