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  • sakabayashi_1999 sakabayashi_1999 Jun 25, 2000 12:04 PM Flag

    New York Times

    June 25, 2000

    By LAWRENCE M.
    FISHER

    y coincidence, on May 22, Vignette announced that
    it was buying OnDisplay, and
    WebMethods
    trumpeted its acquisition of Active Software.

    The
    deals, both billion-dollar-plus stock swaps, put a
    spotlight on an obscure
    branch of the software industry
    -- enterprise application integration. It makes
    for
    an awkward phrase, but the companies in this
    niche could be poised for
    hypergrowth in the era of
    electronic commerce.

    Getting one software program
    to talk to another has been tricky ever since a

    programmer created the second mainframe application and
    tried to connect it to the
    first. As mainframes
    gave way to minicomputers and minis to client
    server
    networks running packaged applications, the
    problem worsened, becoming a sort of
    permanent
    employment act for consultant armies.

    With the rush
    to conduct business online, connecting one
    application to another
    has assumed greater urgency. Now a
    company must not only make its own
    inventory program
    communicate with the application that enters orders, but
    it
    must also make these pieces of software connect
    to their counterparts at vendors
    and customers.


    Software integration has become too big a problem
    to address one connection at a
    time, with custom
    software from consultants or in-house programmers. So a
    gaggle
    of new companies -- including those in last
    month's deals as well as Tibco
    Software, NEON
    Systems, Vitria Technology and the Software Technologies
    Corp. --
    have emerged to offer ready-made software
    to help stitch together corporate
    America's
    patchwork quilt of business programs.

    "There are
    very few categories of the software business that have
    a greater
    long-term opportunity than this one,"
    said Roger McNamee, a partner in Integral
    Capital
    Partners, a venture capital fund that began investing in
    many of these
    companies when they were still
    private and continues to hold them as publicly
    traded
    stocks. "They have an advantage over the average tech
    stock in that the
    demand curve is vertical."


    The biggest reason has been the Internet-fueled
    proliferation of specialized
    applications, all of which
    must be connected both to so-called legacy
    applications --
    those that companies have been using for
    years to automate business processes --
    and to
    every new Web program that comes along.

    While
    it may be too early to pick the ultimate winners,
    investors might consider
    buying a basket of these
    stocks. McNamee particularly likes Vitria and
    Software
    Technologies, known as STC -- two companies with
    very different market profiles.

    "Vitria is
    distinguished by focusing on the telecom industry," he said.
    "The amount
    of legacy stuff in that industry is
    staggering; the amount of change in new
    technology is
    equally staggering, so it was perceived as too difficult.
    That's given
    them something of a protected niche."


    Software Technologies, one of the earliest
    entrants, is more horizontal, working
    with many
    industries. "STC is sort of the everyman of the space,"
    McNamee said.

    Most integration companies started
    by solving a particular problem, often for a

    particular industry, and now must expand their offerings in
    order to grow. One
    path is through acquisition,
    which explains why WebMethods, a specialist in

    business-to-business integration, acquired Active Software, a
    specialist in
    coordinating applications within a
    business. Vignette, which sells software
    designed to
    let companies personalize customers' interactions
    with their
    Web-based systems, acquired OnDisplay
    to bolster its business-to-business
    integration.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • The consolidation trend favors larger companies,
      particularly those with big market
      capitalizations and
      premium stock prices -- potential currency for new
      acquisitions.
      That is why Rehan Syed, an analyst at S.G. Cowen,
      has a buy recommendation on
      NEON and a strong buy
      on Tibco.

      "I believe all these vendors will
      extend their capacities, either through acquisitions

      or in-house development," Syed said. "We think NEON,
      the largest company in the
      space, will continue
      to do well. Tibco, as one of the largest, with a
      premium market
      cap, is positioned well to be a
      consolidator."

      The spring sell-off punished integration
      companies severely, as technology
      investors gravitated
      toward blue-chip names like Sun Microsystems, Oracle
      and
      Cisco Systems. So while some integration
      companies still have sky-high
      price-to-earnings
      multiples -- or lack earnings outright -- they are
      generally trading
      50 percent or so below their highs
      for the year.

      The main threat to the sector
      is that companies could change their software
      buying
      patterns, moving away from mixing and matching
      applications from many vendors
      and toward suites, which
      include various applications that are designed to
      work
      together. Oracle, in particular, is pushing a
      suite of back-office and e-commerce
      applications,
      and Microsoft plans a technology called BizTalk.


      "The fact that you need these companies at all is
      a function of how programs were
      built in the
      past," said Charles Phillips, an analyst at Morgan
      Stanley Dean Witter.
      "I think it will get easier to
      connect third-party applications without creating

      another layer of technology."

      He is not alone.
      Jeff Wrona, portfolio manager of the $3.6 billion PBHG
      Technology
      and Communications fund, worries that integration
      "is quickly becoming a
      commodity."


      Nevertheless, Phillips sees opportunities in the sector. He has
      an outperform
      rating on WebMethods and Software
      Technologies, both of which were taken public
      by Morgan
      Stanley. "From an investment standpoint, this is a good
      time to look at
      these companies," he said. "The
      absolute size of the companies is still quite small."

      • 1 Reply to sakabayashi_1999
      • The consolidation trend favors larger companies,
        particularly those with big market
        capitalizations and
        premium stock prices -- potential currency for new
        acquisitions.
        That is why Rehan Syed, an analyst at S.G. Cowen,
        has a buy recommendation on
        NEON and a strong buy
        on Tibco.

        "I believe all these vendors will
        extend their capacities, either through acquisitions

        or in-house development," Syed said. "We think NEON,
        the largest company in the
        space, will continue
        to do well. Tibco, as one of the largest, with a
        premium market
        cap, is positioned well to be a
        consolidator."

        The spring sell-off punished integration
        companies severely, as technology
        investors gravitated
        toward blue-chip names like Sun Microsystems, Oracle
        and
        Cisco Systems. So while some integration
        companies still have sky-high
        price-to-earnings
        multiples -- or lack earnings outright -- they are
        generally trading
        50 percent or so below their highs
        for the year.

        The main threat to the sector
        is that companies could change their software
        buying
        patterns, moving away from mixing and matching
        applications from many vendors
        and toward suites, which
        include various applications that are designed to
        work
        together. Oracle, in particular, is pushing a
        suite of back-office and e-commerce
        applications,
        and Microsoft plans a technology called BizTalk.


        "The fact that you need these companies at all is
        a function of how programs were
        built in the
        past," said Charles Phillips, an analyst at Morgan
        Stanley Dean Witter.
        "I think it will get easier to
        connect third-party applications without creating

        another layer of technology."

        He is not alone.
        Jeff Wrona, portfolio manager of the $3.6 billion PBHG
        Technology
        and Communications fund, worries that integration
        "is quickly becoming a
        commodity."


        Nevertheless, Phillips sees opportunities in the sector. He has
        an outperform
        rating on WebMethods and Software
        Technologies, both of which were taken public
        by Morgan
        Stanley. "From an investment standpoint, this is a good
        time to look at
        these companies," he said. "The
        absolute size of the companies is still quite small."

 
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