A t the decade's midpoint, the software market remains as tumultuous as ever. More than half the companies on InformationWeek's first ranking of independent software companies, published in 1990, no longer appear on the list. Some were acquired. Others failed to keep pace. A few went belly-up. In fact, the software industry seems to be forever "maturing."

Last year there were 479 mergers and acquisitions, worth a total of $27 billion , in the information systems market, according to Broadview Associates LLP, a Fort Lee, N.J., investment bank. Many involved software suppliers. All that activity has produced the benefits of fierce competition: lower prices, better service, more choice.

But for corporate customers such change can be daunting. With so many mergers and acquisitions, how can a technology manager be sure that this year's supplier will still be around next year? Hence our ranking provides a scorecard of who stacks up where.

Though the InformationWeek Top 50 ranks software vendors by revenue , size doesn't guarantee success. In the past year, one of last year's 10 largest vendors--WordPerfect Corp.--was acquired, while another--Dun &Bradstreet Software--dropped in the rankings significantly.

Despite such flux, we focus here on the 10 biggest companies because they supply the majority of software used by corporate America. We also continue to focus on "independent" vendors, those companies that get at least half their revenue from software sales (see chart) . Some of the large hardware vendors also do a significant business in software (see chart) . We include non-U.S. companies that do at least 25% of their business in the United States. The revenue figures that form the basis for our Top 50 software list are the handiwork of Broadview Associates, the leading investment bank in the field of technology mergers and acquisitions.

Numbers don't tell the whole story, of course. To give a better idea of trends in the software market, we asked a small army of staff writers to examine the 10 largest companies on the list. (Legent, technically No. 11, was included because No. 10, Software AG, was able to provide only an estimate of its revenue by press time.) These companies run the gamut from PC applications to mainframe utilities to niche markets. Together, their performance and challenges capture the ongoing battles in the maturing software arena.

Microsoft: No. 1 With A Bullet

Poor Microsoft. The king of desktop software surveys the computer industry like a restive emperor who perennially seeks new lands to conquer. Fearing saturation in the corporate PC market it dominates, the software titan is targeting several potentially lucrative opportunities: 32-bit desktop software, enterprise software, interactive networks, and home computing.

Of course Microsoft has for years warned that the PC market is approaching saturation--only to post financials that beat all expectations. Indeed, thanks to the popularity of Windows and the Office desktop software suite, Microsoft's revenue last year rose to just shy of $4.7 billion, a nearly fourfold increase since 1990, when its revenue topped the $1 billion mark. The king of Microsoft, chairman and CEO Bill Gates, is appropriately as rich as Croesus, but he has not grown lethargic. "Our past," he wa rns, "does not ensure our future."

"Microsoft is clearly at a crossroads," adds Rich Edwards, a financial analyst at Robertson, Stephens &Co., a securities brokerage in San Francisco. "But it had the foresight to invest in several new opportunities years ago."

Topping the list of developments is Windows 95 and Office 95, a pair of 32-bit upgrades for Windows and the Office applications suite slated to ship in August. Though Win 95 has been under development for more than three years and often delayed, Microsoft hopes its advanced networking features will prompt organizations to upgrade a large portion of the 70 million PCs that now run Windows 3.x. And though industry analysts expect Windows 95 and Office 95 to add more than $1 billion to Microsoft's annual revenue, Microsoft executives are cautious. "Our Windows legacy is also our burden," says Paul Maritz, senior VP of Microsoft's developer division. "We've got to ensure that Win 95 supports yesterday's Windows applications."

The stakes are equ ally high in Microsoft's business systems division, which oversees the Windows NT/BackOffice server initiative. Microsoft has invested more than $500 million since 1988 to develop NT and BackOffice. After a slow start, analysts predict annual NT/BackOffice sales will more than double to $1 billion by 1996, from about $400 million today.

"The thing about Microsoft is they're persistent," says Arthur Tisi, chief information officer of the Metropolitan Museum of Art in New York and an NT user. "Even if there are problems with an initial software release, they stick with it and eventually get the product right."

