Hungry investors hover over dying CRM firms

Lisa Baertlein

PALO ALTO: Specialty software makers are struggling to survive while vulture

investors circle, certain that the pickings will get even cheaper and more

plentiful amid a lengthy drought in technology spending.

Particularly at risk are vendors in the once-hyped and well-funded customer

relationship management (CRM) space. Those companies - which sell software to

automate things like selling, marketing and customer service, usually with

Internet capability, are in the grip of a shake out that's expected to leave

just a handful of players standing.

"These companies are being washed out left and right," said Tricia

Salinero, a principal at merger and acquisition advisor Broadview International,

who said she has been fielding calls from companies offering or seeking

bargain-basement deals.

Divine intervention



Chicago-based Divine Inc. - which picked up some remains from busted Internet
consultant marchFIRST - is among the first to target wilting CRM vendors. Among

other things, Divine agreed to buy Open Market in a stock-for-stock deal that

was announced two months after it sold its software for building online stores.

While Open Market appears to have found a happy ending, its story chronicles

how small, money-losing, publicly held companies fall victim to the brutal

spiral of shrinking revenue, expanding losses, dwindling cash and investor

flight. Open Market went public in July 1999 and has posted operating losses

during its entire existence.

Its stock hit a high of $65.50 in March 2000 and slid to 94 cents the

following December as the air rushed out of the Internet bubble. In what is now

an all-too-familiar double whammy, financial analysts stopped covering the

company while the institutional investors they market stocks to dumped shares.

The value of Open Market's deal with Divine has shrunk along with its sagging

stock, falling to about $32 million today from about $54 million when first

announced in August.

The naked emperor



For several years, CRM has been one of software's brightest stars. Industry
analysts were forecasting explosive growth. Vendors with limited offerings

jumped on the bandwagon, joined by e-commerce players that morphed into the

space by adding features and adopting the loosely defined acronym eCRM.

Many of the sector's now-struggling companies went public in 1999 and 2000

when there was plenty of money for companies with losses matching their profit

aspirations. The stocks soared. Sector darling E.piphany - best known for

helping companies track customers' Web habits - saw its stock top $216 in March

2000.

In July 2000, investors pushed Blue Martini Software shares to a high of

$77.63 and sent the stock of its rival, Art Technology Group, to $126.88. But

those days are officially over. E.piphany - which has yet to see a profitable

quarter - now trades round $6. The stocks of Blue Martini and Art Technology

Group, eCRM companies that are experiencing mounting losses, hover around $1.

CRM is "the next emperor to be spotted with no clothes," said

PeopleSoft Chief Executive Craig Conway, who is snapping up small software

companies priced at $50 million or less.

Nothing is immune



Sector gorilla Siebel Systems dominates the market. It has a broad range of
products and services, which are expected to bring in sales of around $2 billion

this year. And, it has posted an operating profit every quarter since its June

1996 debut as a public company.

Nevertheless, Siebel's stock has tumbled into the low $20s from a high of

nearly $120 in November 2000 on concerns about the economy and increased

competition from big software companies such as SAP AG, PeopleSoft and Oracle

Dain Rauscher Wessels analyst Cameron Steele said E.piphany is one of the

companies that investors and analysts still have on short lists of CRM vendors

that may one day strike gold. "The good news is that they've got quite a

bit of cash and a good management team. It's yet to be seen whether they're

going to be able to execute in this environment," he said.

Part of the optimism stems from the fact that E.piphany - along with Pivotal,

Aspect Communications and Dendrite International - is in the ever-shrinking

ranks of CRM companies with stock that's trading above $5.

A club that nobody wants to join



Companies whose stock prices fall below the make-it-or-break-it $5 level
risk losing valuable employees. In addition, new stories that was once easy to

come by and virtually guaranteed a bump in share prices, tend to be mostly

negative or next-to-impossible to get.

"It's just tough to get back on the radar screens," Steele said.

Such issues probably won't keep companies like Onyx Software, Primus Knowledge

Solutions and Selectica - all of trading under $5 - from trying to grab

headlines that may help their fading prospects.

"As these companies look for things to announce other than 'We're

missing our Q3 (third quarter profit estimates)' or 'We're missing our Q4',

you'll see a number of merger-of-equal transactions," Salinero said.

Despite all of the commotion, PeopleSoft's Conway predicts that investors

will have to strain to hear failing companies' last gasps. "Software

companies either mutate into something much less visible or they're so quietly

put to sleep that nobody notices that they're gone," he added.

(C) Reuters Limited 2001.