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.

"Acquisitions that we have
been looking at for some time may now be more attractive," including companies
such as Sun Microsystems, Research In Motion, Yahoo and others who’ve hoarded
cash but are otherwise struggling, Ellison said at Oracle’s annual
stockholders’ meeting held Oct. 10.

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.