there is purpose to be anxious, or at the least cautious. With software trade consolidation barreling along, some distance outpacing every other U.S. industry, CIOs should plan cautiously and suppose fast. Will an acquiring company stop innovating the technology you've standardized on, content material to feed on a gentle eating regimen of your protection expenses? Will a clammy-palmed salesman fronting a application colossal substitute your straight line to a smaller vendor's CEO? Or will the acquisition deliver wonderful alternate, with a vendor's new mum or dad investing extra in analysis and development and providing you with entry to a larger, extra knowledgeable help crew?
application consolidation isn't the voracious monster some individuals perceive it to be. proper, it be pushed through big companies desperate for growth. however technology managers needn't concern that consolidation will devour away at competition or innovation within the application industry: There are still lots of new ideas and novel procedures seeping in.
THE big graphic
When it comes to acquisitions, software dominates all technology sectors, accounting for forty% of the $298 billion in tech M&A offers completed ultimate 12 months and half of the $306 billion in offers in 2005, according to Thomson economic. The runner-up: information superhighway agencies, which accounted for just 18% of remaining 12 months's tech M&As.
while software at all times has been an acquisitive business, the offers are becoming larger and more complex. ultimate yr, 1,726 application groups have been bought, the optimum quantity when you consider that 2000, based on funding enterprise software equity community. however extra amazing was the dimension of some of those deals: Hewlett-Packard's $4.5 billion acquisition of Mercury Interactive, EMC's $2.1 billion buy of RSA protection, and IBM's acquisitions of FileNet and web protection methods, both of which handed $1 billion.
These deals came on the heels of Oracle's massive-bucks, excessive-profile acquisitions of PeopleSoft, Siebel, and Retek--as well as 23 other agencies--over the last two years. IBM isn't some distance at the back of, with 22 notches on its belt over the same duration. Microsoft has bought more than 25 corporations in that time, although most of them have been tiny startups obtained below the radar.
This year, megadeal watchers are practising a watch on Cognos and enterprise Objects, each with annual earnings within the $1 billion latitude, as knowledge acquisitions. enterprise intelligence is sizzling, and the largest carriers want in--therefore Microsoft's acquisition of ProClarity closing April. NCR's contemporary resolution to spin off billion-dollar-plus data warehousing specialist Teradata is viewed through some as making Teradata a greater fascinating acquisition target to large tech corporations and even a private fairness company. Siemens closing week obtained UGS, a maker of product existence-cycle administration application, for $3.5 billion in money from three private equity firms.
during the past four years, 430 publicly traded utility businesses, most of which had grown via acquisitions themselves, had been swallowed up, says Ken Bender, managing director at utility equity group. also, extra deepest investors have become into the fray. Witness Hellman & Friedman's recent $1.3 billion acquisition of Intergraph. "private equity corporations and greater software corporations are awash in cash," says Bender.
earnings-hungry companies are eyeing the utility-as-a-provider model, too, which is getting hundreds pastime from each the mission capital and the consumer communities. A buyout of Salesforce.com, one of the vital successful SaaS organizations, would supply a huge IT supplier a splashy entrée. IDC anticipated final month that Salesforce should be received this 12 months.LET'S MAKE A DEAL
Why the entire big deals? Theories customarily core on business maturity, vendors seeking new growth and market alternatives, or a mix of the two. Some view consolidation because the natural progression of an ageing trade, continually dredging up a assessment to the international auto trade. however accept as true with that both application suppliers and patrons have more money to spend than in years previous. IT budgets have multiplied continuously when you consider that bottoming out 5 or 6 years ago, and it be universally forecast that spending on software will proceed to upward push this year, as long as whatever thing surprising does not derail the financial system. meanwhile, software groups, that have been under Wall street force to center of attention on profitability a couple of years ago, have shifted back to earnings-increase concepts to trap extra of those rising IT budgets. so they're purchasing businesses with technologies that both complement their own or pressure their groups into new areas.