Even if Windows 95 and NT fail to equal the success of today's Windows, Microsoft still has two more aces up its sleeve: Microsoft At Home and the Advanced Technology Group. The At Home division produces education and entertainment software, such as the popular Encarta CD-ROM encyclopedia. Advanced Technology is a research and development arm that spends $150 million a year to identify software mark et opportunities, such as interactive video servers. It is also developing Microsoft Network, an online service bundled with Windows 95 that aims to compete with CompuServe, America Online, and Prodigy.

The wild cards, of course, are Microsoft's problems with the Justice Department. Nonetheless, analysts don't foresee any setbacks that could hurt Microsoft's bottom line. "Even with the controversy, I still rate Microsoft stock a buy," says analyst Edwards.

So do many others, which is why organizations continue to bet on Microsoft software.

Computer Associates: No Clamor For Glamour

By Barbara DePompa

Computer Associates International, the world's second-largest software company, doesn't generate the headlines that Microsoft does, but it's quietly pleasing investors and gaining customers. Between March 1994 and March 1995, its stock price soared by more than 90%.

Because CA sells back-of fice software, it's virtually unknown outside the industry. "It ain't glamorous, but almost all the largest companies in the world use our products," says Charles Wang, CA's chairman, CEO, and founder. Its strong stock, Wang adds, proves "there's a great deal of life left in the mainframe software business."

This year, the Islandia, N.Y., developer has set a new priority: meet customer needs for integration, especially in its flagship CA-Unicenter product. CA has inked development agreements with other vendors, including Microsoft, IBM, Data General, Novell, and the Santa Cruz Operation, that aim to ensure that their products will remain compatible with CA's Unicenter systems management software.

In March, CA and Hewlett-Packard joined forces to combine the largest systems and network management products into a single integrated platform, called Unicenter for OpenView. Industry analysts predict the first version could expand CA's Unicenter revenue to $500 million from about $300 million and bring HP abo ut $1 billion in server sales. "This is one of the 10 biggest product announcements of the year," says Peter Kastner, a consultant with the Aberdeen Group Inc., a consulting firm in Boston.

The CA-HP offering addresses what many users agree is a key barrier to widespread acceptance of distributed client-server computing, namely, the lack of integrated network and systems management. Until now, customers have had to purchase various components of systems or network management software and integrate them on their own. Unicenter for OpenView will provide a turnkey integrated solution, starting at about $100,000. Notes Scott Robertson, VP of information systems for food processor Ore-Ida Foods Inc. in Boise, Idaho, "In time, this type of offering could help us integrate the management view of both the systems and the network."

Oracle: Hold On Tight

By Katherine Bull

Last year was a good one for Oracle. The Redwood Shores, Calif., company leapt over the $2 billion revenue mark and grabbed more than 35% of the database server software market. It also retained its role as the world's largest provider of relational database products. Oracle's main goals this year? Figure out a way to beat Microsoft, and keep a tight grip on its leadership in the database market.

Oracle, led by Larry Ellison, its irreverent CEO and president, marked the last year with several splashy an- nouncements. The biggest: Oracle partnered with BT for trials of its Interactive Media Services, which will link TV set-top boxes in U.K. homes to public communications services. This partnership has helped Oracle--and Ellison--realize a dream of being a major player on the information highway.

This year, Oracle took the industry by storm by announcing that it would roll out a series of database workgroup products that would directly compete with Microsoft's. Adding a new twist was Oracle's decision to distribute i ts line of Oracle7 products via the Internet and CD-ROMs on a 90-day free trial basis. As of May, Oracle says that 30,000 copies have been downloaded and used by potential customers.

One sore point remains: Oracle's applications business. Ray Lane, president of Oracle operations, has fought hard to improve the line, which represents just over $200 million of the company's revenue. On the basis of a recently completed analysis of the applications business, Oracle is changing the organization to better compete with applications giants SAP America and PeopleSoft. "There are changes to be made," Lane admits. "We're going to take advantage of the lucrative applications market." Overall, Oracle's outlook is bright, say analysts. "Oracle has all the pieces in place," says Rob Tholemeier, a senior analyst at the Meta Group, a consulting firm in Stamford, Conn. "They just need to execute on a well-defined strategy across all the products in the company. I think they can do that successfully."

That well-defined strategy will require a way to stave off competition from Microsoft in the enterprise computing arena. "Microsoft is basically a distribution company," says Lane. "We think we have the right way to distribute product and create high-value products, and that will beat Microsoft any day."

