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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, 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

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; and follow him on Facebook and Twitter.