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Analysts consider Microsoft-Siebel pact

Microsoft may be preparing to make a minority investment in the business software maker, according to analyst reports.

Microsoft and Siebel Systems are planning to announce a new pact next week that may involve the software giant making a minority investment in Siebel, securities analysts said.

Microsoft Chairman Bill Gates is scheduled to deliver a keynote speech at Siebel's annual user conference in Los Angeles on Monday.

At the conference, the two companies are expected to reveal details about a financial agreement and exclusive development plans, according to Brent Thill and George Gilbert, analysts at investment research firm Credit Suisse First Boston.

"We believe a small stake would be consistent with prior Microsoft practices of investing to effect a desirable outcome, such as the use of their technology," the analysts' report said.

Under the terms of the pending agreement, Siebel has pledged exclusive support for components of Microsoft's next-generation Web services technology, called .Net Framework, in the next release of its popular customer relationship management (CRM) suite, according to the report. Siebel will also invite Microsoft sales representatives to meetings with its largest accounts.

In a separate report issued Wednesday, JMP Securities analyst Patrick Walravens downplayed the possibility of any financial deal between the two companies.

"Siebel doesn't need the money," Walravens said in his report. "Any investment would be immaterial to Microsoft. I'm not sure what the point of it would be."

Siebel had more than $2 billion in cash, cash equivalents and short-term investments as of June 30, the company reported in July. And despite a slump in IT spending, Siebel continues to be profitable. The company reported net income of $29.8 million, or 6 cents per share, in the second quarter. It is scheduled to announce third-quarter earnings Thursday.

Representatives of Microsoft and Siebel said the two companies enjoy a long-standing partnership, but they would not comment on the analyst reports, which they deemed speculation and rumor.

Wall Street has been speculating for several weeks, however, if Microsoft was interested in buying Siebel. The company has on the acquisition path recently to establish a foothold in the market for corporate applications, the kind developed by Siebel, SAP, PeopleSoft and others.

The company bought Great Plains Software, which specializes in accounting applications, for $1.1 billion last year. It acquired Navision, a business applications company based in Denmark, for $1.45 billion in July.

With more than $2 billion in revenue last year and a current market capitalization of $3.2 billion, Siebel would certainly be a much heftier acquisition target. Siebel took the business applications market by storm in the late '90s with a software suite designed to help companies streamline sales, marketing and customers service activities.

But with the CRM market in a rut, Siebel shares have slid more than 80 percent from a high of more than $36 earlier this year. The company's declining valuation may make it attractive to Microsoft, which wants to extend its reach in the business applications market, sources say.

Still, chances that Microsoft would acquire Siebel are remote, analysts said.

"It would be out of character for Microsoft to do an acquisition this big," Walravens said. "I think what you'll have is a partnership in which Microsoft and Siebel promote .Net. That makes a lot more sense to me. That's what Bill Gates loves to talk about."

Microsoft is eager to recruit software makers, including Siebel, to support its forthcoming set of .Net products, the makings of a software infrastructure on which business applications like Siebel's could run.

Yet Siebel also supports competing infrastructure products from IBM that are built on the Java 2 Enterprise Edition (J2EE) development platform. Siebel would risk alienating IBM and other infrastructure partners, such as BEA Systems, if it favored Microsoft, analysts said.

In addition, a budding rivalry between Siebel and Microsoft makes significantly stronger ties between the two companies less likely, said analysts. Siebel is the biggest player in the multibillion-dollar market for CRM software. Even as Gates delivers his keynote address, his product developers will be putting the finishing touches on Microsoft's own CRM applications, set to debut later this year.

Siebel and Microsoft recently agreed not to renew a 4-year-old reseller deal that expires at the end of the year. The agreement gives Microsoft the right to resell Siebel applications. Siebel signed the reseller deal with Great Plains before Microsoft acquired that company last year.

"Microsoft is a competitor or will soon be a competitor to Siebel," said Joshua Greenbaum, an analyst at Enterprise Applications Consulting. "The strategic level of this agreement can't be that high."