Does Software Consolidation Stifle Innovation? - InformationWeek

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Software // Enterprise Applications
02:15 PM

Does Software Consolidation Stifle Innovation?

The software industry is quickly settling into a gang of four: IBM, Microsoft, Oracle, and SAP. Where will the next billion-dollar competitor come from?

Barry Libenson, CIO at Ingersoll Rand, considers himself fortunate. While the odds increase every day that the company's key software vendors will get caught up in disruptive takeovers, so far Ingersoll Rand has landed on the right side of every deal. "The companies we've aligned ourselves with are doing the acquiring," he notes, pointing to Oracle as a primary example. "The scary thing is when you're at the other end of the spectrum. Then you're at the mercy of who's doing the acquiring."

There's reason to be concerned, or at least cautious. With software industry consolidation barreling along, far outpacing any other U.S. industry, CIOs must plan carefully and think fast. Will an acquiring company stop innovating the technology you've standardized on, content to feed on a steady diet of your maintenance fees? Will a clammy-palmed salesman fronting a software giant replace your straight line to a smaller vendor's CEO? Or will the acquisition bring positive change, with a vendor's new parent investing more in research and development and giving you access to a larger, more knowledgeable support team?

Software consolidation isn't the voracious monster some people perceive it to be. True, it's driven by big vendors desperate for growth. But technology managers needn't fear that consolidation will eat away at competition or innovation in the software industry: There are still plenty of new ideas and novel approaches seeping in.


When it comes to acquisitions, software dominates all technology sectors, accounting for 40% of the $298 billion in tech M&A deals done last year and half of the $306 billion in deals in 2005, according to Thomson Financial. The runner-up: Internet companies, which accounted for just 18% of last year's tech M&As.

Less is more for Libenson, who says the fewer software vendors he has to deal with, the better

Less is more for Libenson, who says the fewer software vendors he has to deal with, the better
While software always has been an acquisitive industry, the deals are getting bigger and more complex. Last year, 1,726 software companies were acquired, the highest number since 2000, according to investment firm Software Equity Group. But more impressive was the size of some of those deals: Hewlett-Packard's $4.5 billion acquisition of Mercury Interactive, EMC's $2.1 billion purchase of RSA Security, and IBM's acquisitions of FileNet and Internet Security Systems, both of which exceeded $1 billion.

These deals came on the heels of Oracle's big-bucks, high-profile acquisitions of PeopleSoft, Siebel, and Retek--as well as 23 other companies--over the past two years. IBM isn't far behind, with 22 notches on its belt over the same period. Microsoft has bought more than 25 companies in that time, though most of them were tiny startups acquired under the radar.

This year, megadeal watchers are training an eye on Cognos and Business Objects, both with annual revenue in the $1 billion range, as potential acquisitions. Business intelligence is hot, and the biggest vendors want in--hence Microsoft's acquisition of ProClarity last April. NCR's recent decision to spin off billion-dollar-plus data warehousing specialist Teradata is viewed by some as making Teradata a more attractive acquisition target to big tech companies or even a private equity firm. Siemens last week acquired UGS, a maker of product life-cycle management software, for $3.5 billion in cash from three private equity firms.

In the past four years, 430 publicly traded software companies, most of which had grown through acquisitions themselves, have been swallowed up, says Ken Bender, managing director at Software Equity Group. Also, more private investors are getting into the fray. Witness Hellman & Friedman's recent $1.3 billion acquisition of Intergraph. "Private equity firms and larger software companies are awash in cash," says Bender.

Revenue-hungry vendors are eyeing the software-as-a-service model, too, which is getting tons of interest from both the venture capital and the user communities. A buyout of, one of the most successful SaaS companies, would provide a big IT vendor a splashy entrée. IDC predicted last month that Salesforce will be acquired this year.

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