The rapid rate of acquisitions of software companies in the first half of 2007 likely will continue for the rest of the year.

Before this week, the software industry saw some $29.6 billion worth of mergers and acquisitions, compared with $11.6 billion in the same period last year, according to The 451 Group, an independent technology industry analyst firm. The same factors underpinning that deal flow - consolidation of a maturing industry, cash-rich acquirers and smaller target companies plodding along - will remain in place for a while, according to several observers.

"We think the pace will continue," said Citigroup analyst Brent Thill.

"The dot-com era gave birth to a lot of public software companies, many of which don't have the breadth or the capital to survive as standalone corporations. They have good assets, but they don't necessarily have a platform," Thill said.

Among the possible targets, industry observers say, are small to medium-sized companies that specialize in security or online software.

The 451 Group's Brenon Dalyexpects that 2007 will set a record, thanks in part to record cash holdings by large software companies and private equity firms.

"First, there's innovation and then there's consolidation, and software is in consolidation. That's not to say that there isn't innovation in open-source or on-demand, but for mainstream enterprise software you don't get venture funding," said Daly.

"In a consolidating market, efficiencies win, and most efficiencies are wrung out by bigger companies," he added.

At the top of the list of buyers is Oracle Corp. Oracle has acquired about 30 companies in as many months, and Chief Executive Larry Ellison has said he will continue to buy.

Even people skeptical about the momentum of software M&A, like Cowen & Co. analyst Peter Goldmacher, believe him. "Oracle is a juggernaut. They'll keep going," said Goldmacher.

Oracle aside, according to Goldmacher, the continuation of dealmaking will depend on interest rates remaining low.

Other analysts agreed that may be true for private equity deals, but interest rates won't affect larger software companies, whose purchases have usually been for cash.

Other potential acquirers include Microsoft Corp., SAP AG, Hewlett-Packard Co., International Business Machines Corp., Cisco Systems Inc. and several private equity funds.

Possible Targets

For these willing buyers, small- and medium-sized target companies are willing sellers for several reasons. Amid all the M&A activity, customers have been reluctant to buy their software until they know whether the company will be bought and, if so, by whom. In fact, according to independent technology stock analyst Trip Chowdhry, important customers are telling the large companies which smaller software producers they should buy.

BEA Systems Inc., which makes transaction and message management software, is an example of this, said Chowdhry, who predicted that the M&A pace will accelerate in the second half of the year.

"Customers know BEA won't remain independent, so they're not buying. If BEA is acquired by Oracle and you're already an Oracle customer, you'll get a good deal on BEA software. If you're an SAP customer, probably not," he said.

BEA declined to comment on its potential as an acquisition target, as did the other companies mentioned in this article.

Management of the smaller companies are also willing to sell, said The 451 Group's Daly, because they generally are unhappily beholden to a few large institutional investors. And, he said, regulatory costs under the Sarbanes-Oxley law are disproportionately high for smaller companies, and those costs can take a big bite out of relatively small bottom-lines.

Security software companies will be targeted, Daly said, because it's one of the leading software lines that companies continue to spend more money on. He cited IBM's deal last year for Internet Security Systems as an example.

"We would expect HP to follow suit. Security has to be a core part of the network," he said.

Daly's top pick for a target here is McAfee Inc., maker of antivirus and network management software.

"They've had such a tough run of it on the public market," he said. "Going private would certainly be an option for them as well. They don't have any debt to speak of, and they have something like $1.5 billion cash on hand, which fits the leveraged buyout model."

Online software companies like Omniture Inc. and data integration companies like Informatica Corp. are also potential targets, though not necessarily this year, said Citigroup's Thill.

"We don't think there's anything near-term [for Omniture or Informatica], but they certainly have some good assets that bigger companies would like to have," he said.

Chowdhry also cited Informatica as a possible target. Openwave Systems Inc., which writes programs to enable cell phone access to Internet-based services, could also be a target, Chowdhry said, as could smaller enterprise software makers Sybase Inc. and Lawson Software Inc.

"If they don't get acquired, they will lose their business. Either acquire or be acquired - that's the only way you can survive the next couple of years," said Chowdhry.

Lawson, an often discussed takeover target, still has a year to go to turn things around, said Goldmacher, but then it could be for sale.

Though Lawson declined to comment, its chief executive has said that Lawson's strategy is to become the third largest enterprise software company in the world, an alternative to Oracle and SAP.

In general, Goldmacher thinks the best strategic deals in software have already been done. "Every transaction gets further and further down market for quality. It's now about consolidating market share rather than leveraging synergies and revenue," he said.

Below the mid-sized companies, analysts agreed, are dozens of small-cap software companies in security, data integration and online applications that could be targeted.