With an eye toward bulking up its emerging SOA business, Software AG is offering roughly $550 million in cash to buy webMethods. The obvious rationale is getting critical mass. According to Gartner numbers, the combined entity's SOA business would trail only that of IBM and Tibco respectively.

My colleague Jason Bloomberg of ZapThink pronounces this "huge news," characterizing this as "a market share play and an SOA play entirely." He concludes that "Larry Ellison is not going to be happy about this news."

On paper this looks like a great deal. Both companies' SOA lines were incomplete, webMethods needed deeper pockets and put itself in play (it evidently entertained several potential offers), and Software AG had a bed of cash to make it happen.

A few more details: while Software AG is about 2 - 3x the size of webMethods, its SOA business is barely a half of the size. Both companies' geographic footprints are almost mirror images: While Software AG's customer base is 56% Europe and 25% North America, webMethods' presence is 62% in North America and 26% in Europe. And, excluding registry/repository (the stepping stones for SOA governance), and a more sensitive area around BPM (Business Process Management), there are few product overlaps.

In some respects this is a tail of two cities: Software AG, with an annuity legacy business, seeking to jumpstart growth in SOA where it sees its future. webMethods, with the more substantial SOA portfolio, which has been struggling to reinvent itself from its B2B/EAI roots. In a bit of irony (and to show the devaluation of IT dollars in the post dot com era), the company solid itself for less than half what it paid back in 1999 for Active Software, the EAI company that was supposed to be webMethods' future.

In the past five years, webMethods has been through belt tightening and roughly a half dozen acquisitions. And a year ago, it looked like it was starting to get its old groove back with 12% profits. But in the next three quarters (Q4 numbers should come out any day), webMethods sank back into the red, which CEO David Mitchell blamed on poor sales execution and gaps in its SOA offerings.

Obviously, Software AG hopes its $550 million will be better spent than webMethods' $1.3 billion (for Active). While the balancing of regional presence and filling out of product lines makes sense, one plus one doesn't always make three.

As Dana Gardner put it, the track record of German-US mergers is not exactly stellar. But he also points out that M&A provides a great opportunity for SOA firms to eat their own dog food -- e.g., if it works for us, it'll work for you. But as David Linthicum, who in a previous life was CTO for Software AG's abortive SAGA Software unit, points out, size doesn't substitute for strategy and a firm roadmap.

And one of the first proof points will be how Software AG handles BPM, where it currently relies on a heavily-promoted strategic partnership with Fujitsu that faces competing product from webMethods. As Software AG CEO Karl-Heinz Streibich told us, there is a significant sales pipeline with the Fujitsu product, and Fujitsu BPM will continue to be the company's strategy in the short- and mid-term. But in the next breath he added, "[Our own] IP always has a preference wherever they fit into same [product] segment."

It's going to be tricky telling a coherent story to customers there. Of course, that's the challenge going into any merger, but even more so for a company that is now ramping up its SOA message. While BPM won't be the only proof point of the Software AG/webMethods combo, we feel it will be an important one.


Tony Baer, principal of onStrategies, is a well-published IT analyst with over 15 years background studying implementation issues in enterprise systems, application development, data management, and business intelligence. Baer's commentaries and rants on the state of the IT market are available here.