Gary Scholten, CIO at $9 billion-a-yr principal economic community, says he has highlighted application industry consolidation as a "chance subject and a chance" with the business's board. Scholten learned the hard means. a while back, some of the financial capabilities company's software suppliers changed into obtained by an IT infrastructure supplier that wanted to take the software in a totally distinctive course, one which didn't mesh with principal financial's IT infrastructure. So fundamental needed to dump the application and transition to some thing else.
having said that, acquisition by way of a larger company can put a struggling utility company on extra strong fiscal footing and permit it to scale its structure, Scholten says. And consolidation can basically boost a customer's impact with an alpha supplier. as an instance, essential financial's impact with Oracle has accelerated as Oracle has obtained businesses main does enterprise with. "For every negotiation they have with them, that performs a part," Scholten says. Premier consumer repute can mean more desirable quantity licensing deals, improved access to supplier executives, and inclusion on customer advisory boards to affect the supplier's expertise street map and strategic direction.
the less, THE improved
despite rising budgets, the dictate to run a lean IT corporation hasn't modified. Working with fewer carriers ability spending less money managing relationships. As a big Siebel account and a big Oracle client, Ingersoll Rand's Libenson says he had huge negotiations occurring with both corporations. Now he deals with only one. "the less groups I must take care of, the more straightforward my job is," Libenson says. And he applauds Oracle's acquisition of Oblix, which Ingersoll Rand become the use of for identity administration. "It really legitimized the technology and helped extremely from an integration perspective," he says.
nonetheless, when it involves software relocating from one proprietor to one more, integration is an immense problem, along with upgrades and licensing. Oracle co-president Charles Phillips referred to at Oracle OpenWorld in October that there may be "no pressured march" migrations from one software platform to an extra, even as the vendor continues its personal march toward the integrated functions framework referred to as Fusion, the first part of which is due next yr. Oracle will provide upgrades quickly for its Oracle E-business suite and the JD Edwards, PeopleSoft, and Siebel product strains. The JD Edwards improve will be the primary in 10 years, the enterprise says. In December, Oracle announced an umbrella utility licensing scheme for all its purposes, as a way to eliminate the complexity of sifting during the numerous schemes of PeopleSoft, Siebel, and others.
Ingersoll Rand's Libenson has had some journey integrating Oracle's and Siebel's apps, and he'd want to see Oracle make faster development. "but being simple, integrating two monolithic structures is an enormous amount of labor," he says.
Oracle's acquisition strategy is dropping it some deals. activity Chalet, a $350 million-a-yr retailer, selected SAP's retail providing over Oracle's on account of the lack of integration between Oracle financial apps and the retail apps of Retek (got by way of Oracle in 2005), says game Chalet CFO Howard Kaminsky.
Musical instrument maker Yamaha uses Oracle for ERP, however bypassed the company's CRM application for Salesforce's on-demand product, using Tibco application to join its Salesforce apps with its ERP device. The main cause it selected Salesforce became as a result of utility as a provider provided sooner implementation and decreased complexity, says David Bergstrom, Yamaha's corporate planning supervisor. he is having a hard time understanding how Oracle's acquisition approach will benefit his business. "It seems like it be simply gotten greater complex for them," he says, on the grounds that the "menu of issues" Oracle presents up. "it be not as basic, clean, and clear as with a Salesforce answer."
Gartner analyst Alexa Bona says she has heard a good volume of grumbling from Oracle purchasers about the protection Oracle gives after it acquires a software seller. As assist and other personnel from those acquired businesses get laid off or circulation on, "some shoppers believe one of the most skills units are missing, yet support costs are better," Bona says.
now not so, argues Oracle senior VP Sonny Singh. Oracle surveys its shoppers periodically on their experiences with help and communications, and their figuring out of Oracle's vision, Singh says. in the last 12 months, Oracle's customer satisfaction expense, as measured by using its world shoppers program surveys, is up 16%, although he won't reveal the bottom number for that enhance aside from to claim it became high.
not exceptionally, Oracle's opponents are trying to poke holes in its acquisition strategy. Marc Benioff, the fancy founder and CEO of Salesforce, calls Oracle "the GE of software," because it runs those utility company contraptions as separate income-and-loss centers, a lot like the conglomerate GE runs its aircraft engine, plastics, and broadcasting gadgets. "it might be a breakthrough in utility administration if they could make it work," he says.
