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To grow, Borland to cut off its roots

The company, once synonymous with software development, charts a new course--without its development tools.

Once again, it's time for Silicon Valley stalwart Borland Software to reinvent itself.

The company on Tuesday said it intends to purchase testing tool company Segue Software for $100 million in cash and sell its highly regarded but low-margin developer tools business.

Executives said the acquisition and divestment is intended to accelerate an ongoing realignment at the company: rather than sell one-off developer tools to programmers, Borland has been trying to sell large suites of tools to high-level technology executives.

"It's remarkable that they've been able to hang on and remain a reasonably sized company," said Anne Thomas Manes, an analyst at the Burton Group. "They were not going to survive trying to be an IDE (integrated development environment) company because nobody pays for IDEs anymore."

News.context

What's new:
Borland is selling its development tools to focus on high-end lifecycle tool suites and will acquire testing company Segue Software for $100 million.

Bottom line:
Open-source and increased competition are forcing Borland to abandon its traditional business and focus on new areas of growth potential.

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In fact, Borland announced Wednesday that fourth quarter revenue declined 14 percent and losses grew to $9.6 million. But exiting the development tools business, where the company sells JBuilder, Delphi, and C# Builder, is a dramatic--and potentially risky?move for a company with a rich history in software development and a strong following among programmers.

It's also another major shift in strategy at Borland, which has had to make over its 22-year history so that i could adjust to competitors and changing habits among its customers.

Today, Borland's traditional business is being undercut by open-source. In the past two years, the rise of freely available open-source IDEs, notably the Eclipse software, has cut the legs out from beneath the stand-alone tools market, said analysts.

Over the past three years, Borland has acquired a number of specialized tools providers and recast its product line around so-called application lifecycle management. These suites provide large software development organizations with tools tailored for different stages of the development process, including gathering application requirements, modeling and testing.

Segue Software, based in Lexington, Mass., has a line of products for testing application performance and spotting bugs before and after they go into production.

The big picture

Although the market for IDEs has become less profitable because of free open-source products, analysts said demand is growing for more complete development-related offerings.

Software development projects are more complicated today because corporations often outsource portions of development jobs and many are shifting to a modular, flexible application design, called a service-oriented architecture.

In addition, large corporate customers are seeking so-called governance and portfolio management tools, which give managers a better understanding of how various IT projects are progressing and how to audit projects, analysts said. Market research firm IDC estimates that the IT project and portfolio management market grew to $403 million in 2004, a 16 percent increase over 2003.

Borland, in fact, acquired Legadero last October for IT project management. About a year ago, it bought a consulting company called TeraQuest Metrics, which employs the authors of the CMMI (Capability Maturity Model Integration), a model for evaluating how effective corporations are at software development.

Given the growing demand for lifecycle suites and portfolio management applications--with market revenues expected to grow around 15 percent in coming years--Borland's shift in focus makes sense, said Melinda Ballou, program manager for application lifecycle management at IDC.

However, Ballou sees some potential pitfalls for the company's new strategy, in part because of the competition: IBM, Microsoft, Mercury Interactive and CA.

"Now (Borland) has to stitch all these pieces together and do it extremely well in a very competitive space against the biggest vendors," said Ballou. "It has business resonance--it's attractive. But it's all in the execution."

Neither Borland nor Segue Software has resources of larger competitors and both have had problems maintaining consistent profitability, she noted.

Borland's former CEO Dale Fuller stepped down last July following a disappointing second quarter, which the company blamed in part on a drop in IDE sales. On Wednesday, company CFO Kenneth Hahn said 2006 will involve "a significant operational transition," but the company expects to be profitable in the fourth quarter of this year.

Fresh challenges

Borland's Rick Jackson, chief marketing officer and senior vice president of products, on Wednesday conceded that the company is taking on a lot at once with its planned divestment and a relatively large acquisition amid dropping revenue. But selling both high-end lifecycle suites and individual IDEs "created different operational models" within the same company, he said.

"As we're not a multi-billion dollar company, it's difficult to support two business models simultaneously and advance both," Jackson said.

Jackson said Borland does not have a buyer in mind for its development tools, but the company hopes to sell them as a single entity. Last year, Borland shareholder Robert Coates petitioned the company's board to spin off its developer tool product lines to "restore Borland's market value."

Thomas Manes at Burton Group said the company's success in the coming years "is very much dependent on the management team and whether they can make this transition."

Borland does have a history of dramatic, if not fully successful, turnarounds.

In 1998, the company changed its name to Inprise and said it will focus on back-end middleware software sales to large corporations. Two years later, it took back its original name of Borland because the new name hadn't caught on.

Also in 2000, Borland proposed a merger with desktop software company Corel, but the two companies nixed that plan. Analysts said the proposed merger, intended to give Borland added bulk in the face of growing competition from IBM and Microsoft, did not have clear benefits for Borland.

Borland is also well-known for its unsuccessful attempt to take on Microsoft directly in the productivity application suites in the '90s.

But despite its tumultuous past, Borland today maintains a good reputation and cachet, particularly with software developers, said analysts and industry executives.

"Borland is a perennial contender," said Cornelius Willis, vice president of marketing at open-source start-up SourceLabs and a former Microsoft employee who had competed against Borland. "It's a brand that tech people have a lot of respect for."