Novell: Year Of Decision

By Caryn Gillooly

If ever there's been a make-or-break year for Novell Inc., this is it. For the past 11 years, Novell has been a success story that few others could match. The customer base has grown from a few cutting-edge users to more than 60% of the local area networking market. Now, for the first time in Novell's history, it faces serious competition. Microsoft's Windows NT operating system threatens Novell's hold on the networking market. And other companies lead in new areas where Novell is now expanding.

Novell's challenge is twofold: The company must keep its customer base hap py--and intact--while expanding into other areas that will be crucial to its future. "Some new initiatives we have under way will help that a lot, but we will also continue to evolve NetWare and the networking services that are part of it," says Robert Frankenberg, Novell's president and CEO. "Five to 10 years from now, we'll take networking for granted. We'll be so accustomed to it, we'll be surprised when it's not there."

On the NetWare front, Novell is doing everything possible to stave off NT. Novell is trying to get customers to upgrade to the latest version of its network operating system, NetWare 4.1, which uses Novell's much-touted NetWare Directory Services (NDS) global naming scheme.

But because a move to 4.1 and NDS makes this upgrade far from routine, many customers are holding back, debating whether NT has matured enough to become a viable alternative. "Yes, we use NetWare now, but nothing is a given concerning moving forward," says Larry Hochendoner, design engineer at Westinghouse Commun ications in Pittsburgh. "NT is clearly up there."

Making A Move
Frankenberg notes that Novell is also moving aggressively into other technologies, including desktop applications, embedded networking, even consumer products. Unfortunately, in virtually all these areas the competition card comes up again--competition the company isn't used to in its own area of expertise, not to mention new areas of business.

Adding to the strain of strong competition, Novell also needs to get its own house in order. Just one year after the acquisition of WordPerfect, there are still a lot of kinks being worked out. They include replacing some of the top executives who left recently, such as Adrian Reitveld, formerly WordPerfect's CEO, and David Moon, its chief technology officer.

Observers are optimistic that Novell--specifically under the direction of Frankenberg--can rise to meet these challenges. If so, that will certainly make this a year to remember.

SAP: The Conqueror

By Doug Bartholomew

Sap AG's swift success in high-end business applications software is almost unparalleled in the computer industry. "The only phenomenon like it in the market was the total acceptance of IBM as the hardware standard during the 1980s," observes Karl Newkirk, managing partner in charge of Andersen Consulting's worldwide SAP practice.

Last year, this leviathan of the enterprise applications software market earned $1.1 billion in revenue, up 70% from a year earlier. While the German company plays in global waters--roughly 68% of its sales came from outside the United States--its North American sales have ballooned by 150% since 1991. Most of the new sales are for R/3, its flagship set of client-server applications for managing accounting, manufacturing, distribution, and human resources.

Worldwide, some 3,000 companies have purchased R/3. Most choose SAP because they view its software as a perfect tool for tying together the information that su pports various business activities. "SAP is fully integrated," says Ray Kump, CIO at Remington Arms, a firearms manufacturer in Wilmington, Del.

SAP's traditional competitors, Oracle and D&B Software, seem to have all but conceded the pole position in the race to dominate the client-server software market. Oracle's applications division, beset by staff defections and reorganizations last year, saw sales increase only 26% in a market that boomed 69% in 1994, according to International Data Corp., a research firm in Framingham, Mass.

Meanwhile, D&B Software, slow to round out its SmartStream line of client-server applications, has yet to announce a single buyer of its manufacturing module, released in December.

Nonetheless, SAP has its detractors. Some question whether the software is capable of high-volume transaction processing. Others wonder if the costs of the software and consulting fees to install it outweigh the benefits. On March 28, the Plant-Wide Research Group, a manufacturing IT research firm in North Billerica, Mass., published a research report on SAP that sounded a warning. "We believe that the euphoria surrounding R/3 may be misplaced," writes Matthew Verrochi, the report's author. He criticizes the software for being difficult to implement, more costly than advertised, "mainframe-centric," and lacking in rich functionality.

Still, SAP, with revenue up more than $400 million since last year, must be doing something right.