Steve Mills, senior VP and group government of IBM software, cracks, "Fusion is set confusion." IBM may still speak, having virtually pioneered the massive-bang software acquisition--and interplatform integration headaches--with its $3.5 billion buyout of Lotus development in 1995.
In recent years, IBM has taken a extra concentrated, smaller-scale strategy to acquisitions. sure, it's largest was a doozy: the $2.1 billion acquisition of construction toolmaker Rational. however that changed into back in 2001. Mills says IBM is never keeping off big acquisitions--it paid $1.6 billion for FileNet in a deal that closed in August--however's extra focused on the middleware market, together with utility involving IT infrastructure and application integration. "It offers us the most fulfilling leverage," he says. "If they moved outdoor these linked areas, they might have a tons tougher time getting return." IBM's fourth-quarter profits consequences confirmed an 11% enhance in earnings to $three.fifty four billion; the business attributed a piece of that increase to its 2006 application acquisitions.
Mills insists that IBM has taken outstanding care in retaining its client relationships all over acquisitions. "We invest extra in know-how than earlier than the acquisition," he says. "We invest extra in income and help than the business did previous to the acquisition." The antithesis, he says, is the "Charles Wang mannequin," referring to the founder and former chairman of laptop buddies, which tore through the application industry in the Nineteen Nineties with acquisition after acquisition, engendering animosity amongst its received customer bases by removing development, milking maintenance expenses, and forcing clients towards software they didn't want. "I don't think shoppers are distressed that acquisitions are occurring; they are distressed when the buying company indicates no degree of dedication and investment in the expertise," Mills says.
but IBM cannot please the entire individuals all the time, either. David Hauser, CTO of telecom company GotVMail and a former Tivoli client, says Tivoli modified dramatically after it turned into bought with the aid of IBM 10 years ago. in barely the remaining four years, 15 IBM acquisitions were absorbed via the Tivoli manufacturer. "Tivoli became too plenty cost, too lots trouble, and in reality went far from its core company of monitoring," Hauser says. As Tivoli grew, Hauser had issue discovering suggestions about the common know-how. He at last gave up and moved to an open supply network monitoring tool from GroundWork known as Nagios.
the gang OF 4
main economic's Scholten says he'll keep away from a hot startup's promising new know-how if that company looks to be a takeover candidate. ultimately, it's going to hurt innovation in the software business if influential purchasers like most important monetary turn away, he admits.however no longer all know-how users feel that means. "I do not believe americans are so concentrated on operational efficiencies that they're incapable of seeing when something unique, and maybe greater, is happening," says longtime industry watcher Amy Wohl. What's greater, mission capital spending on tech startups is on the upward push.
actually, consolidation potential fewer choices. if in case you have two leading ERP alternatives, in place of the five or six that existed five years in the past, you have got less negotiating leverage, Scholten says.
there isn't a getting across the indisputable fact that the greatest utility organizations--IBM, Microsoft, Oracle, and SAP--have become bigger. Some insist that a weak IPO market, acquisitive IT vendors, and buyers' want to work with fewer companies will make it unimaginable for a large fifth or sixth rival to emerge. "you are going to in no way see one more billion-dollar business utility enterprise," says Glover Lawrence, managing director at McNamee Lawrence & Co., an funding company specializing in tech M&As. "Google may additionally at last compete with Microsoft, however not as an enterprise utility company."
but however VMware, got through EMC in 2004 for $625 million, operates as an independent subsidiary (separate income, marketing, and R&D from the mother ship), it is rarely an independent enterprise. notwithstanding it were, "VMware is a true anomaly," CEO Diane Greene says. For a utility business of its dimension to develop as quickly as it is, it have to add a new layer to the software business's "stack." In VMware's case, it's virtualization. For Salesforce, it's application as a service. For Google, it be selling advertisements. "these new layers don't come around very regularly," Greene says. "There are not that many in reality enormous new things."
possibly. Or possibly they simply haven't seen them yet. "there may be no longer a country in the world this is not making an attempt to foster some kind of indigenous software industry," says IBM's Mills. Salesforce's Benioff says he is searching for the next killer app, nonetheless it may not come from his business: He thinks it will come from a developer in Shanghai, Bangalore, japanese Europe, or another far off vicinity, delivered over Salesforce's AppExchange platform. "there is no manner that developer goes to get to a Merrill Lynch or different large client with out us," Benioff says.
