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Acquisitions - Good or Bad for the CIO?

Saturday, 11 September 2010 12:07 Ayman Abouseif
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Technology companies, with an unprecedented amount of cash on hand have turned to acquisitions not only to stay on top of rapid technological changes but also to broaden their offerings and eliminate their competitors. The alternative for cash rich companies would have been to either return the cash to their share holders or to re invest it in their operations in order to speed up organic growth.

An analysis of Bloomberg data on S&P 500 technology acquisitions shows that Hewlett-Packard was the most active buyer over the last three years, with $19.2 billion in disclosed M&A spending, followed by Oracle, Microsoft, and IBM. There's more where that came from: S&P 500 tech sector companies generated $137.6 billion

in free cash flow over the past 12 months, with Microsoft's $20.2 billion leading the way. IBM’s CEO Sam Palmisano said on May 12 that IBM plans to spend $20 billion on acquisitions through 2015, shelling out more in five years "than we did in the previous 10."


But let us try to categorize the main strategies behind some of the key IT acquisitions, keeping in mind that many acquisitions would fall to one degree or another into multiple categories:

  • Hop to the Leaders Quadrants - These are acquisitions that help the acquirer reposition its offering  to Gartner’s Leaders Quadrant in one swift move, this is usually achieved by acquiring a company that is already in the leaders quadrant, the best examples would be IBM - Cognos, Oracle - Siebel and SAP -Business Objects.
  • Cover a new market segment – Acquisitions designed to help the acquirer cover a new market segment and broaden its offering. After a successful merger and post merger integration, the acquirer becomes a key player in the new market segment. Best examples would be Oracle - Sun, IBM - Tivoli, HP - EDS, Oracle - Primavera, IBM – FileNet.
  • Acquire new customers and eliminate competitors – The objective has more to do with consolidating the acquirer’s leadership position by eliminating a competitor and acquiring new customers with their ongoing revenue streams. Most obvious examples are Oracle - PoepleSoft, IBM - Informix, PeopleSoft - JD Edwards, HP - Compaq and Oracle - DEC Rdb.
  • Gain access to new core technology – primarily the acquirer gains access to research and development, new emerging technology and intellectual property rather than a finished product. Many of CISCO’s and Microsoft’s small acquisitions fall into this category.

But how do acquisitions impact CIOs? You can look at the impact in a number of different areas:

  • Better integration – newly acquired products gain tighter integration with the acquirer’s products leading to easier deployment and lower customer side integration cost.
  • Fewer players – there is no doubt that the buying spree by the larger players has left CIOs with fewer and fewer choices. A snapshot of the market today reveals that at the enterprise level, there are only two ERP players, one CRM player, and two middle ware players!  Is the market becoming a sellers’ market where the buyers have few choices and the sellers have the final word?
  • Broader vendor relationships – whether you like it or not, the major acquirer’s namely IBM, Oracle and HP now cover a larger footprint within your technology space and this can only go up with time. Essentially bigger players are becoming increasingly more important to CIOs and of course this impacts your negotiation power.

Whether you see these as positive or negative developments may vary, but one thing is for sure, IBM, HP, Oracle, Microsoft and CISCO joined by EMC, SAP and Dell are eating away smaller players. Even open source vendors did not escape the buying spree, MySQL is now part of Oracle and SAP is rumored to be in negotiations to acquire Red Hat!


Review the acquisition history of IBM, Oracle, HP, CISCO and Microsoft.



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Comments 

 
0 #8 Mourad Fahmy 2010-11-19 09:02
We can't stop the trend, so we might as well try to enjoy the ride. Consolidation and vertical integration will make it easier for us chart and deploy projects. Granted we will have somewhat limited choices but also each of those choice will be more credible.
Just get on with it.
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0 #7 Tarek Saleh 2010-11-02 18:56
Hi, Gartner has recently warned against what they called "super vendors" .. they consider the current wave of IT mergers and acquisitions dangerous because it slows innovation and reduces competitiveness .. take a look at the full article here:

http://www.computerworld.com/s/article/9191638/Gartner_warns_of_emerging_super_vendors_
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0 #6 R Al Bolouchi 2010-09-30 22:05
From a selfish point of view, I am happier to see the bigger players acquire the smaller ones.

The reason, small players never make it to small markets like Oman, at least when they are acquired they are carried into our market by the big players.
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0 #5 T Fathalla 2010-09-30 21:38
Acquisitions are good for us CIOs, they make our life simpler, fewer competitors is not necessarily a bad thing.
The question is whether the acquiring company manages to retain the talent and innovation within the acquired company so that its products continue to grow and develop.
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0 #4 Tareq A 2010-09-23 03:20
Acquisitions will never stop, I am sure you know from your MBA that they are a sign of market maturity.
On the other hand new start ups, with new innovative ideas will always challenge the established leaders.
I am comfortable working with fewer broader vendors but will occasionally, pick a smaller start up if they have truly innovative solutions that work for our business or offer much lower TCO
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0 #3 Daniel S 2010-09-20 10:53
The almost natural process through which innovation turns into businesses will never stop.
No matter how many acquisitions take place, there will always be new companies with new innovative ideas that will challenge the established players. And that is what I like about the IT industry.
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0 #2 J Khan 2010-09-12 01:53
I am truly worries about the fact that we have fewer and fewer vendors left. This wave of acquisitions will ultimately take away our negotiation power and with time may lead to poor vendor services and support.
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0 #1 M Mahmoud 2010-09-11 22:04
Thanks, very good article. Where do you classify the SAP Sybase acquisition. So far I have not understood the real motive behind it.
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