Merger: Spinach for Small Fry

Think of Selectica (Nasdaq: SLTC  ) and I-Many (Nasdaq: IMNY  ) as two Popeyes preparing to compete with the Blutos of the compliance software world.

As megacompanies in enterprise software aim to get bigger through acquisitions -- witness Oracle's (Nasdaq: ORCL  ) hopes of devouring PeopleSoft (Nasdaq: PSFT  ) -- the two small fry players are joining forces in hopes of bulking up to play on the same field with the big boys. This urge to merge may be prompted as much by tight corporate budgets as the lure of empire expansion.

Last week, Selectica announced it was purchasing I-Many for $70 million.

Selectica develops software applications to help companies optimize their product offerings for cost reductions and enhancement of revenues. Customers include biggies such as Cisco (Nasdaq: CSCO  ) , Dell (Nasdaq: DELL  ) , and Juniper Networks (Nasdaq: JNPR  ) .

But Selectica's most recent quarterly results hint at the current difficulties in the enterprise software market. Revenues were $7.2 million, down from $9.9 million in the same period a year ago. The company posted a net loss of $4.1 million, compared with a loss of $3.2 million in the same period a year ago.

I-Many's software manages the complexities of corporate commitments. This includes contracts for such things as required payments and collections.

Last quarter, the company posted a 14.1% increase in revenues, to $9.3 million. But there was a $0.02-per-share loss in the quarter, although the company expects to hit profitability in 2005. It also boasted of winning key new customers, such as Schering Corporation.

Well, the combination of Selectica and I-Many may result in a synergistic "1+1 = 3" scenario. In fact, the new entity will now be able to provide a comprehensive suite for the enterprise compliance market, including, in the words of Selectica, "configuration, price execution, quote management, contract management, contract compliance, regulatory compliance, revenue management, and prescriptive analytics."

The deal is expected to realize cost savings of at least $10 million in the first year; it's also expected to become accretive in the first year. In fact, the new entity will be able to leverage into the fast-growing Sarbanes-Oxley compliance business, which could spell serious profit in the not-too-distant future.

Fool contributor Tom Taulli does not own shares in the companies mentioned in this article.

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