We have seen a consolidation wave begin in the Business Intelligence space. IBM just bought Cognos and Oracle recently bought Hyperion. SAP just announced they are buying Business Objects after barely having time to digest their recent acquisition of Pilot Software.

There are three major database vendors at this time: IBM with their DB2 product, Oracle with their flagship Oracle database and Microsoft with their SQL Server database. IBM and Oracle now have premier, industrial-strength data analysis and reporting products in their product portfolios that complement their core database products. Microsoft has what, Excel?

Actually, Microsoft, like IBM and Oracle, has a suite of proprietary tools that do happen to integrate very well with Excel and SQL Server. Still, IT departments are not deploying the Microsoft tools for heavy-duty corporate use. Microsoft is unique among the big three by their lack of a premier reporting product. It seems safe to assume that Microsoft will be the next major player to buy one of the remaining independent companies in the BI space.

Candidates for acquisition

Informatica and SAS (privately held) have been mentioned as some of the few remaining large players in the sector. There are also a group of smaller players that might make excellent takeover targets for Microsoft. Let's take a look at some of the prime candidates.

Informatica (INFA)

Market Cap: $1.4B
Enterprise value/free cash flow: 34.6
Price/Sales: 3.82
PEG: 1.37
PE: 32
Debt: $230M

Actuate (ACTU)

Market Cap: $463M
Enterprise value/free cash flow: 21
Price/Sales: 3.5
PEG: 1.23
PE: 27.7
Debt: 0

Microstrategy (MSTR)

Market Cap: $1.8B
Enterprise value/free cash flow: 31
Price/Sales: 4.89
PEG: 1.52
PE: 22
Debt: 0

SPSS (SPSS)

Market Cap: $689.3M
Enterprise value/free cash flow: 11.86
Price/Sales: 2.4
PEG: 1.04
PE: 28.56
Debt: $150M

Characteristics of the top candidates

Informatica has its strength in data: integration, migration, data warehousing and data synchronization. This is important in large corporations where disparate data sources need to be brought together to provide a complete picture of business performance. Informatica does not offer a strong reporting component.

Actuate is the cheapest in terms of market cap and provides the investor more cash flow for the price. Despite weak revenue growth, the company has shown good growth in net income over the last several quarters and a tight control on costs. The product suite is complementary to Microsoft with a built-in Excel integration capability. Besides strong reporting tools, they offer full cube-based OLAP analytics with multi-dimensional modeling.