BEA: Icahn, not Ellison is key player in this drama

So, the long-awaited shoe finally dropped. Oracle launched an unsolicited bid for BEA. While a BEA acquisition has been anticipated for a long-time, I'm surprised only that it took so long for Oracle to finally come calling; BEA would have been much cheaper a few years ago, but perhaps Oracle was preoccupied digesting its other victims acquisitions.

The Wall Street Journal characterized this acquisition as symbolic of the death of the midsize tech company; the notion being, I guess, that these firms are too small because customers putatively want to deal with fewer, bigger vendors. There might be some truth in that, I suppose.

However, I think more insight about the future trend of the software industry can be seen in Carl Icahn's BEA involvement. Icahn has long been a financial engineer par excellence. He specializes in taking positions in low-growth companies plagued by wasteful spending and then "encouraging" them to sweat down to fighting weight by divesting extraneous businesses.

The fact that Icahn and his ilk (today another firm announced that it was "encouraging" Sybase to auction itself off in order to raise its stock price). In its letter to Sybase's CEO, the firm stated:

"We are concerned that the company will use capital for risky and unnecessary acquisitions while there are several low-risk opportunities within the company to significantly improve value."

In other words, this investor doesn't want to see Sybase attempt to push out new products or enter new markets, just milk the existing products, thank you very much.

What the BEA and Sybase investor activisim indicates is that the growth game is up in enterprise software. I've long felt that BEA was the most vulnerable large software company in the industry because its core market was being eaten away by open source; while it was dying due to its dependence upon selling middleware, increasingly commoditized by open source, its commercial counterparts (i.e., Oracle, IBM, and SAP) were succeeding because they could give away the middleware as part of a larger deal. And those vendors are not really growing, either. They're just milking their installed base, which they increase by purchasing faltering rivals.

The involvement of financial engineers tells us that awareness of the exhaustion of the enterprise model has permeated Wall Street. When the business model blows out, all that's left is financial engineering (and, of course, the few remaining companies still upright milking you, the locked-in customer, for all you're worth). The only question that remains is who is willling to bid more for additional pools of locked-in customers -- financial engineers or technology companies.

What's surprising about all this is that the spread of software is by no means complete. Does anyone think that every company in America (not to mention the rest of the world) has a fully functioning IT capability? Far from it. Icahn is just letting us know that the current players aren't capable of satisfying market needs -- given their existing business models. The future of the enterprise software industry looks a lot more like Studebaker than Starbucks. The big money in the industry belongs to those who can figure out how to deliver software at an appropriate price point; the even bigger money belongs to those who can build new businesses based on pervasive, less expensive software.