Ups and Downs of AcquisitionsBy Lawrence Walsh | Print
Re-Imagining Linux Platforms to Meet the Needs of Cloud Service Providers
In the past month, technology vendors have shelled out more than $10 billion in acquisitions. M&A activity is heating up, and that has positive and negative implications for channel partners.
While it may not feel like it to everyone, the economy is definitely rebounding. Tech vendors, solution providers and managed services are all reporting robust increases in customer interest and sales activities. And, as the latest round of corporate earnings has shown, the tech industry is once again generating healthy profits.
Beyond the revenue and profits, the rebounding economy is providing confidence for making calculated investments. The tech vendors are once again flexing their muscles in mergers and acquisitions, and the implications for the channel are tremendous.
Just in the past few weeks, we’ve seen SAP shell out $5.8 billion for Sybase, Hewlett-Packard pay $1.2 billion for Palm, Salesforce.com pay $142 million for crowd-sourcing specialist Jigsaw, and IBM buy Cast Iron Systems for an undisclosed sum. There are rumors floating around Wall Street that Symantec is on the verge of buying VeriSign’s SSL business unit for $1.3 billion. And there have been a number of smaller deals, too. In the past month, tech companies have paid out nearly $10 billion in acquisitions.
M&A activity has been going on through the recession, as big vendors went shopping for companies with deeply depressed valuations. The granddaddy of those deals was Oracle buying Sun Microsystems for $7.5 billion. More recently, Symantec bought two encryption companies – PGP Corp. and GuardianEdge – for $370 million. And Cisco’s acquisition machine successfully nabbed video specialist Tandberg for $3.4 billion.
Money doesn’t seem to be a problem. The top 10 IT vendors are sitting on more than $150 billion in cash reserves. Cisco alone has more than $40 billion in the bank. Microsoft reportedly has more than $37 billion in the vault. And it’s hard to pin down how much cash-machine Apple has; some reports put their reserves at $23 billion but others say it’s as much as $42 billion.
The expectation is that tech vendors will keep opening their wallets for three reasons. First, they need to extend their technology and product capabilities. Second, they need to capture revenue and profits – and it’s easier to buy that than build it organically. And third, they need to stave off pressure from investors to release cash reserves in the form of dividends.
M&A among vendors is both a blessing and a curse. As vendors gobble up smaller companies or merge to form new companies, they add new products and capabilities to their portfolios. This gives them and their partners another reason to reach out to their customers and prospects, potentially resulting in more sales and revenue. This has been the theory behind the Cisco and Hewlett-Packard M&A strategies, as each wants partners to sell more equipment and services that are attached to their core technology offerings.
Acquisitions for technologies and capabilities take a bit longer to play out, but ultimately produce high value by augmenting and enhancing the existing products in a vendor’s portfolio. A good example of this is CA Technologies’ recent spending spree on cloud computing companies. It’s spent probably a half-billion dollars on Nimsoft, 3Tera and Oblicore, three companies that form the backbone of its cloud computing and virtualization management strategy unveiled this week at CA World in Las Vegas. Arguably, CA could have built these tools through its existing products, but acquiring these resources expedited the execution of its cloud strategy. When vendors acquire technology for integrating with existing products, it gives partners the opportunity to sell upgrade and new services to their customers.
The downside to M&As is disruptions to channels and integration with vendor programs that don’t match a solution provider’s business model. Integrating companies and channel programs take time; it took nearly 18 months for McAfee to integrate Secure Computing partners into its primary channel. It took Symantec more than two years to fully converge Veritas into a single channel. And some vendors simply choose to let companies they acquire operate independently because they don’t want to disrupt channels or sales.
The heating up of M&A activity means that many smaller, innovative vendors are fast becoming targets for acquisitions by larger vendors. This is problematic for solution providers who place their trust and bets on smaller vendors that provide them with close tech and sales support only. When those small companies are bought by large vendors, solution providers suddenly find themselves swimming in the ocean rather than the small pond to which they became accustom. This was the case with VARs that signed up with startup PureWire, a cloud-based Web filtering company that sold to Barracuda less than a year after its founding; several solution providers said they were perfectly content being a PureWire partners but weren’t happy about being thrown into the Barracuda mix.
Another problem for solution providers is vendors don’t always commit the necessary channel investments to make M&As work. Many analysts saw the HP acquisition of Palm as a defensive move; it needed a platform to compete against Apple, HTC and Google in the smartphone and mobility market, and it needed to keep the Palm assets out of the hands of rival Dell. The potential for HP to enter the smartphone market and build a competitive business through its existing channels is tremendous. But at least one analyst is dubious about HP’s resolve, given its history of cutting costs rather than investing in business and channel development.
Set aside the reality that most M&As never produce the promised returns, vendor growth through acquisitions produce many benefits for them and their partners. But as M&A activity increases, solution providers need to keep a mindful eye on how an acquisition will affect their business and what investments they will have to make to capitalize on the new opportunities. When partnering with smaller vendors, it’s also a good idea to keep tabs on an alternate supplier in case you don’t like their new partner company. Above all, solution providers need to understand that vendors aren’t paying for them in an M&A deal, but they are definitely a part of the overall equation.
LAWRENCE M. WALSH is a vice president and market expert specializing in security and channels at Ziff Davis Enterprise. His blog, Secure Channel, follows security technologies, vendors and trends in the channel. You can reach him at email@example.com; and follow him on Facebook and Twitter.