The Year in Review: Enterprise Software Acquisitions

Tis the season for “year in review” posts. Here’s my year in review for enterprise software acquisitions.

I don’t want to spend any time on the Oracle/PSFT/SEBL/RETK story because it’s been so well covered by others. What I find more interesting is the acquisitions of the classical venture backed enterprise software startups. When I say “classical venture backed software startups,” I’m talking about those software companies that raised $x million in various rounds of venture capital to build a product, get some customers, build the channel, etc.

Here’s a list of 2005 acquisitions that I could think of. I’m a little chagrined to do this list because VC’s have nifty access to services like VentureSource that make their lists more complete than what I can come up with on my own. I’ll add to the list and correct any errors as I learn about them. Please go easy. Acquirers are in parentheses.

Bowstreet (IBM)
Callixa (SAP)
Collation (IBM)
Collaxa (Oracle)
Compoze (BEA)
Connecterra (BEA)
Cyota (RSA)
Datapower (IBM)
Gluecode (IBM)
Groove Networks (Microsoft)
Infommersion (Business Objects)
Innobase (Oracle)
Khimerics (SAP)
M7 (BEA)
Oblix (Oracle)
Open Network (BMC)
TimesTen (Oracle)
Velosel (Tibco)

Some observations looking at this list:

In approximately 30% of these acquisitions, the venture investors almost definitely lost money (Bowstreet, Groove, Oblix, OpenNetwork, TimesTen). I'm determining this based on the cumulative funding raised relative to the (presumed or stated) acquisition price. This probably also means the founders’ shares and employees’ options were crammed down to close to zero. When so few venture backed software companies reach the promised land of a exit in a given year, it’s sobering to see the promised land isn’t as great as it’s cracked up to be.

Of the companies acquired post series C (Cyota, Bowstreet, Groove, Oblix, OpenNetwork, TimesTen, Velosel), nearly all were money losing propositions for venture investors. Cyota is a clear exception to this rule. I don't know about Velosel. There were poor rewards in 2005 for company stakeholders who had chosen to double down their bets and expand their business with equity capital. By contrast almost 100% of the companies acquired series A were bought at some premium to the A round (which rarely exceeds $15 million post money). These companies exited with (presumably) happy founders, investors and employees.

A few big acquirers sat on the sidelines in 2005 when it came to enterprise software acquisitions including CA and HP. Not all of these companies are typical acquirers of “next big thing” venture backed startups, but most of them are on a good day. Also absent are most of the mid-sized enterprise software acquirers like Parametric, Mercury Interactive, Ariba, Cognos, Hyperion Sybase and webMethods.

I think it will take a year or two to see if these observations turn into full-blown trends.

I'd be interested in other people's "predictions for 2006" on this same topic.