By Jonathan Rudy On Dec. 13, 2004, after an 18-month takeover battle, PeopleSoft agreed to be acquired by Oracle (ORCL
; S&P rank: buy; recent price: $12). The deal closed on Jan. 7, 2005, with a final value of $10.5 billion, adjusted for some additional expenses. We believe that the resolution of this long fight served as the catalyst that's driving the much-anticipated consolidation of the software industry.
Up to that point in 2004, consolidation fell into the category of small, niche acquisitions, in the hundreds of millions of dollars. (There were some exceptions, such as Jupiter Network's (JNPR
; hold; $23) acquisition of Internet security software provider Netscreen Technologies in a $4 billion all-stock deal in April, 2004.)
ENTERPRISE EXCESS. Among other recent deals: On Dec. 16, 2004, Symantec (SYMC
hold; $19) announced that it will acquire Veritas Software (VRTS
; hold; $21) in an all-stock transaction valued at approximately $13.5 billion. This acquisition will likely close in the second quarter of 2005, subject to necessary approvals.
In March, 2005, IBM (IBM
; hold; $76) agreed to acquire Ascential Software in a cash deal valued at approximately $1.1 billion. The deal closed on May 2. On Apr. 18, Adobe Software (ADBE
; buy; $57) agreed to acquire Macromedia (MACR
; buy; $38) in an all-stock transaction valued at approximately $3.4 billion. This deal is expected to close in the fourth quarter of 2005, pending necessary approvals.
In our opinion, there was, and still is, too much capacity in the industry, particularly in enterprise software. This overcapacity has created a great deal of pressure, in our view, for enterprise software providers to discount their products, particularly at the end of any given quarter.
SWEET ON SUITES. During the Justice Dept.'s antitrust trial against Oracle, the company demonstrated numerous examples of extreme discounting. We believe Oracle's acquisition of PeopleSoft will help stabilize pricing in the industry and, at a minimum, should eliminate the need for extreme discounting.
Additional reasons for further consolidation, in our view, are that the software industry is growing in the low- to mid-single digits, as opposed to the double-digit growth of the 1990s, and customers are starting to limit the number of outside vendors they deal with. In this environment, we believe the larger suite providers are better positioned to gain market share. Microsoft (MSFT
; strong buy; $25), Oracle, and SAP (SAP
; buy; $41) should continue to outperform in 2005, in our opinion.
One rumored acquisition target is Siebel Systems (SEBL
; sell; $9). We think investors should avoid this stock, even though investing in targets often can prove more profitable than buying the shares of consolidators. Siebel has struggled over the past couple of years following the collapse of the technology bubble. Its CEO recently resigned, and the company posted a 41% year-over-year license revenue decline in the first quarter of 2005.
FIND REAL STRENGTH. While, in our view, Siebel does have a healthy balance sheet, with about $2.2 billion in cash and investments and little debt, we have a sell recommendation on the shares, as trading appears to be based on the potential acquisition of the company as opposed to what we view as its challenging fundamentals.
When it comes to investing in software stocks, we think you should stick with the companies that have solid fundamentals first. An acquisition should serve as just icing on the cake.
In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations, and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations, and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations, and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index, and in Asia the S&P Asia 50 Index.
For All Regions:
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Additional information is available upon request.
This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC, which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").
The research and analytical services performed by SPIAS, S&P LLC, and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.
S&P and/or one of its affiliates has performed services for and received compensation from JNPR, SYMC, VRTS, IBM, ADBE, MSFT and SEBL during the past 12 months.
ORCL, MACR and SAP are not customers of S&P or its affiliates.
This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. Analyst Rudy follows software stocks for Standard & Poor's Equity Research