Oracle will pay $5.85 billion for rival Siebel

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Boston.com

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Software giant Oracle Corp.

agreed to buy rival Siebel Systems Inc. for $5.85 billion yesterday in a deal reflecting a wave of consolidation in the once

-booming software sector.

The deal was widely viewed as a win for Siebel shareholders, who analysts say were pushing

for the company's sale, yielding them $10.66 per share for stock that has dropped 13 percent since the beginning of the

year.

Siebel, which once produced heady profits and stock gains through sales of innovative products, has had slower

growth, resulting in less than stellar financial results. And industry watchers said the deal was a sign that the software

business had shifted from growth mode to mergers and acquisitions to remain competitive.

Internet technology

''budgets are not growing as fast as they were in the 1990s and the cost of sales is high," said Ragu Gurumurthy, senior

vice president and head of the technology practice at the Boston consulting firm Adventis Corp. ''On top of all these

things, there is no fundamental innovation that is solving a new type of problem for the customer. If you don't have that

and it's hard to sell the products you already have, then you have to consolidate."

Siebel built its business

selling customer service software, but many of the large contracts that had fueled its growth have dried up. Siebel's

revenues dropped from $1.6 billion in 2002 to $1.3 billion last year, and the company recorded a net loss in its two most

recent quarters.

Analysts said shareholders were encouraging a sale because of Siebel's weakening

performance.

''Siebel had flattened out and it had some profitability problems. There was an expectation among

investors that something had to be done to change the company around," said Paul Hamerman, vice president of enterprise

applications at Forrester Research.

The company was eliminating jobs and in April replaced former chief executive

Mike Lawrie with George Shaheen, but that wasn't enough to quiet shareholders, Hamerman said.

Siebel spokesman Steve

Diamond would not comment on the shareholder issue, but said the company's acquisition was ''great news for our customers,

partners, shareholders and employees." Several calls to Oracle were not returned yesterday.

Already this year Oracle

has bought six other firms, not counting Siebel. Among those deals was the $10.6 billion purchase of database software firm

PeopleSoft in January. In July, it bought ProfitLogic, a Cambridge company that develops software for the retail industry,

and last month it paid $650 million for a stake inI-flex Solutions, an Indian company that makes banking

software.

While consolidation is likely to continue, big software companies like Oracle are being selective.

''Future applications will be focused on specific industries," Hamerman said.

Oracle probably wouldn't

have a hard time finding companies to buy, said Howard Anderson, a Massachusetts Institute of Technology professor of

management and a former software venture capitalist. He predicts that small software companies will have a harder time

finding profitability over the next five years than they did in the first half of this decade.

Big companies are

trimming the number of software firms they do business with, from as many as dozens down to two or three that have the

capability to handle all of their needs, he said. That will make it tough for software firms to land new business and force

many of them to turn to each other for survival.

But even then, it's more likely that small to mid-sized software

firms will be swallowed by bigger players than for them to merge with each other, he said.

''It's going to be hard

for them to buy companies, and there are going to be two or three big software companies," with enough capital to do

acquisitions, he said.