Firms Acquired as Value Falls

With tech sales slowing and the share prices of many companies depressed, software companies looking to quickly add features and functions to applications are turning to acquisition rather than development.

Reagan Lancaster can recite the numbers off the top of his head. There are 300 publicly traded software companies trading under $5 a share, Lancaster said. Two hundred have market capitalizations below $10 million. Forty-nine are trading below their market value. And thats not including the perhaps hundreds of privately held companies running out of venture capital and looking for a lifeline.

"Its an incredible opportunity to do another technology roll-up," said Lancaster, who oversaw the acquisition of 15 companies when he was president of i2 Technologies Inc. and is now supervising a similar acquisition spree as founder and CEO of Titan Ventures LP.

The Dallas-based company isnt alone. With tech sales slowing and the share prices of many companies depressed, software companies looking to quickly add features and functions to applications are turning to acquisition rather than development.

Titan is building a CRM (customer relationship management) software company, Telluride Technologies Inc., through acquisitions. In the past two months, Telluride has acquired technology from Kesar Inc., InterWorld Corp. and Macrosoft Corp., giving it order brokering, order management and sales force automation technologies for its emerging CRM suite.

Lancaster has more numbers: Those three companies combined have 1,000 customers, have accounted for $100 million in revenues, and have spent $300 million on research and development. And Titan has acquired the rights to their technologies for little more than the promise of future revenues.

"Were not building an early-stage company," said Lancaster. "Were building a mature company with a mature product suite."

That building will continue. In the next couple of weeks, Titan plans to add three more companies to the Telluride portfolio—for customer service, channel management, and sales and operations planning, Lancaster said.

The acquisitions wont stop with Telluride. Titan plans to start other companies to roll up the market for other software technologies such as performance management and product life-cycle management. The strategy will remain the same: Buy point technologies that are built on Java 2 Enterprise Edition, combine them into an integrated suite, then pour resources into sales and marketing rather than R&D, Lancaster said.

"Its a pretty simple model," said Lancaster. "If you look at most major software companies—Microsoft [Corp.], Oracle [Corp.], SAP [AG], i2—they took someone elses intellectual property and built software companies around it."

Titans strategy is reminiscent of Divine Inc., which has rolled up more than a dozen struggling software companies since early last year to build integrated suites for content management, customer interaction management and collaboration. The Chicago company addresses what it calls the "Extended Enterprise."

Divine also acquired a professional services organization for the inevitable integration and implementation headaches at customer sites.

The more established suite vendors have gotten into the act as well. PeopleSoft Inc. has added sales configuration and e-marketing capabilities to its CRM suite with the acquisition this year of technologies from Calico Commerce Inc. and Annuncio Inc., respectively. Siebel Systems Inc. late last year added analytics by buying nQuire Software Inc. E.piphany Inc. has built its suite largely on acquisitions, and Kana Inc. is the sum of the acquisition of 11 different companies.

Even as Titan seeks to build application suites through acquisitions, much of the hole-filling in existing suites has now been completed, and a new wave of acquisitions simply for the purpose of consolidating market share is about to begin, according to Eric Schmitt, an analyst at Forrester Research Inc., in Cambridge, Mass.

Mark Richey, who sold his privately held CRM company, Synchrony Communications Inc., to Divine last fall and is now a sales and marketing executive at Divine, agreed. Richey said Divine filled one of its last technology holes when it acquired Delano Technology Corp. earlier this month.

"Going forward, youre going to see acquisitions more for market share than for technology," Richey said. "Were pretty focused on executing with what we have."

The consolidation of software companies is hardly a bad thing. Forresters Schmitt said most executives of struggling software startups are "relieved" to be acquired. Lancaster has received at least 1,800 inquiries from companies wanting to be taken over by Titan. He said many CRM startups were founded in the hope that a larger player such as Siebel would buy them.

Customers are often relieved, too. Nutri/System Inc., in Horsham, Pa., uses technology from eShare Communications Inc. to provide live chat on its site, mainly for one-to-one counseling sessions for its paying clients, a key part of its Internet services.

Deborah Gallen, vice president of operations at Nutri/System, said she welcomed Divines acquisition of eShare last year.

"Small [software] companies are scary," said Gallen. "Were in better hands now. The Internet was new; we were all new at it. It was a risky business for all of us. To find our partner still standing when the dust settled was really nice for us."