SAP is hoping for whatever like that with its provider-oriented structure approach. With its SOA technology, known as NetWeaver, SAP does not deserve to acquire. in its place, it's partnering with tons of of smaller providers whose application capabilities snap into SAP's ERP suite, mySAP, explains bill McDermott, CEO of SAP Americas. With massive software acquisitions, "you have to rewrite the code base of the individual companies, integrate the tradition and people from very distinct corporations, after which get the consumer to obtain disparate items," McDermott says. Oracle's received apps are not yet provider-enabled. "So theirs is sort of a lung-and-coronary heart transplant," he says, "the place ours is plug and play."
application groups practically have two growth alternate options: innovate or acquire. SAP is hoping its increase will come from the former, by means of NetWeaver and an upcoming software-as-a-service providing that, it claims, may be distinct than what's currently available.
there's a great deal driving on that innovation. SAP's financial results final week had been disappointing: utility income for its fourth quarter was up 7% to 1.three billion euros and 10% to three.1 billion euros for the yr, lower than what SAP had anticipated. on the identical time, SAP referred to it's preparing a application service for midsize businesses that they could examine on the internet earlier than committing, will cost them significantly less than a package software suite, and, not like Salesforce's, will allow them to store records on native programs. or not it's unclear when the providing might be available; SAP says it is going to provide details within just a few months.
Microsoft, however, is each buying and innovating. possibly greater than any utility enterprise, it be relocating aggressively beyond its core application business, into unified communications, safety, and mobility. and then there are the purchaser products: Zune, the iPod challenger, and the wildly standard Xbox 360, itself whatever thing of a technology platform and pushed by way of the innovation of outdoor builders. Salesforce's Benioff describes Microsoft--with obtrusive envy--as one of the crucial few a hit "multicategory, multiproduct" tech groups.Microsoft is never averse to throwing round its appreciable weight. In November it announced new client access licenses for several products, including alternate and SharePoint; they require extra licenses for certain facets--antivirus insurance plan, as an instance. in order to pressure up fees for some consumers, but now not all: Many change customers already have antivirus utility in location, in order that they might not pay Microsoft extra for that characteristic.
Microsoft during the past few years also has gotten extra aggressive about persuading clients to buy broader license agreements, with the aid of charging greater expenses for selective agreements that cover particular items. IBM executives called a meeting with several Forrester research analysts, complaining that via its license practices, Microsoft is attempting to devour up so a lot of IT budgets there may not be enough left for different providers, says Forrester analyst Julie Giera. Forrester offers teaching classes for corporations coming into negotiations for Vista, office 12, and different new Microsoft apps, so they emerge as with--and pay for--best what they want.
"all of the companies would love to have you do an all-you-can-consume buffet," says Scott Rosenberg, CEO of Miro Consulting, which helps IT patrons negotiate utility licenses. "it's sort of like those holiday programs that say, 'don't worry, chill out, you won't have to worry about scrambling on your bank card, simply belly up to the bar.' however until you drink heavily or devour like a soccer participant, you are going to overpay."
certainly, during this era of bigger is improved, it be sensible to preserve a watch on now not most effective what you are drinking, however also what's getting consumed, and via whom. a number of weeks of secret negotiations between two application agencies might leave a client with an impressively greater and stronger supplier, or a bellyache of uncertainty and obstacles.
Illustration by Mick Coulas
continue to the sidebars:the way to provide yourself with protection In A utility Acquisitionand You won't have To Be Locked In