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Technology / AI and automation

M&A Impact: ESM Mergers Set to Spilt Market

Chairman, CEO and owner of Candle Corporation, Aubrey Chernick, flatly denies that any part of his privately-held company is up for sale. He dismisses rumors that surfaced last week of Computer Associates offering $900 million for Candle’s Omegamon mainframe performance monitor. Chernick says, since setting up Candle 23 years ago, he has seen offers pretty much once a week, every week. But he insists there have been no talks with Computer Associates. I have not spoken with anyone from CA, confirms Chernick.

Takeover speculation in the $12 billion enterprise systems management (ESM) market is being fueled by platform and application interconnection needs. Vendors are having to shift position to meet the dynamics of a market that has been sent into a tailspin by the demands of e-business and EAI (enterprise application integration).

ESM concerns have moved on from issues of database tuning, server performance and network monitoring. The focus is now on high- availability, 24 x 7 service across e-business infrastructures and end-to-end assurance of applications spanning multiple platforms. Consequently, vendors in this market are re- positioning product portfolios to play to these strengths. CA, for example, is couching its purchase of Platinum Technology not in terms of the strength of its acquired DB2 run-time technology or the richness of workload scheduling software, but in terms of leveraging Platinum products to build new generation e-commerce platforms.

Another aspect driving consolidation is the preference by big business to deal with fewer vendors. The ESM market is therefore increasingly being dominated by the enterprise giants that have used acquisitions to grow even larger.

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The record-breaking $3.5 billion acquisition of Platinum by CA is in step with BMC’s $1.85 billion M&A habit. In little over a year, the company has paid $285 million for performance management firm BGS, spent $915 million buying Boole&Babbage for its Command/Post console manager and made a $650 million cash purchase to buy New Dimension, the provider of the Control operations management suite.

BMC and CA, alongside IBM/Tivoli are now way ahead of the rest of field with the result that Compuware, Candle, Sterling Software and a couple of also-rans in Hewlett-Packard and Bull have been left trailing. That said, further consolidation in the sector looks certain.

As for the current round of mergers: There was nothing at all surprising about the Platinum takeover, says Wayne Morris, VP of corporate marketing at BMC, Other, perhaps, than the size of the premium CA paid. That was a surprise.

The first time stories started up about a potential Platinum-CA tie up back in April 1997, Platinum stock had been trading around $17, revenues were $623.5 million for fiscal 1997 and the company had a market capitalization that was nudging $1 billion. Two years later, after spending some $900 million buying Memco, LogicWorks, LBMS, Mastering Inc, and Hewlett-Packard’s Intelligent Warehouse line, Platinum sales had stormed to $968.2 million at the close of fiscal 1998, leaving CA having to pay $29.25 a share.

Morris maintains that CA will now get busy looking for ‘cost synergies’ within Platinum, whereas BMC’s objective in assimilating New Dimension, Boole and BGS is to look for growth opportunities. Something he calls ‘revenue synergies’. All BMC’s acquired businesses were sound, and only constrained by limited distribution outlets and a conservative management style, he argues.

BGS executives had been satisfied with annual sales growth of 12% or 13%. In contrast, last fiscal year BMC’s growth was nearer 40%, according to Morris. Add in the past acquisitions, and we very nearly doubled, he says. There are signs that changes in management style have taken their effect. Twelve months ago, BGS produced revenues of $57 million, $6 million shy of its $63 million target, and it had around 200 staff at its corporate headquarters. Under BMC, the payroll now numbers 350 with sales real near $100 million, according to Morris.

Merrill Lynch estimates BMC has a cushion of deferred revenues from service and maintenance that rose 57% year-on-year, on which the company can build future business. And the BMC model is far more aggressive than discount-happy Boole and price-cutting New Dimension.

BMC tends only to discount deeply where its salesforce can sell in high volume. According to Morris, future sales efforts across its product line will build on the geographical reach of its field marketing, an account management structure that allows for single point negotiation and the backing of specialized product teams with a deep understanding of each BMC software line. The financial analysts at Merrill Lynch suggest BMC’s 25% core growth targets for the current fiscal year will be exceeded on a combination of new product flow and realized synergies with Boole and New Dimension.

Technology analysts at Meta Group, however, see BMC’s signaled improved financial performance merely as a countdown to price increases. We expect BMC to increase B&B pricing early in 2H99 (probably July), one reports suggests, and we predict 40%+ price increases for large Boole&Babbage users. Much the same is in store for Platinum users too, according to Meta, although rather than increase prices CA is more likely to reduce Platinum’s generous discount rates, it argues.

CA’s supposed overture to Candle reflects the Santa Monica-based vendor’s move into EAI. Candle has undergone a transition from selling systems for mainframe systems management to middleware management and it is now making a play for applications management and EAI services. Candle’s Roma EAI product set includes an open integration broker, graphical development environment, packaged application connection interfaces, as well as systems management capabilities and integration with MQSeries. If EAI is its future, what would Candle want with its venerable Omegamon product?

Chernick describes his company’s mission statement as providing industrial strength applications management. He points to that fact that most applications driven by EAI systems were never intended to be used in this way, so effective management and administration tools are required to monitor and control their behavior.

That said, BMC has its own EAI intentions. Morris says that use of its Enterprise Data Propagator, Change Data Mover and Bulk Data Mover products on top of MQSeries would give something of value in the EAI market, helping to keep applications in lockstep by managing data transfers between them. In the main though, he says, the coming 12 months is a year for execution as BMC integrates its extended product set.

It has just announced Patrol for MQSeries, a combination of products from Boole & Babbage and BMC. And work is underway to enhance its SpaceView product with some of the predictive analysis features of BSG’s Best/1. The plan is to ready a push into storage management with applications that would carry out recoveries in the disk storage subsystem itself, providing for near instantaneous recovery of an application. The company says we should also expect to see it build stronger partnerships with storage vendors. EMC is on board, and there will be more to come.
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CBR Staff Writer

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