Thoughts On The Tech Industry

Any Real 'Value' in Software M&A These Days?

Today's Wall Street Journal has an excellent article entitled As Software Firms Merge, Synergy Is Elusive.  Conventional wisdom (and a popular quote) for the past 20+ years has been that 70% of all M&A activity 'fails', i.e. fails to ultimately deliver shareholder value.  In the 90's my former firm CSC Index double-clicked on the statistic and found there were three fundamental reasons why M&A activity fails:

• Poor Intent - strategy to do the deal in the first place was flawed
• Poor Deal Making - terms of the deal were not ultimately favorable for the buyer, buyer overpaid, etc.
• Poor Post-Merger Integration - buyer and seller could not realize the efficiencies/synergies

The law of large numbers is certainly driving a lot of large tech buyers to continue buying; IBM, Oracle, SAP, Microsoft, Cisco and others need to continue to do big deals in part for solid top line revenue growth.

Takeaway: Our view is that large tech companies are failing to realize post-merger integration synergies.  Ultimately CIOs will continue to deploy SaaS, open source and a myriad of other strategies as a means to avoid vendor lock in.

IBM/Cognos - What's Left?

Not surprisingly, IBM announced plans to acquire Cognos today.  Our immediate reactions:

• Although everyone is denying it, certainly feels responsive and "me too" to SAP/BOBJ and ORCL/HYSL.
• At $5B, it's the largest software acquisition by IBM, and in fact greater than IBM spent in 2006 on all 16 software acquisitions it did.
• IBM has been in the BI space for a long time, it'll be interesting to see if they can extend this into a broader Performance Management play, of which they have been late to the game.  Also, watch what they do with SaaS and BI.
• While the big get bigger, we continue to see tremendous innovation around the BI stack, particularly with open source, i.e. Paris based Talend.
• MicroStrategy anyone?

Thoughts?

Exit Strategies in Application Integration

Exit strategies were a hot topic of discussion at the Milestone Group’s recent Integration/SOA CEO luncheon on mergers and acquisitions. A comparison was made between the current state of the information technology industry and other more mature industries such as medical equipment and pharmaceuticals. In those industries there is certainly innovation, and new companies are still being formed but the likely end-game for most new companies is acquisition by a major company with established brands, distribution channels and support infrastructure. This is Larry Ellison’s vision of the future of IT for sure, but is acquisition, rather then IPO, the likely end-game for the majority of IT vendors?

One way to analyze this is to consider that information technology as a percent of GDP has grown from about one percent in the 1960’s to seven to eight percent of GDP today. If one believes that information technology has now reached a plateau and that eight percent represents the steady state then growth in IT products and services will grow only as fast as GDP – a much lower rate than what we’ve experienced. Since lower growth in spending reduces a small company’s opportunity to grow to critical mass quickly and forces larger companies to look to acquisitions for growth, the ‘acquisition as end-game’ argument is well-supported.

The move to open source software, the subject of a 451 Group conference the morning of our M&A luncheon, is further support for this argument. As the revenue derived from software approaches zero, value will shift to services and support. Customers, looking for that “one throat to choke”, could likely look to a few large providers.

Oracle’s acquisitions of late also support the idea of a slow growth, mature industry. One of our panelists described Oracle as the “CA of the client server world”, buying companies on the down slope for their maintenance revenue. With Safra Catz, an investment banker, being named heir-apparent to Larry Ellison, its clear Oracle is betting on consolidation rather than innovation for growth.

So is software a commodity? And is innovation in IT dead? There are a number of factors that indicate 8% is just the beginning and that the next forty years could be even more transforming for Silicon Valley than the last forty. More in Part 2…

Email me at [email protected] with comments.

Exit Strategies in the BI / Data Management Space

We had the opportunity to recently host and moderate another CEO roundtable for executives in the Data Management software space; this event focused on developing and implementing exit strategies . We assembled a dynamic set of panelists that had first hand experience in both the 'buy' and 'sell' sides of recent M&A strategy and deals, and the roundtable generated significant discussions and enthusiasm.

