|Shares of Retek were just muddling along...until SAP and Oracle got caught up in a bidding war for it.|
| * data as of 3/21/05 |
| Source: Thomson/Baseline|
NEW YORK (CNN/Money) – Oracle is at it again.
After spending more than a year and a half fighting -- and finally winning -- a takeover battle for PeopleSoft, Oracle (Research) just won a bidding war with business software rival SAP (Research) for Retek, a developer of software that helps retailers manage their inventories.
SAP originally agreed to buy Retek (Research) for $8.50 a share. Oracle countered with a bid of $9 a share and after SAP upped its offer to $11, Oracle raised its offer again, to $11.25, or about $670 million. At that point, Germany's SAP said, "Auf wiedersehen" to Retek.
But analysts say it's likely that SAP will try and buy someone else. And for that matter, Oracle may not be done buying software makers.
During an antitrust trial regarding the PeopleSoft deal last year, a list of other companies that Oracle was looking at was disclosed in court. Included on that list were some fairly big software companies, notably Siebel Systems (Research), Business Objects (Research) and Sybase (Research).
Then there's IBM, which has scooped up several software makers in the past few years. It recently struck again with a $1.1 billion purchase of Ascential Software, a maker of data management products. Security software leader Symantec is currently in the process of buying storage software firm Veritas.
And there's a little company called Microsoft that has a fair amount of cash.
Time to go shopping
So this could be just the beginning of a major feeding frenzy in the software sector. Both the Oracle-PeopleSoft saga and the bidding war for Retek show the industry giants are willing to do whatever it takes to buy growth as the industry matures.
"I don't think investors really appreciate the economies of scale inherent in enterprise software, especially now since it's a much slower growth business," said Bert Hochfeld, an independent software analyst. "The industry needs to consolidate."
Selling software to large businesses, the so-called enterprise market, is no longer a really sexy area of technology. The long-term projected earnings growth rates for Oracle and Microsoft, for example, are just 11 percent annually. Analysts expect SAP's earnings to increase at about a 14 percent rate. That's good ... but far from spectacular. In the late 90's, these companies routinely posted earnings increases in excess of 20 percent a year.
But Hochfeld said there are plenty of opportunities for stronger, larger companies like Oracle, SAP, IBM and Microsoft that want to buy smaller firms and improve their profit margins by weeding out redundant sales and marketing costs.
To that end, Hochfeld said many companies he follows are vulnerable to being bought, including Ascential competitor Informatica, as well as Parametric Technology and MatrixOne, whose software helps companies manage product development.
He also said that Lawson Software, which competes with Oracle and SAP in the application software market (automating routine business tasks like payroll and customer accounts) could be a target. Lawson was another of the companies on Oracle's merger wish list.
None of these names are industry giants, however. Their market values range from a low of $271 million for MatrixOne to a high of $1.4 billion for Parametric.
But Richard Williams, an analyst with Garban Institutional Equities, said he thinks smaller players are more likely targets than some better known names such as Siebel or Business Objects that have often been mentioned as takeover chum.
That's because merger talk has lifted the prices of several of these stocks to what he thinks are unreasonable levels. "Many software stocks are vastly overvalued," Williams said. "The reality is when you go in and analyze them, there is a tremendous takeover premium built in." Business Objects, for example, trades for about 25 times earnings and Siebel has a P/E of about 31.
In addition, what probably made Retek attractive to Oracle and SAP was the chance to gain access to Retek's retail customers and their suppliers -- and to start selling other software products to them, Williams added.
So instead of larger firms, Williams said other niche developers like Retek competitor JDA Software could be a viable takeover candidate, as could Aspen Technology, whose software is primarily used by chemical, oil and pharmaceutical companies.
He also thinks two small supply chain software developers, Manugistics and Logility, could be a good fit for a bigger software company.
Another area that seems ripe for merger activity is the so-called infrastructure market, where companies develop software that helps their customers manage Web networks.
"There is definitely going to be consolidation in infrastructure," said Trip Chowdhry, an analyst with FTN Midwest Securities, adding that BEA Systems, long-rumored as a possible target for Oracle, and NetIQ would make the most sense as takeover candidates.
Chowdhry said he expects Oracle, IBM, Symantec and even Sun Microsystems -- which has been recently emphasizing its software business -- to be among the more aggressive acquirers.
But like Williams, Chowdhry said investors shouldn't be investing in companies solely on hopes that they will be bought. "Not every software company is a takeover candidate," he said.
For a look at software stocks, click here.
Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the firms mentioned.
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