Lotus: Petal To The Metal

By Mary Hayes and Stephanie Stahl

To many, Lotus Development remains synonymous with 1-2-3, the company's acclaimed spreadsheet product. But through both internal development and acquisitions, Lotus has expanded its business application offerings over the past decade to include a word processor, a database, graphics, and its increasingly popular Notes information management software.

Though Lo tus is now widely considered the leader in the groupware market, where its Notes communications software reigns, the Cambridge, Mass., company's PC software business has taken a battering in recent years from Microsoft and other competitors; a loss of $17.5 million in the first quarter of 1995 attests to its ongoing struggle in that arena.

In fact, Lotus has for several years been shifting its focus to the communications business to make up for its slowing desktop business. Its recent acquisition of SoftSwitch added robust message-switching technology to the company's communications arsenal. The strategy appears about to bear fruit: In the fourth quarter of 1994, for the first time in its history, Lotus's communications revenue outpaced its desktop applications business.

That gives rise to a half-full/half-empty perception test: Is the shift in revenue growth due to a truly successful focus on communications, or is it proof that the company's applications business is in deep trouble?

Many analysts are concerned about Lotus's long-term viability in the desktop software market, which brings Lotus considerably higher profit margins than its groupware business. Desktop software is now sold to corporations in the form of suites, which are discounted packages containing several business applications. And Microsoft owned more than 80% of the suite market last year.

"Lotus's application business is discouraging, and it slowed down more than anyone anticipated in the first three months of 1995," says Terrence Quinn, an analyst at brokerage firm Furman Selz Inc. in New York. "There's a perception that Lotus won't be in the applications business much longer."

Constant Struggle
Maintaining the lead in the groupware market is not going to be easy, either. Small companies that offer some of the most popular functions of Notes at a fraction of the cost are starting to invade Lotus's turf.

Not only that, but Microsoft, Novell, and IBM are all forging ahead with client-server groupware pla tforms designed to compete with Notes.

In response, an optimistic Lotus says it has no plans to abandon its desktop software business. What's more, company executives say Lotus intends to increase its installed base of Notes users to 20 million licenses by 1997, up from 1.4 million today.

Lotus's plan to keep a stronghold on the market is three-pronged: lower prices for Notes, forge a series of strategic agreements with other large software companies, and upgrade Notes to improve usability and scalability.

All of which puts its target of 20 million users "entirely within our grasp," said Jim Manzi, CEO of Lotus, at a recent conference.

Sybase: My Favorite Year

By Katherine Bull

Sybase Inc. had a big 1994. The Emeryville, Calif., company drove its revenue to an all-time high and made a big splash with its announcement of plans to merge with Powersoft (a deal not reflected in this year's rankings). Thanks to big customer wins, like Tele-Communicat ions Inc., Avis, Time Warner, and Chrysler, the database vendor increased revenue by more than 62%--and picked up valuable mindshare in the process.

The key to 1994's success, says Dave Peterschmidt, Sybase's chief operating officer, was the corporation's commitment to provide open, client-server technology. "Sybase provides an architectural approach that is an open environment across multiple platforms," he says.

Sybase spent a busy year acquiring companies that could help build that open, client-server position. Its biggest acquisition was Powersoft, a provider of PC-based applications development tools that have long been touted for their compatibility with Sybase's database technology. The developer shelled out $940 million for Powersoft, but the acquisition helped Sybase shore up a conspicuous product weakness.

Sybase also acquired Micro Decisionware Inc. and Expressway Technologies in 1994. Although these were smaller acquisitions, they were important to the company's overall technology dire ction. "When Sybase acquired Expressway, it proved that it knew what it takes to be successful in the client-server database arena," says Rob Tholemeier, an analyst with the Meta Group, a consulting firm in Stamford, Conn.

Sybase reported lower than expected earnings in its most recent quarter. Mark Hoffman, president and CEO, attributed the results to diminished server license revenue in North America and Europe. Despite a stellar 1994, this recent stumble will certainly galvanize competitors. Sybase executives plan to increase the sales force and cut costs in order to get the financials back on track.

Adobe: What, We Worry?

By Scott Leibs

You might think that all the hype lavished on the Internet would cause a shudder at Adobe Systems Inc. The company's PostScript software keeps all those laser-printed documents looking sharp. But Adobe executives think they'll benefit from the Net's explosion. "The move from paper-based to electronic documents doesn't worry us," says Charles Ges chke, Adobe's president. "People will still want authoring tools."

