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!