Soft Stock Markets Could Spark Vendor Consolidation Wave

A new wave of vendor consolidation could shore up struggling companies, foster innovation and help VARs drive new technology to customers even as the rest of the economy suffers.

Oracle chief executive Larry Ellison made waves last week when he said the slumping economy created a “buyer’s market” that the software giant could leverage to acquire other software companies.

While Microsoft says it won’t revisit acquiring Yahoo and IBM is sticking to its usual slow-and-steady acquisition plan, analysts say a wave of mergers and acquisitions could have a number of positive benefits, help shore up a flagging tech sector, and infuse confidence in solution providers and their customers who’ve been wary of making purchases in an iffy market.

For one, smaller, innovative vendors who may not have the resources to survive a deep recession could find a reprieve in an acquisition by a larger, solvent company. With venture capital drying up, many otherwise successful firms may find being acquired brings a new lease on life for their innovative technology. There’s one caveat: How will it affect the end user?

“If larger players like Hewlett-Packard, IBM, Microsoft and Oracle decide to buy up smaller, innovative companies to help them fill in their portfolios so they can better service their customers, that’s a good thing,” says Tiffani Bova, a channel research vice president at Gartner.  She adds that a reduced number of vendors will further benefit the channel, since it will ease vendor management hassles.

If a large vendor buys a complementary vendor or rival and does a good job of integrating both companies’ channels, it may actually improve the partners’ offerings around specialized solutions they are investing in.

“Consolidation is not necessarily a bad thing—if it is done with the goal of servicing the customer better while also making more revenue for shareholders,” Bova says.

 Of course, if a company’s acquired, there’s always a chance that acquisition could dampen its ability to innovate and fundamentally alter its direction, says Michael Speyer, a consultant at Forrester Research.

If a company were acquired by a large player such as Oracle or Microsoft, it would have to take marching orders from its new parent and wouldn’t have as much control over its competitive direction, Speyer says.

There are numerous examples of solution providers adopting a smaller vendor’s product lines and thriving because they get a lot of attention and support. That tends to change in a flash when they’re absorbed into a larger program through acquisition; suddenly, they find themselves as small fish swimming in the big ocean among swarms of sharks.

Solution providers could benefit if their small vendor partner is subsumed by a larger company that helps clean up redundant offerings and invests in the channel. In such situations, the acquiring vendor would simplify the marketplace, and reduce technology complexity and channel conflict.

 “Consolidation might make an impact on the number of different solutions [VARs] bring to their customers. A wave of consolidation would lessen the chance that solution providers would have competitive products and solutions in their line cards,” Speyer says.