The "Always a Bridesmaid" List of Software Companies

From Left (in blue): Adobe, Tibco, Take-Two, THQ, Red Hat, Citrix, Salesforce.com

Here’s a cliché I’ve heard just about enough of:

So-and-so analyst/commentator “expects a wave of software consolidation to begin.“

Barron’s Eric Savitz discussed Citigroup analyst Brent Thill‘s latest consolidation prediction this week and I was really embarrassed for all involved.  It’s almost amazing how many times this list has been regurgitated over the years.

Here are Thill’s candidates (aka The Usual Suspects):

• Informatica (INFA): Market cap $1.5 billion
• Omniture (OMTR): $991 million.
• Citrix (CTXS): $6.1 billion
• Red Hat (RHT): $3.9 billion.
• Nuance (NUAN): $3.6 billion.
• Salesforce.com (CRM): $5 billion.
• McAfee (MFE): $6.2 billion.
• Concur (CNQR): $1.5 billion.
• Take-Two Interactive (TTWO):$614 million.
• THQ (THQI): $538 million.

Take-Two?  What else is new?  Red Hat?  How many times will that old chestnut be trotted out?  He missed a few other perennial targets that never end up getting acquired but are always mentioned…how about Tibco (TIBX) or Adobe (ADBE)?  What about SAP (SAP)?  How many times have we heard that so-and-so is hot and heavy for these three companies also?

I guess he skipped these stale targets this time so as to have something else to talk about the next time he puts out a software consolidation piece.

Here’s the deal…

No one wants these companies that badly and most of them probably aren’t even thinking about deals.  For the majority of them, if they ever do sell, it will only be under duress.

Sure, there could be decent premiums paid, but from what level?  They never sell out when business is good or new product cycles are kicking in.

There is never, ever any Wave.  Once in a while, Oracle’s Larry Ellison gets a fever to do a deal (and he’s done mostly good ones) but that’s as close to a wave as you get.

Software execs aren’t sheep-minded like finance execs, who do tend to cut deals in reaction to their competitors’ selling out.  Software companies neither feel the pressure to have to buy each other nor do they especially feel compelled to sell.

Some simple reasons for this could be:

• Software is not a capital-intensive business.  You write the program and then run off as many copies as you want for very little cost, the expense is in development and marketing.  There are not many heavy-equipment or real estate rationalization decisions to consider in the name of  “synergies” like you would see in an industrial sector.

• Software CEOs are typically innovative people who believe that rather than combine or grow to fend off challengers, they can simply “create” their way to supremacy in their niche.  Unlike bankers, who worship at the alter of size and scale , software entrepreurs who grow their companies do not believe that there is a limit to their own growth and are more willing to do things organically to get to where they want to be.

• Most software businesses are based away from The Street, out west where pitch books from investment bankers come via Fedex rather than in person.  The M&A guys aren’t breathing down the average Silicon Valley executive’s neck all day long.

Lots of money has been lost in the market chasing the elusive software merger wave that never comes.  As Chuck D of Public Enemy advised, “Don’t Believe the Hype”.

Sources:

Software: Expect More Deals (Barron’s)

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