Shifting Sands

Wall Street Journal – June 26, 2003

By Ann Grimes

Consolidation is the word du jour in the software industry these days, Oracle Corp.’s Larry Ellison and PeopleSoft Inc.’s Craig Conway aren’t the only CEOs talking the talk. The trend is bubbling further down the food chain. Perhaps nowhere more so than among closely held software companies, which received venture-capital backing during the boom and now are hankering for more capital.

Thousands of private, venture-backed software companies “are trying to sell to the same Fortune 500 companies,” says Ron Lissak, managing partner with Catapult Advisors, a boutique investment bank in San Francisco specializing in mergers-and-acquisitions work for software start-ups. “If you think about the customers’ pain point … they all want it to work together seamlessly so they have one throat to choke.”

That push for customer satisfaction could actually help spur more M&A activity in the private sector, Mr. Lissak predicts — or hopes. So far this year, he says, 106 venture-backed M&A transactions occurred, mostly among software companies. Most were fire sales. While below the 449 that took place in 2000 at the peak of the bubble, the current pace harks back to the mid-1990s when mergers averaged about 200 per year. “People forget that M&A is the norm rather than the exception for exits,” Mr. Lissak says. “We need to prepare these companies for the most likely outcome.”