SAP's Business Objects Buy Could Trigger More Software Mergers

SAP's offer on Sunday to acquire Business Objects for $6.8 billion, or $59.35 per share, could help further consolidate the shrinking pool of vendors that provide software used by businesses to power their back office systems, according to analysts.

The proposed deal "highlights the probability of more acquisitions given that traditional software is mature and ripe for consolidation," said Credit Suisse analyst Jason Maynard, in a research note published Monday.

Maynard said that the list of independent business software vendors that might now be considered acquisition targets includes BEA, Cognos, and Informatica.

Shareholders of Cognos, a maker of business intelligence software similar to that sold by Business Objects, appeared to be the biggest beneficiaries of such speculation. Cognos shares were up about 10% in early trading Monday. Shares of Informatica were up more than 3%, while BEA shares were flat.

SAP shares were trading off 5.25% on news of the deal, while Business Objects shares were up 15%.

Potential players in the market for other publicly traded independent software vendors' include IBM, Hewlett-Packard, and Oracle, all of which have exhibited a healthy appetite for smaller software companies in recent quarters. HP said in July that it would pay $1.6 billion to acquire infrastructure automation vendor Opsware, while in March Oracle announced a deal to buy business performance management specialist Hyperion for $3.3 billion.

Some analysts believe the latter deal forced SAP's hand over the weekend. Ovum's David Bradshaw and Helena Schwenk said in a research note Monday that the German software vendor's decision to buy Business Objects was "retaliation for Oracle buying Business Objects' competitor Hyperion."

IBM's software acquisitions in 2007 include DataMirror, WebDialogs, and Sweden's Telelogic. Moreover, Maynard believes that SAP's willingness to pay a sum nine times more than Business Objects' annual revenue to acquire the company indicates it may have had competition from Big Blue. "If IBM was a serious player it could mark a major change in their strategy or an appetite for larger deals," said Maynard.

By gobbling up smaller, niche specialists, major software companies like HP, IBM, and Oracle are able to offer their customers a full range of products under one roof, thus catering to the purchasing preferences of large, commercial buyers. "Large suppliers are attracting an ever larger share of customer spend, as customers try to reduce the number of suppliers to bring some order to their IT buying," Bradshaw and Schwenk wrote.

The downside: Software buyers could face higher prices and fewer choices if consolidation continues.

For their part, SAP executives said acquiring Business Objects will allow the company to broaden the range of business intelligence tools it's able to offer customers. "SAP can now take the opportunity to focus on the industry's next high-growth opportunity, by accelerating and enhancing our efforts for the business user category," said SAP CEO Henning Kagerman in a statement.

SAP said it plans to let Business Objects operate as a standalone entity and maintain its existing brand. Business Objects CEO John Schwartz will continue to lead the company, SAP said. The deal is subject to approval by regulatory authorities in the U.S. and Europe.