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Oracle deal may spur more: analysts
$5.8 billion pact to buy rival Siebel could be the first of many similar transactions to come.
September 12, 2005: 4:06 PM EDT
By Amanda Cantrell, CNN/Money staff writer

NEW YORK (CNN/Money) - Oracle's planned acquisition of long-suffering software maker Siebel Systems did not surprise Wall Street, but analysts say it is a sign of a fundamental shift in the business.

Many tech firms making so-called customer relationship software sprang up during the dot.com boom but when the dust settled after the bust, few of those survived. The software helps clients automate things like sales, buying and managing supplies and other things that affect their customers.

Analysts said the Oracle-Siebel acquisition will spearhead an era of consolidation in that business, which many think is long overdue.

"I've been whining for two or three years that we've got to get consolidation in this space," said Richard Davis, an analyst at Needham & Co. "In the bubble you had way too many companies go public. All these companies turned out to be features and not companies. Now part of the driver is a realization by the big companies that this is a way to capture growth."

Another reason for consolidation: analysts believe customers are getting fed up with how much it costs to integrate software systems like Siebel and are starting to demand one-stop solutions.

"Companies like Siebel, which are very much assembly required, are being bought up and connected to other assembly required companies and sold as integrated products," said Richard Williams, a senior software analyst at Garban Institutional Equities.

"It's kind of like Ford -- Ford started with engines and bodies and customers had to go elsewhere to buy windshields. Pretty soon they ended up with a unified product. Now we are coming up with a unified product for e-business," he said.

Williams said that the conventional wisdom in the industry used to be that integrated software products were not the way to go. But with the advent of suites like Microsoft's e-business package, customers want software they can integrate into those products.

Why Siebel?

Oracle's deal to buy Siebel for $5.8 billion in cash and stock is the latest in a string of acquisitions for CEO Larry Ellison's company that included the purchase of major rival PeopleSoft as well as Retek, which makes inventory management software for retailers. Oracle won Retek in a bidding war with SAP.

Acquiring Siebel (Research) would allow Oracle (up $0.18 to $13.46, Research) to diversify its revenue stream beyond databases, its current bread and butter, since Siebel is considered the biggest and most well-known maker of customer relationship management software, or CRM. The deal would give Oracle instant access to Siebel's 3.4 million users and makes Oracle the biggest player in the CRM software market.

But in buying Siebel, Oracle is inheriting a company with big customer satisfaction problems. Siebel's customers have been unhappy because of the complexity of Siebel's products, which they say are difficult to implement.

Trip Chowdhry, senior software analyst at FTN Midwest Securities, estimated that only about 40 to 60 of Siebel's software implementations have been successful. In the cases where it was not successful because customers found it too hard to use, these companies stopped using the software and in many cases started making their own -- an additional expense.

Also, Siebel's stock is only worth about a tenth of what it was five years ago, shortly after a September 2000 two-for-one stock split.

So why would Oracle want to buy a company with a battered stock price and frustrated customers?

For starters, there are the 3.4 million users.

"One of the things that investors are gradually starting to recognize is that business software is very sticky," said Needham's Davis.

"It's actually very rare or difficult or painful for a business users to switch vendors," he said, offering the example of a company suddenly switching all its employee word processing software from Microsoft Word to a new, unfamiliar program. "It's difficult just to go through the pain of retraining people."

Also, analysts say there is a fair bit of compatibility between the two companies in terms of corporate culture. According to Chowdhry at FTN, about 30 to 40 percent of Siebel's employees formerly worked at Oracle.

For the short term, the acquisition hasn't had much effect on Oracle's stock, which rose about 1.5 percent Monday. Some analysts say its price does not yet reflect the risks shareholders will incur as a result of the transaction.

"To buy (Siebel) and combine them along with other smaller acquisitions into Oracle in a very short time is an unprecedented task in terms of difficulty," said Garban's Williams, referring to Oracle's acquisitions of smaller companies. "It's not easy by any stretch, and that is a lot of risk to try to do that in a short time with a bunch of different technologies."

Who's next on the block

Analysts say Oracle's archrival SAP will not waste time reacting to the announcement. Some say the company will attempt to lure Oracle's customers by pointing out that SAP does not have a burdensome acquisition on its hands that customers have to deal with. Others speculate that the company could make a bid on BEA Systems (down $0.12 to $9.00, Research) or Salesforce.com (down $0.30 to $21.65, Research).

Other rumored targets include Tibco (Research), Filenet (Research), and Aspen Technology Inc. (Research), which sells software to oil and gas companies, as well as Ariba (Research), another CRM software maker.

"Some of these post-bubble things make sense," said Needham's Davis. "The real question as a buyer is whether there is so much broken glass there it's not worth the effort."

Salesforce.com CEO Marc Benioff jumped on the news, issuing a note ahead of its own presentation at an industry conference.

"Oracle put Siebel investors out of their misery today. We have been doing that for Siebel customers for years," he wrote in a note to employees. "Oracle's strategy is simple. Instead of innovating, buy as much installed software as possible, call it all Oracle Fusion, and make sure it all uses Oracle's database. Now, the same thing that happened to PeopleSoft will happen to Siebel -- it will die. "

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For more details on the deal, click here.

Read more of the latest technology news here.

None of the analysts quoted in this story own shares of Oracle or Siebel or have banking ties to the companies.  Top of page

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