Oracle bets big on consolidation

PALO ALTO, California: To hear Oracle Corp. Chief Executive Larry Ellison tell it, the future of the software industry will look much like the past -- the auto industry's past, that is.

With the No. 2 software company embroiled in a bitter fight to clinch a hostile merger, even Ellison's detractors are taking his vision of a rapidly consolidating industry more seriously as Oracle borrows a leaf from the playbook of General Motors Corp., the world's largest, and once most acquisitive, automaker.

"What Ellison is doing is forcing the issue," said Tom Taulli, who teaches a class in mergers and acquisitions at the University of Southern California's Marshall School of Business. "He may as well lead the charge."

Ellison has said that the maturing high-tech industry is poised for a shakeout similar to the one that hit auto companies in the early 1900s. General Motors survived by buying scores of rivals, including Buick and Oldsmobile, over its nearly 100-year history.

While some tech leaders have sneered at Ellison's prediction, Oracle's $6.3 billion hostile takeover bid for smaller rival PeopleSoft Inc. has forced other software makers to dial their alert level to code red.

Whatever the outcome of Oracle's bid, Keynote Systems Inc. CEO Umang Gupta said: "I wouldn't bet against Larry ... I don't think he's tired of running Oracle. I think he's going to do what needs to be done to continue building it up."

Gupta, who is watching the current software consolidation drama from the sidelines, knows what it's like to be at the center of a hostile takeover -- his company, Gupta Corp., was an Oracle target in 1994. PeopleSoft has rebuffed Oracle's advances and is pressing on with its own plan to buy J.D. Edwards & Co.. That combined company would have about $2.8 billion in annual revenue and threaten Oracle's second-place position in the business-planning software market behind leader SAP AG of Germany.

Today's highly fragmented business-software market has too many players and too little corporate demand, according to some analysts and investors who see support for Ellison's view. As a result, companies are scooping up assets that will help them bulk up while shuttering others -- as GM plans to do with the Oldsmobile brand.

Redwood Shores, California-based Oracle is second only to Microsoft Corp. as a software producer, and is the No. 1 provider of modern databases to governments and big companies. Ellison wants to take Oracle to the next level by building up a complementary business selling software -- or applications -- used to track financial information, inventories and customer information.

And, the company is not the only one in the sector pushing growth through consolidation. Two private U.S. equity funds this month are expected to close their $135 million cash purchase of former high-flying Dutch software maker Baan Corp. from Invensys Plc -- a price that comes at a steep discount to Invensys' acquisition price of around $700 million in 2000.

The funds plan to merge Baan with Chicago-based SSA Global Technologies, another portfolio company. The combined entity would have annual revenues of around $600 million. Elsewhere, Canada's Geac Computer Corp Ltd. plans to buy Comshare Inc. for $52 million in cash as the mainframe computer maker continues its bid to morph into a broad-based supplier of business software.

Industry analysts also are watching for merger moves from Lawson Software Inc. -- a smaller applications provider -- and Siebel Systems Inc., which has seen sales of its customer service software tumble and declared itself an acquirer rather than an acquiree.

Gupta, who fought off Oracle's acquisition of the company that bears his name, left during a management shake-up in 1996. In an ironic coda, the company ended up being bought out anyway in 2001 by Platinum Equity, a global acquisition firm.

The lesson he learned, Gupta said, was that the market can be unforgiving for software's smaller players -- even when the business conditions are more conducive to growth. "Oracle made our company an offer, which in hindsight we should have taken," said Gupta.

© Reuters