IT'S NOT EASY

being attractive. Just ask

Business Objects

Last Friday, the chatter was once again that acquisition-hungry Oracle is going to make a play for Business Objects. A potential acquisition by one of the largest software makers in the world is enough to put dollar signs in any investor's eye. One analyst estimates that Business Objects could fetch as much as $50 a share in a buyout. The rumors helped the shares climb 4% in two days to close at $37.91 Monday. But investors may not want to jump into the stock based solely on the company's potential for a speedy takeover.

"If Oracle were going to pick up Business Objects they would have done it a lower price," says Michael Nemeroff, an analyst at Wedbush Morgan Securities. He notes that Business Objects was much more attractive last July, when an earnings miss pushed the stock to a 52-week low of $19.01. Nemeroff, however, doesn't dismiss the possibility of an acquisition sometime in the future. It just probably won't happen soon. (Wedbush Morgan makes a market in Business Objects' stock.)

Even without a buyout, there's still some room for growth in Business Objects' stock just not $50 a share worth. Business Objects is a leading company in one of the most lucrative niches of the software industry: business intelligence. BI applications gather and analyze all sorts of data in order to help companies make better decisions. For example, a BI application could track the number of women's green turtleneck sweaters sold at every Wal-Mart across the country, then cross-reference that data with weather patterns and the number of women living around each location to determine how many green turtleneck sweaters should be shipped to each store. While the software industry as a whole is expected to grow sales by 6% to 8% this year, sales of BI software are expected to double that pace.

"Clearly the BI sector has been a space that has had a lot of chatter regarding attractive assets," says Susquehanna Financial analyst Jason Kraft. In fact, Kraft notes that all of the stand-alone BI names, including Business Objects' competitors Cognos and Hyperion Solutions, have also been subjects of takeover speculation by large software vendors like Oracle and SAP. Susquehanna makes a market in the company's shares.

Business Objects spokesman Peter Olson says the company doesn't comment on rumors. He did note, however, that the company has no plans to sell. "We think independent BI is what our customers want," he says.

But when Oracle is involved, those words may not hold much water. Just recall Oracle's $10.3 billion hostile takeover of PeopleSoft a couple of years ago. In fact, it was during the Department of Justice's review of the PeopleSoft deal that Oracle first revealed its "hit list" of acquisition targets. On the list was Business Objects, and Oracle has proven that it's not afraid to spend some cash to get what it wants. After PeopleSoft, it went on to buy 25 more companies, including its $5.85 billion purchase of Siebel Systems last year. Oracle officials didn't return phone calls seeking comment on Business Objects.

Software Merger Mania

Oracle hasn't been alone in its shopping spree mentality. The whole software universe seems to be looking for retail therapy. Both

IBM

Microsoft

Last March, Oracle unveiled its Business Intelligence Suite and declared BI a potential "billion dollar business" for the company. Microsoft also beefed up its BI operations last spring when it bought privately held analytics and visualization software maker ProClarity. Just last week, Hewlett-Packard added a new business intelligence and information management group to its software division.

The increasing interest in the BI market will undoubtedly alter the competitive landscape. So far, though, analysts say the entrance of Microsoft and Oracle hasn't had a noticeable impact on standalones like Business Objects and Cognos. But, they warn, that could eventually change. "Can the market support all of these vendors growing at double-digit growth? And if not, who's going to fall and stumble?" asks Wedbush's Nemeroff.

Business Objects isn't expected to be the first one to stumble. Analysts have been impressed by the company's new product lineup, and with more than $1 billion in annual revenue, the company has a good footing in the industry and plenty of strong business relationships to show for it. One thing investors might want to keep an eye on is the company's business in Europe, says Nemeroff. That's where Microsoft has some of its strongest partner relationships. If Microsoft starts eating away at Business Objects' market share, the analyst believes it'll be most evident across the Atlantic.

Investors who got in when Business Objects' stock bottomed out at $19 last summer have had a good run, but is there more fire behind its shares? I wouldn't expect big returns, but there's at least a little upside to the shares. Potential investors should note however, that over the past five years, Business Objects' stock has had a hard time hitting and staying above the $40 range.

Nemeroff, who has a Buy rating and a price target of $41 on the shares, believes the company's upcoming fourth-quarter earnings report due out on Feb. 6 might just help break that barrier. According to a consensus estimate of analysts compiled by Thomson First Call, Business Objects is expected to report earnings per share of 56 cents (excluding option expense) on revenue of $352.3 million for the quarter. In the fourth quarter of 2005, the company reported earnings of 42 cents on sales of $304.6 billion.

While I wouldn't write off the possibility of Oracle or some other software giant, for that matter getting its paws on the company, I think it's best to look at Business Objects as more of an investment than a takeover candidate. That may change in the months ahead, but for now investors should be prepared for healthy returns, not monumental ones.