Software firms being gobbled by Internet giants

USA Today

Software makers who mushroomed with the Internet are fading away just as quickly as they sprouted.

In the first three months of this year, 380 mergers and acquisitions totaling $13 billion occurred in the Internet software market. That is up from 211 deals worth $5 billion in the previous quarter, according to mergers and acquisitions firm Software Equity Group.

And analysts say it is just the start of a busy software shopping season. "As the Internet industry consolidates, so does the software market," said Chris LeTocq, industry analyst at Guernsey Research.

Among the latest deals: PeopleSoft last week acquired SkillsVillage, an upstart Web-services firm. Actuate said it would buy Tidestone Technologies, its third acquisition in a year. IBM recently snapped up Informix's database software business for $1 billion.

Yesterday, a potential bidding war loomed for Internet software firm Proxicom after South Africa-based Dimension Data Holdings offered 30 percent more a share for the firm than has Compaq Computer.

"The companies that weren't uplifted by the false Internet phenomenon should be fine," said Larry Ellison, Oracle's chief executive officer. Software makers face several obstacles, including:

• Too many players. At least 30 software makers now peddle software to help companies do business over the Internet, "which is three times as many as the market can support," said Simon Yates of Forrester Research.

• Companies are enhancing product lines through acquisitions. This year, software giant Macromedia gobbled Allaire for $360 million, and Hewlett-Packard completed a $480 million purchase of Bluestone Software. Both firms specialize in the fast-growing market for Web servers. "These companies are in high demand," said Jeff Tarter, editor of Soft-letter.

• Flagging stock prices. Although many software stocks have spiked since April, many of those in e-business are swooning. Ariba's stock is off 95 percent from its 52-week high. Tibco Software shares are down 90 percent from their 52-week high. And Commerce One is down 89 percent, closing yesterday at $9.06 from a high of $84.13. That makes them prime takeover prizes. "They're classic victims of the boom-and-bust cycle of the Internet," Forrester's Frank Gillett said.