The Next Software Acquisitions
Now that SAP has changed course and cut a deal to buy Business Objects, more strategic acquisitions in the sector are likely

October 9, 2007 by Steve Rosenbush

For decades, German software giant SAP (SAP) has been steadfast in its commitment to organic growth. During the last three years, SAP has spent a relatively modest $1 billion or so on acquisitions. During the same period, rival Oracle (ORCL) has announced $25 billion worth of deals, according to research analysts at Citigroup (C). But all of that changed on Oct. 7 when SAP said it would make its largest acquisition ever (, 10/8/07) and pay $6.8 billion for Business Objects (BOBJ), a business intelligence and data mining company based in France.

It's a sign of how mergers and acquisitions will reshape the software sector in the months and years ahead. Growth in software is slowing, and private equity firms are struggling to raise financing for big acquisitions in the rocky credit markets. That opens the door to strategic buyers—from SAP and Oracle to IBM (IBM) and Hewlett-Packard (HPQ)—to seek out more deals. "The credit crunch has made business more difficult for private equity firms, and software companies now feel they have a free hand to do deals," says Bill Whyman, an analyst with researcher ISI Group.

Slack Sales, But Steady Service Revenue

Growth in the software industry has slowed dramatically in recent years. The $80 billion market for applications software, in which Oracle and SAP compete, increased by 14% in 2006, according to analyst Jim Shepherd of AMR Research, well short of the high-double-digit rates of the 90s.

Even in a slowing market, though, M&A can be extremely profitable for software companies. That's because big corporate software customers spend large amounts of money on maintenance and service fees to keep their software up to date. The payments for maintenance and service, which typically continue after a company is acquired, can be 30% to 40% of the original contract price. "Those fees tend to pay for mergers over time," Whyman says.

That's why SAP was willing to pay a market premium of about 20% for Business Objects, even though investors thought SAP overpaid. Business Objects shares closed at $57.83 Monday, just below SAP's offer of $59, but well above their previous close of $50. Shares of SAP fell $2.87, or 4.85% (, 10/8/07), to $56.36.

Next Up on the Block

Several more deals are likely in the market for business intelligence. Shares of rival Cognos (COGN) soared $6.05, or 13.6%, on Monday, to $50.50, with many investors betting that Cognos will be the next takeout. "A Cognos deal has been rumored for a while," says Peter Falvey, co-founder of investment bank Revolution Partners. Whyman thinks the best fit might be IBM (IBM), which already has a close relationship with Cognos, a high-end purveyor of software that helps companies analyze their markets. Oracle could be a buyer, too. Oracle already bought a similar company called Hyperion. But Hyperion's software is marketed to chief financial officers who want to analyze their spending decisions. Cognos could be sufficiently different to justify a deal for Oracle, Whyman says.

It's even possible that Business Objects could itself remain in the crosshairs. "I would not be surprised to see someone else put in a bid for Business Objects," Falvey says. Such an offer might not be likely, but it could make some sense for Microsoft (MSFT), which already does a fair amount of business with Business Objects.

Citi's Picks

Citi software analysts suggested in a report on Oct. 5 that more deals are likely. Their top takeout picks include BladeLogic (BLOG) and Informatica (INFA). BladeLogic provides data-center automation systems, which are in strong demand. And Informatica is achieving 19% growth thanks to its business of data integration, a crucial tool in an increasingly complex world of information.

Another top name on the list of software takeover candidates is BEA Systems (BEAS), which makes infrastructure that supports applications. Whyman says a deal for the company is past due, because BEA management has shown little interest in selling. But it would be a logical fit with HP (, 2/28/07), which is focused on software infrastructure.

Not so long ago, software companies had little reason to sell. They were hoping for a big initial public offering. But in the new environment of slower growth, it's more difficult for a smaller company to generate enough growth to support a big IPO. That's why software mergers are making more sense for buyers and sellers alike.

Rosenbush is a senior writer for in New York.