IT strategy: Left behind

David Rae

Consolidation in the software sector is not new. But the type of frenzied
activity experienced over the past month will have surprised even the most
hardened of industry watchers.

In fact, no sooner had the ink dried on German software company SAP’s letter
to Business Objects proposing a $6.8bn takeover, than Oracle responded with a
$6.7bn offer for software company BEA Systems.

The move by Oracle is audacious to say the least. Not only does it steal
SAP’s thunder (surely not even Larry Ellison would spend the best part of $7bn
on winding up a rival), but it comes just a few months after Oracle agreed to
spend $3.3bn on Hyperion ­ number three in the business intelligence market, in
which Business Objects is number one.

And this, rather neatly, brings us to number two: Canadian-based software
company, Cognos. Were Cognos to go the same way as Business Objects, Hyperion,
BEA Systems, Siebel, PeopleSoft, Great Plains, JD Edwards, Navision (I could go
on) there are a number of suitors that may ultimately sign the cheque. But
there’s one that stands out as being rather more likely than the others (I’ll
give you a clue, its technology will have made you swear at least once, probably
more than once and possibly does so on a daily basis).

I am, of course, talking about Microsoft. As it happens, Financial Director
magazine spoke at length to its group CFO, Chris Liddell, during October,
coincidentally on the very morning that the Oracle/BEA Systems announcement was
made. Naturally, talk got onto consolidation in the software industry. “Everyone
inside all of the [Microsoft] divisions is empowered to look across the
landscape and think seriously about whether acquisitions make sense in terms of
driving growth,” he said. “And we are continuously looking at a large number of
acquisitions that range in size,” he continued.

That’s all very well, we thought, but what about Cognos? Predictably, and
quite rightly, Liddell offered us a “no comment” on that particular line of
questioning. However, it’s safe to assume that Microsoft will be working on an
acquisition proposal. In fact, it probably accounts for one of the “large
number” of potential acquisitions that Liddell said Microsoft divisions have
already mulled over recently.

Having acquired Great Plains for $1.1bn in 2000 and Navision for $1.3bn two
years later, Microsoft certainly doesn’t shy away from writing big cheques.
Indeed, it has acquired a total of 24 companies ranging from a paltry $10m to a
substantial $6bn over the last year or so.

But since 2002, Microsoft has been relatively quiet within its business
software division, Microsoft Dynamics. And now that Navision and Great Plains
have been successfully digested and, probably more importantly, now that both
SAP and Oracle have made significant acquisitions, its next meal surely can’t be
far away.

The addition of Cognos would add thousands of new customers to the Microsoft
fold while at the same time being a relatively easy integration for both
companies (they already work closely together). Synergies in support, service
and development would make the acquisition even more tempting. The prospect of
an acquisition has not been lost on the markets, either. Following news that SAP
was to acquire Business Objects, Cognos stock rose by almost 10% on speculation
that it would be next. When news broke that Oracle had bid for BEA Systems,
Cognos stock reached a record high.

While the price that Microsoft will have to pay for Cognos will be far closer
to the substantial than it will to the paltry, the real question is whether it
can afford not to acquire. Microsoft has so far failed to penetrate the
enterprise software market where SAP and Oracle enjoy something of a duopoly.
But penetration of that market is near the top of Microsoft’s priority list for
the next decade, of that there is little doubt, despite what it might say in
public.

After all, in 2003 it considered breaking into this market by acquiring SAP ­
a project code-named Sagittarius which was ultimately dropped due to the myriad
complexities that the integration would present.

Such an acquisitive route, however, is no longer an option. Now that Oracle
has bought most of the competition, there is virtually no chance of a
Microsoft/SAP merger falling below regulators’ radars. And that leaves Microsoft
with no choice but to do it the hard way ­ organically. And, because of this, it
simply can’t afford to let SAP and Oracle steal a march, something which the
acquisitions of Hyperion and Business Objects, not to mention BEA Systems,
threaten to do.

In April’s IT Strategy column, I asked, “Now that Oracle has swallowed
Hyperion, how long until SAP takes a bite at either Cognos or Business Objects?
And how long then until Microsoft hoovers up the remaining player?” Well the
answer to the first is, about seven months. The answer to the second? Watch this
space.
Or, depending on who you talk to, “no comment”.