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IT Execs Distrust Software Mergers

By Larry Dignan  |  Posted 2003-07-14 Print this article Print

As Oracle and other enterprise software vendors pursue a course of acquisition, executives express wariness about the penchant for market domination; many prefer the advantages of a best-of-breed approach.

Toyota's Mike Elsesser is a big believer in best-of-breed software.

Elsesser, Toyota's national technology manager of enterprise data management, says his software infrastructure features Oracle, IBM and Microsoft databases, business intelligence software from Brio Software, Cognos and MicroStrategy, and a slew of other applications.

Toyota, like other proponents of the best-of-breed strategy, has a simple motto: Buy the best applications to solve a problem and integrate them.

"Our strategy is to never go with just one vendor," says Elsesser. "We don't want to be locked in."

Apparently, Elsesser missed the memo from Larry Ellison, the iconoclastic chief executive officer of Oracle, the database and enterprise software giant. By launching a hostile $6.3 billion bid last month to buy PeopleSoft, Ellison is trying to tell you this: The software industry is consolidating and customers will buy suites from just a few vendors (preferably Oracle).

Of course, that's not the only opinion around. PeopleSoft rejected two Oracle overtures over antitrust concerns, sweetened its prior $1.7 billion bid for planning software supplier J.D. Edwards, and volleyed lawsuits and full-page newspaper ads to thwart Oracle. But even if Oracle fails to land PeopleSoft, its sudden move is still likely to set off a round of mergers and acquisitions and reduce options for large buyers of software.

Companies such as customer-relationship-software supplier Siebel Systems will be in play even if Oracle does not acquire PeopleSoft, says Jeff Gould, director of research at Peerstone Research. Financially struggling companies such as i2 Technologies and Manugistics could also become takeover targets.

Oracle is not the only consolidator in the software industry. Data storage software vendor Veritas has been gobbling up companies such as application performance management software supplier Precise Software Solutions for $609 million. Mercury Interactive last month bought privately held information technology corporate governance software vendor Kintana for $255 million.

If the consolidation continues, software deployers could be forced to use the software of an acquiring company—whether they like it or not.

To hear vendors tell it, there will be a few giants such as SAP, Oracle and Microsoft controlling the software landscape and hawking suites of enterprise applications. "In two years we'll all be gobbled up," says one account executive at a business intelligence vendor that could be prey one day.

Technology executives, however, aren't about to cede control to a handful of software companies. "If all software goes the way of Oracle buying PeopleSoft, it could make our lives more difficult," says Elsesser. "But we're always going to be buying best-of-breed type stuff."

Elsesser and other executives note that there are always waves of companies cooking up innovative technology. Companies such as Mercury Interactive took a niche, monitoring the performance of software, and turned it into a hot category called business technology optimization.

Bottom line: Executives will find smaller vendors to keep the big players honest, no matter what.

"The integrated suite is largely a fantasy," says Lawrence Jankovic, chief financial officer at W.H. Freeman/Worth Publishers, a New York-based publishing company. "Some things that make sense will be brought together, but I'm still a big fan of best-of-breed."

Analysts say one of the reasons the best-of-breed approach endures is many suites are cobbled together via acquisitions. PeopleSoft helped build its suite with the acquisitions of supply chain software provider Red Pepper in 1996 and e-business applications company Vantive in 2000. Depending on the integration work by the software vendor, some of these functions such as supply chain management are as difficult to integrate as if they were bought from another company.

"Look at the large players—Computer Associates, [IBM's] Tivoli, HP OpenView and BMC Software—they have all been put together via acquisition," says Meta Group analyst Glenn O'Donnell. Computer Associates built its product line with acquisitions such as Sterling Software and Netreon, a storage area networking company.

O'Donnell says it will be almost impossible for the software industry to consolidate to one or even a handful of vendors, because it's difficult for one company to be the master of all trades. As a result, suites are strong in some areas and weak in others. "If these suites actually delivered it would be a different world," says O'Donnell.

Among those on the front lines of the consolidation wave: PeopleSoft customers who may have to migrate to Oracle's suite. When Oracle launched its bid for PeopleSoft, it noted in a statement that it wouldn't actively sell PeopleSoft products, but would provide "enhanced support." Other advanced PeopleSoft features would be incorporated into Oracle's e-business suite.

On Oracle's fourth-quarter conference call, Ellison said he was giving PeopleSoft customers a choice, a theme reiterated days later when the company raised its bid from $16 a share to $19.50. Analysts are now convinced Oracle will work to keep PeopleSoft customers. "PeopleSoft customers can choose when and what they want to migrate to," said Ellison, adding that customers could keep PeopleSoft 7 if they wanted.

It remains to be seen how many PeopleSoft customers will migrate to Oracle in the event of a takeover. PeopleSoft customers say they are taking a wait-and-see approach. PeopleSoft CEO Craig Conway says his customers have responded to the Oracle bid with "surprise and, in most cases, indignation." Ellison counters that PeopleSoft customers such as Merrill Lynch were jumping ship to Oracle before the bid.

In any case, executives remain wary of promises of easy transitions. "If it's not a straight upgrade, it's a job," says Deborah Garfinkel, director of information technology at First Financial Equities, a mortgage broker based in Englewood, N.J.

So how might this consolidation wave shake out? Amid the mergers, SAP is expected to remain the clear leader with more than 18% of the enterprise application market, according to IDC. It is currently pitching a "best of suite" approach, arguing each part of its enterprise suite could be a market leader.

No. 2 will be Oracle if it acquires PeopleSoft. If Oracle is thwarted, PeopleSoft with its acquisition of J.D. Edwards will be No.2.

In this high-stakes game, players focusing on one area of the enterprise application market such as Siebel could be acquired, says Peerstone's Gould.

Kenneth Klein, chief operating officer for Mercury Interactive, says mergers will continue as larger players try to gain volume and smaller vendors merge to grow. But no matter how much consolidation takes place, integration and best-of-breed technologies will remain. "There's no such thing as an application that operates in isolation," says Klein. "Best of breed is alive and well."

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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