Considering some of the key issues discussed at this event, and incorporating our strategy experience with both large ISVs and start ups in this space, we see a number of key trends emerging that data management start up firms should consider:

• The importance of developing alliances & partnerships first

Much of the recent acquisition activity has been a result of developing productive partnerships, where there has been demonstrated joint customer success, alignment with product strategies, and some synergy between corporate cultures and goals of the start up and ISV. There is no question that building strong relationships within the ISV allow for increased awareness of the start up partner, and allows for constructive M&A dialog at the appropriate time.

• Position yourself to allow the ISV to lower the cost of their customer acquisition efforts & identify up-selling opportunities

For the bigger ISVs, the real opportunity for growth is to continue to develop their existing accounts and user bases; providing more value to them (such as incorporating unstructured data analysis, for example, to business managers). Case in point: can your solution allow the ISV to tap into other technology budgets in the clients' organizations, that they typically would not be able to access?

• Don't be a 'bad sales rep' when representing your company for acquisition

CEOs of start ups need to focus on the partner / acquirer's distribution model; how can they assist in driving more value and solutions of the partner through the partner's channels? (so: don't go in to a discussion with the ISV saying: " I would love to get access to your channels so I could sell my stuff to them".......not a good idea)

• If you are good, they will find you...

The bigger ISVs have active teams whose roles are to constantly survey the landscape, interview companies, and make recommendations on strategic alliances and acquisitions. Chances are, if you are making headway in your market sector and are building brand awareness and a sustainable client base, that the ISVs already know about you. Your ISV development and direct sales strategies should take into account how you can leverage these sales channels to build relationships with the ISV sales teams, product managers, and with key accounts where both your company and the ISV may provide a joint solution.

• Can your solution assist in expanding the user base and satisfaction level of corporate users of BI

Currently only 10-15% of all potential users in the corporate world utilize BI solutions, so there is significant opportunity to grow the user base. In addition, many existing users do not fully leverage the power of BI solutions today, so there is an additional opportunity to educate them, increasing customer loyalty, and drive additional up selling opportunities.

• What solutions can you sell to end users

Real time analytics (dashboards) are gaining traction in the marketplace (see the recent WSJ column on dashboards). This trend ties into the one above: if you start selling to end users and line managers, you are going to open up a huge new set of potential buyers. The opportunities for start ups are not just in application extensions, but also in the 'middlware' and data management services required to deliver on the promise of real time operating reports. Unified data management (analysis of both structured data and text) is another area of value to end users, and will require ISVs to evaluate and incorporate new technologies  outside of their core expertise.

Similar to other software segments, the BI / data management sector is experiencing consolidation, but it is also a sector with a projected growth rate second only to the security software sector. M&A is going to driven by the buyers, not the sellers, and most of the buyers will exhibit their 'will' by applying very disciplined, financial analysis to potential acquisitions.

Are Big Tech M&A Deals Making Sense?

According to a 2003 McKinsey & Company study, there are approximately 35,000 software companies worldwide with five or more employees.  A staggering number, but realistic when you think that the barriers to entry are so low.  All it takes is a good idea and someone who can code, (and preferrably well!).  As we've all expected, certainly M&A activity in tech is up; the IPO markets remain largely closed, investors need exits and there is plenty more supply (ISVs), than demand (CIOs writing purchase orders).  But are the mega-acquisitions making sense?  It appears Oracle has been stuck at $12/share for 24 months.  So much for all the effort acquiring Peoplesoft and Retek.  Not to be outdone, Symantec is off nearly 45% in six months, trading at 18.75 when it was as high as 34 just prior to the Veritas deal being announced.  What gives?  Do big deals in tech make sense?  Only two data points, but something to think about next time a major player steps up to the plate and swings for the fences.