A New Breed of Software Company

In Oracle's (Nasdaq: ORCL  ) antitrust trial regarding the PeopleSoft (Nasdaq: PSFT  ) hostile takeover, a verdict is not expected for a few months. Yet there is a verdict forming around the enterprise resource planning (ERP) software market: a death sentence for growth.

This is not to imply ERP is not a good business. After all, with its significant maintenance revenues, there is a lot of free cash flow. But, in finance theory (at least what is taught at MBA schools), ERP companies are basically cash cows. Either you pay the cash to shareholders (which never seems to happen) or blow it on acquisitions and lawsuits (the preferred method).

The most damning evidence was the bombshell of the aborted Microsoft (Nasdaq: MSFT  ) - SAP (NYSE: SAP  ) combination. For Microsoft, the move was an attempt to do something with its huge cash hoard. As for SAP, it was much more troubling: The company realized that the growth story was over. Might as well combine with the most powerful software company in the world, right?

Interestingly enough, customers of ERP software are getting much wiser to the new dynamics of the game. That is, even with only a few competitors, companies are able to play hardball to get huge discounts on software purchases. And it's only a matter of time before companies start to cram down on maintenance fees, as well.

ERP is similar to the standoff between Coke and Pepsi. Growth is a matter of stealing customers, since the market is fairly saturated. In the ERP space, the addressable market is the Fortune 1000, and there are not many new entrants to that class. Ironically, SAP recently snagged ERP customer Pepsi from Oracle.

Then there are cutting-edge companies -- such as (NYSE: CRM  ) and Red Hat (Nasdaq: RHAT  ) -- that are disrupting ERP's world. is building out a platform of Web services that allow better integration with software applications, as well as a recurring subscription revenue model. The firm is gaining significant traction with small-to-medium-sized business customers.

Red Hat, on the other hand, is leveraging the powerful Linux operating system. Backing from IBM (NYSE: IBM  ) is making Linux a viable option for enterprise customers.

The solution for the ERP giants? Well, acquisitions. The problem is that investors have pushed up the equity values of, Red Hat, and others. It's no surprise that Oracle's Larry Ellison is spending time complaining in the courtroom.

Want to read more about Oracle and PeopleSoft? Check out the following articles by Tim Beyers:

Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any of the stocks mentioned.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 508988, ~/Articles/ArticleHandler.aspx, 6/24/2017 9:59:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
Change down DOW 21394.8 -2.5 0.0%
Change up S&P 500 2438.3 3.8 0.2%
Change up NASD 6265.2 28.6 0.5%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

6/23/2017 4:01 PM
CRM $88.62 Up +0.15 +0.17% CAPS Rating: ***
IBM $154.11 Down -0.29 -0.19%
IBM CAPS Rating: ***
MSFT $71.21 Up +0.95 +1.35%
Microsoft CAPS Rating: ****
ORCL $50.95 Up +0.65 +1.29%
Oracle CAPS Rating: ***
SAP $107.48 Up +0.42 +0.39%
SAP AG (ADR) CAPS Rating: ****