A Software Merger Reality Check

Yes, the big feel more and more compelled to get bigger. That doesn't mean it's the right solution to what's really ailing the industry now

The end of 2004 saw a rash of monster software mergers. Oracle (ORCL ), after 18 months of dogged pursuit, finally landed rival PeopleSoft for $10.3 billion cash. Less than a week later, security software maker Symantec (SYMC ) announced a merger with storage software maker Veritas Software (VRTS ) in an eye-bulging $13.5 billion stock deal.

Now, Wall Street analysts and industry cognoscenti alike are predicting that 2005 will be the year that big-name software mergers become common. They may be right, but investors should hope they're wrong. "This is a very short-term response to a fundamental shift in how people are buying software, and it's not addressing the problem," says John Hagel, a tech management consultant and author.

The problem, as most execs know, is that corporations don't buy software the way they used to. For years, companies like Oracle made a mint selling to chief information officers and other technical folks inside companies. But business execs, not the tech guys, are increasingly making the buying decisions. While being bigger and having a lot more customers allows a company like Oracle to be a lot more efficient, it doesn't solve that basic sales problem one lick.


  Also, merging two large software companies is tricky. It's extremely difficult to blend technologies, and as a result, a merged company ends up keeping on the bulk of the sales, support, and development staff of both companies. That makes it difficult to fulfill the cost-savings envisioned when merger plans are hatched.

Just ask Zach Nelson, CEO of up-and-coming Internet software maker NetSuite. In the late 1990s, Nelson was one of the executives at security software maker Network Associates when it went on a buying spree in an effort to become the biggest security software maker in the world. "We tried to do all these acquisitions and keep the same operating margin we were used to," he says. "We ended up cutting in our acquisitions, and it didn't work."

Around the same time, Baan Co., an old competitor of PeopleSoft and Oracle, was attempting a similar roll-up of business software companies. That too, was a bust. In fact, back in those days, even Oracle CEO Lawrence J. Ellison preached that major software acquisitions were a bad idea because it can be so hard to merge different cultures and technologies.


  Clearly, Ellison has changed his mind. He figures that with the software industry's growth in the dumps -- it's expected to expand around 6% this year, a far cry from the double-digit gains of the 1990s -- the best way to survive is to get big and do it fast. Fair point.

But not much has changed in the software industry to suddenly make these big deals succeed. It will be more than a little interesting to see if Ellison can make his giant experiment with PeopleSoft work. "I give Oracle a lot of credit for sticking to its guns, and you have to hand it to the PeopleSoft board for getting their shareholders a hell of a premium for their stock," says Joshua Greenbaum, principal at software consulting firm, Enterprise Applications Consulting. "But long-term, this one is going to be hard to make good on."

NetSuite's Nelson actually thinks Oracle can pull it off. But his actions speak even louder. This week, recruiters from NetSuite, which will double its workforce to 600 this year, will be driving a truck around the PeopleSoft campus, in hopes of landing some top talent that gets laid off. Perhaps they'll also find a few who are unhappy with the new boss.

And in software, the only real assets are the people.

By Jim Kerstetter in San Mateo, Calif.

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