Written by Andrew Wahl
IBM’s $5-billion mid-November deal to acquire Ottawa software maker Cognos Inc. is as momentous as it was completely expected. Big Blue has been bulking up through software acquisitions for years, and Cognos (TSX: CSN) was both an existing strategic partner and an obvious target, after its two largest direct competitors, Hyperion and Business Objects, were acquired earlier in the year. Quite simply, Cognos was the last major independent making business intelligence and performance management software that compiles and crunches operating data. On track to clear US$1 billion in revenue for its current fiscal year, which closes at the end of February, Cognos has achieved all that it could by itself, and it had run out of acquisition targets of its own. That the deal, which should be completed in early 2008, ranks as IBM’s largest-ever acquisition is a testament to Cognos’s accomplishments.
As Cognos disappears after 39 years as an independent company, it’s difficult to see another of its kind emerging in Canada. The next-largest software company in the country is Open Text Corp. (TSX: OTC), a Waterloo, Ont.–based maker of content management software that has amassed roughly US$660 million in revenue during its past four quarters, thanks in part to its own consolidation efforts (it acquired Toronto’s Hummingbird Ltd. in 2006). With another couple of companies under its belt, it could approach the US$1-billion milestone. But many industry watchers assume Open Text will also disappear into the maw of one enterprise software giant or another sooner or later. “The very likely exit for Open Text will be SAP,” says George Goodall, senior research analyst at Info-Tech Research in London, Ont. SAP’s recent US$6.8-billion takeover of Business Objects will certainly give it an opportunity to figure out how to swallow large companies, says Goodall, and Open Text could be next.
And when Open Text goes, who’s left? A scan of Canadian Business’s Tech 100 ranking reveals a dwindling list of software companies, especially those selling to businesses. Constellation Software (TSX: CSU) is the largest, with about US$230 million in trailing-four-quarter revenue. In March 2006, Geac was bought for about US$1 billion by Golden Gate Capital, and Infor (another Golden Gate company) acquired Workbrain in June of this year. DataMirror was snatched up by IBM in September.
The buying spree is partly due to the fact that companies of a certain size are just natural tuck-under acquisitions. But another reason is that the market for corporate software has turned, with interest in stand-alone best-of-breed applications waning in favour of integrated systems offered by the likes of Oracle, SAP and IBM. “People are looking for easy choices, or consolidating their application portfolio,” Goodall says. “People are looking for one throat to choke.” The boom in corporate software applications that began in the 1990s is coming to an end — and it’s harder to spot where the next big opportunities lie. There’s buzz about Web 2.0 social applications, but Goodall doesn’t expect those to grow like business intelligence did. “There isn’t necessarily the next, big bright shining ball to pursue,” he says.
The sky isn’t falling, though. Technology is ever-evolving, so it’s quite possible for the brains inside a company such as Cognos to leave and crack open a new market. But it will take time, gumption and savvy to spot a trend in corporate IT that will warrant a company worth $5 billion 10 years from now. And, given past experience, no one should expect it to remain Canadian for long.