In fact, the Mountain View, Calif., developer is betting that the need for such tools will not only provide a lucrative corporate business, but also a growing consumer arena. Its 1994 acquisition of Aldus Corp. went a long way toward providing a line of products and a strong distribution channel into the consumer market. Aldus was best known for its PageMaker desktop publishing products and PhotoShop "electronic darkroom" image capture and manipulation software. "Aldus had some great products, but it didn't own a lot of the underlying technology," Geschke says. "Now we can offer it all."

A key piece of that mission--and the linchpin of Adobe's strategy--is Acrobat, which allows for the distribution of digital documents. "Acrobat will be bundled with Netscape, and we expect that announcement to lead to many others," Geschke says.

Early Acrobat customers say the technology provides a way to link Adobe's product line. Chris Miller, dir ector of Macintosh production at Capps Studio, an advertising agency in Chicago, says because Adobe's products are now integrated more tightly, "we can do things like produce CD-ROM-based advertising materials that customers can use to develop their own ads. Everything from images to text can be embedded on a CD-ROM that's easy to ship and use."

Adobe started this year with a 24% jump in revenue and an 80% rise in net income. The merger with Aldus, which required Adobe to divest certain duplicate products, is complete. As long as Acrobat doesn't stumble, Adobe should enjoy a strong year.

Computervision: Go Softly

By Scott Leibs

Computervision corp. has the distinction of making its Top 50 debut with a Top 10 ranking, even though its revenue actually declined in 1994. That's because Computervision got out of the hardware business and concentrated exclusively on software and services, thus qualifying for the Top 50.

Computervision makes CAD/CAM (computer-aided design and manuf acturing) software that now runs on a variety of hardware platforms. By refocusing, the company has boosted its bottom line enormously. Computervision posted a $9.8 million profit in 1994, after suffering a $571 million loss in 1993. It also adopted strong cost-cutting measures and rolled out some new products that Doug Smith, its chief financial officer, says will pave the way for revenue growth this year. "Our shift to software has created a large pipeline of new business," Smith says. "We've spent the last 18 months preparing for that, and now we have to make good on it."

One key will be the emerging area of electronic product definition (EPD). This software is used by manufacturers for designing, building, and testing--which eliminates time-consuming and costly manual prototyping. In one sense Computervision is lucky: Its focus on software-intensive methodologies, such as EPD, comes just as manufacturers are reengineering every phase of design and production with a vengeance. They're looking for new ap proaches, and Computervision is happy to oblige. The company landed 330 new customers in 1994. Computervision will have to increase revenue substantially to maintain a spot in next year's Top 10. CFO Smith says he's confident the company will do just that.

Legent: In Good Stead

By Barbara DePompa

Since January, when Jerre Stead took over as chairman and CEO of Legent Corp., he's been busy building a new management team and trying to execute worldwide product strategies.

Legent, based in Herndon, Va., develops mainframe utilities software. Revenue has grown, but Legent still has its difficulties.

"Legent has had problems with a lack of consistency in management and in the execution of strategies over the past two years,'' says Charles Frumberg, an analyst with UBS Securities in New York. To fix things, Legent started the year with a shakeup of top management. Joe Henson, Legent's chairman, and John Burton, its CEO, both stepped down to make room for Stead, who formerly headed AT&T Global Information Solutions.

Stead has moved quickly to get his house in order. He replaced some longtime Legent execs and promoted others. The latter included Brendan Dawson, now executive VP and chairman of the global operations team, and Robert Luscombe, now VP of North American sales.

In Stead's first four months as CEO, he visited 130 customers and worked to rectify sales and marketing structural problems in the company's European operations. A country-by-country organization has been transformed into a single consolidated European operation. "I believe in doing things once on a global or local basis," Stead says. The adjustments are considered critical to Legent's future success, but could hurt its financial performance in the short run. Nonetheless, analysts and customers are generally pleased with Legent's software technology. "Legent is still on a good path," says Wade Brown, executive VP of IS at Washington National Insurance Co. in Lincolnshire, Ill. , a Legent customer.

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