A Street.com article - Silicon Valley: The March to Middleware
Message 6566753
By Medora Lee
Staff Reporter
SAN FRANCISCO -- After the Y2K deluge, how will companies spend on software?
That question is growing more important to the companies that create enterprise software, or software used by other companies. According to Europe's largest software and
services group, Cap Gemini, companies have spent $494 billion so far to exterminate the Y2K bug that threatens computers when the calendar changes to 2000. But now
that many companies have chosen their Y2K software, the next big wave looks to be middleware.
Middleware isn't as sexy as Y2K software. No one is pitching scripts to Hollywood producers on the function it performs: linking myriad applications to get them working in harmony so information can be
shared and managed across a system.
The flurry of corporate mergers this year and the rise in online commerce are forcing more companies to make those applications work together, and quickly. So keen is demand that middleware is shaping up
to be just as rich a lode as Y2K has been. Software companies are already jockeying for a foothold in the middleware market.
"We're betting the company on it," says Samir Gulati, senior director of product marketing at Software AG Systems (NYSE:AGS - news) , a company that has specialized in fields such as database
management but this month moved into the market for middleware with its Sagavista software. "We see middleware as one of the biggest markets."
Software AG wants to make middleware its core business in three to five years. So far this year, it has invested more than $35 million to rebrand itself as a middleware company on top of $6 million to $8
million on Sagavista. The company helped MCI WorldCom (Nasdaq:WCOM - news) integrate the computer systems of its two recently merged components -- both of which wanted to keep their own IT
infrastructure. "Integration of two companies like that can be mind-blowing," Gulati says, "which is where we come in."
About 40 cents of every dollar that companies spend on information technology already goes toward such systems integration, says New Era of Networks (Nasdaq:NEON - news) CEO Rick Adam. The
middleware segment should grow about 33% a year to $7 billion by 2002, up from $1.7 billion in 1997, according to market researcher International Data.
To most companies, the fear of missing the e-business bus is just as terrifying as the prospect of crashed computers come New Year's after next. Financial companies, for example, will need middleware to
handle electronic transactions on old mainframes and to deploy large software applications to distant customers on different platforms.
Other companies, such as Novell (Nasdaq:NOVL - news) , are also preparing to enter the middleware arena. Earlier this month, Novell began testing SQL Integrator, which presents information from
different databases as if all the information is coming from one source.
Some middleware companies are trading at relatively inexpensive levels after BEA Systems (Nasdaq:BEAS - news) warned that the Asian slowdown and weak economies in the U.S. and Europe were
prompting companies to cut back on software spending. Goldman Sachs, Credit Suisse First Boston, Piper Jaffray and Dain Rauscher Wessels lowered their ratings on BEA, pushing the stock down
50% to 13 5/16 Friday. On Tuesday, the stock traded as low as 12 13/16.
While the news jolted holders of BEA, faith in the middleware sector remains strong. "It's still a good company, and I still believe in the whole area of middleware," says Marc Klee, fund manager of the $250
million Jo hn Hancock Global Technology (Nasdaq:NTTFX) fund, which currently holds BEA stock.
Some analysts said BEA's problems were of its own making because the company relied too heavily on big contracts. Still, the bad news brought down other middleware makers such as Rational Software
(Nasdaq:RATL - news) . Rational has fallen more than 20% since BEA's announcement, creating what Credit Suisse First Boston analyst Wendell Laidly called a "terrific buying opportunity." Laidly wrote in
a report Monday, "We spoke with management over the weekend and were pleased to confirm business remains very solid."
As one of the analysts who downgraded BEA last week, Laidly remains confident in the middleware sector as a whole. "The market is not going away," he says. "Demand is still there. It's just the timing."
For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the Thomson Company Reports.
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