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Firms With Established Lines Appear in Best Shape : Software Shakeout Far From Over

January 13, 1986|DONNA K. H. WALTERS | Times Staff Writer

He's 28 years old, but Terry Garnett says he feels closer to 50. In less than three years, he nurtured an idea into a computer program, then into a company and finally into an acquisition plum. Along the way, Garnett picked up a load of executive-level pressures and headaches.

Garnett is one of those bright young entrepreneurs in Silicon Valley who seem to come along as regular as payday. Last year he sold his company--named Lightyear, after the software package he and two programmers created--to a Cocoa Beach, Fla.-based software developer and publisher. His riches, he said, are mostly of the unspendable specie: experience. Still, he's not complaining. He's lined up a short consulting stint and then will rejoin his peers at Stanford University to start his MBA.

In the software business these days, there are hundreds of bright young entrepreneurs just waiting for a chance to be as lucky as Terry Garnett. They're gussying up their companies and tramping along the courtin' circuit, looking for a merger mate so they, too, can get back to "the creative part of business and not have the pressure of these make-it-or-break-it situations," as Garnett puts it.

Analysts say 1986 will be a good year for software companies, but they mostly mean the kinds of companies that Garnett's was not: companies with established product lines, such as the big three: Lotus Development, Ashton-Tate and Microsoft. The others, they say, are up for sale.

That's because 1985 was a rough year, and the changes forced by the marketplace will be long-lasting. Developers that don't have the wherewithal to get their products on the software best-seller lists will be gobbled up or forced out by the stronger companies. The remaining companies will add to their shares of the market.

And, strangely, the average computer buyer who looks around for software programs will see little difference.

Trend to Continue

There may be fewer programs to choose from than there otherwise might have been, but who will miss what never was? The discount pricing trend sparked by mail-order houses will continue, but analysts are saying that prices on some of the more popular packages probably will go up.

To observers of the high-technology industry, this all has a familiar ring to it; the personal computer industry has been going through the DTs of withdrawal from years of what Adam Osborne, one of its victims, called "hypergrowth."

The shakeout of personal computer makers turned into the slump of 1985, when sales of PCs failed to keep up with past growth rates. Orders for semiconductors, the amazingly tiny circuits that are the brains of the computer, dropped. And computer makers and chip makers alike began reporting losses, laying off workers and closing plants--many of them the same companies that just a year before swaggered from a full stomach of record profits and expansion.

Like the third climber roped for a mountain trek, software companies also stalled. Venture capital for software developers dried up, leaving many enterprises like Garnett's Lightyear stuck halfway between success and failure.

But this year, most segments of the industry are expecting better times. Analysts predict 20% to 25% growth in business for companies that sell microcomputer software--the kinds of programs that a department head might use in a desk-top computer to put together a budget, or that enable a salesman to keep track of his customers' orders, or that make it easier for authors to write and secretaries to correspond.

That means revenues approaching $3.1 billion, just in this segment of the market, according to Robert Lefkowits, director of software research at InfoCorp. (The segment excludes the much more costly software used by mainframes, the big computers that cost $1 million or more apiece.) That's about 19% higher than last year's sales of $2.6 billion of applications software, including specialized niche programs, such as for lawyers or funeral parlors.

Fewer companies will be counting the profits from those sales: 1985 was a record year for mergers and acquisitions in the software business. According a survey by Broadview Associates and ADAPSO, an Arlington, Va., trade group for computer services and software companies, there were 203 mergers and acquisitions in 1985 among the businesses that the trade group tracks, which encompass software, data-processing services and consulting, training and education. That's a 43% increase from the year before. Of those mergers, 59% were in the software products category--with more than half of those among microcomputer software companies.

Four Acquisitions

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