- Is desktop virtualization's promise overstated?
- Can Ballmer pilot Microsoft through a changed tech course?
- Novell's open source collaboration play
- Microsoft's mobile mistake
- Salesforce.com for sale?
- Microsoft Yahoo Deal Springs a Leak
- Has open source sold out?
- Not too late to make small profit on BEA sale
- Microsoft tries an end run around Google
- Takeover fever still rages
March 06, 2008
Is desktop virtualization's promise overstated?
Citrix Systems, EMC's VMware unit, Microsoft, Symantec, and other big dogs have shelled out more than $2 billion on acquisitions related todesktop virtualization in less than two years. But now that they've got the technology, it's not at all clear that customers will buy it.
Indeed, analysts and surveys of big IT buyers point to different conclusions about corporate appetite for the technology.
"Desktop computing, as it is practiced in enterprises today, is broken. Windows desktops are not secure. They are plagued by email-borne viruses and other malware. For this and other reasons, they are too costly to manage," says Rachel Chalmers of the research firm 451 Group.
Chalmers cites a survey of 376 IT buyers by ChangeWave Research showing that 60 percent already have budgets earmarked for virtual desktop technologies.
Desktop virtualization moves the actual desktop to the datacenter and provisions a copy to the user as needed. The promise for IT is that users can no longer mess up the desktop image that IT has decided is stable and authorized. Desktop virtualization also promises to let IT separate the various OS and application layers, thus making it easier to protect the core OS from other components and to rebuild any compromise pieces on the fly.
Is desktop virtualization's promise overstated?
Wait a minute. I certainly won't argue that the Windows desktop isn't broken, but is it really accurate to imply that desktop (remember, we're not talking about servers here) virtualization can fix all those ills? I'm not so sure. And neither are buyers.
Just last month, Intel released a survey that paints a somewhat less bullish picture than ChangeWave's. According to that survey, 39 percent of the enterprises have a current deployment of desktop virtualization, but the number of companies doing "broad deployments" of server virtualization and related technologies such as application streaming, was in single digits.
And then there's a recent survey by our sister publication CIO, which found that 25 percent of enterprises were using desktop virtualization and another 13 percent planned to do so within a year. But 21 percent said it would be one to three years before they deployed, and 37 percent said they were not interested.
Unclear purpose, emerging alternatives weaken the case
"Desktop virtualization's greatest obstacle is the clarity of the business case," Burton Group analyst Chris Wolf told CIO. "Until the technology matures, you're not going to see the 12- to 18-month ROI that's common with server virtualization today. That's why I've seen enterprises willing to dip their toe in the water but not quite ready to jump in feet first."
Adding to the uncertainty are the multiple flavors of desktop virtualization, which Chalmers categorizes this way: client-hosted, device-hosted, server-hosted, and cloud-hosted. "We also recognize four closely related technologies: OS streaming, application streaming, OS-hosted virtualization, and terminal services," she says.
Chalmers adds that other mainstream computing companies, including CA, Hewlett-Packard, and IBM, whose core business includes managing traditionally configured and provisioned Windows desktops, are responding to the "threat" of desktop virtualization by building, as opposed to buying, their own solutions.
It's worth remembering that virtualization of all types isn't really a new idea. "Despite the appearance of rising to stardom almost overnight, virtualization is in fact a technology that dates back to the earliest days of computing and is really an ongoing phenomenon with an evolving role in corporate IT infrastructure," says Forrester analyst Galen Schreck.
Old or new, there's plenty of smoke here. But how much fire, and by that I mean profit for vendors and value for buyers, is a lot less clear.
I welcome your comments, tips, and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on March 6, 2008 03:00 AM
February 28, 2008
Can Ballmer pilot Microsoft through a changed tech course?
Under pressure from Wall Street, European regulators, users, and a host of nimble competitors, Microsoft's brain trust is trying hard to steer a new course. It won't be easy.
Microsoft faces pressure, threats from all sides
A decade after the United States dropped any serious inquiry into Microsoft's business practices, the E.U. continues to fine Microsoft to make it change its cowboy competitive ways. Just yesterday, it fined Microsoft another $1.3 billion for anticompetitive practices, for a total of $2.5 billion to date.
Customers have responded to Microsoft's long-delayed Vista desktop operating system with a resounding "no thanks," and the company's effort to get its own office-productivity file format approved as a standard by the International Standards Organization has been rejected.
And despite successes with SharePoint 2007 and good reviews for the new Windows Server 2008, Microsoft has been increasingly embattled by open source alternatives such as Linux, and it faces a growing threat from Google in the on-demand delivery business.
The bid to take over Yahoo, a move to reinvent Microsoft's faltering Web advertising business, is running into opposition from Wall Street, which thinks that merging two troubled companies makes as much sense as transplanting a diseased heart into an ailing patient.
And while these wounds were still smarting, Adobe shot another arrow Microsoft's way, announcing its AIR development platform, one more step away from the Microsoft desktop and toward computing in the cloud.
These forces have led Microsoft's CEO Steve Ballmer to claim it's now behaving differently, though there is some skepticism about how real that commitment is.
Can Ballmer steer Microsoft out of the roadblocks?
The highly competitive Ballmer, you might say, is the man who cried "nice." And like the boy who cried wolf, no one believed him. The software giant's attempt to make nice with much of the developer community by opening up its APIs for key products was greeted with a jaundiced eye by regulators at the powerful European Commission.
However sincere Microsoft's stated change of heart may be, it is becoming clearer and clearer that Microsoft -- which knows it has to change -- is still struggling to find a fresher path.
What's a poor CEO to do?
Now that Bill Gates has effectively left the building, Ballmer is free to transform Microsoft, a job made all the tougher by the enormous reservoir of mistrust the company has engendered over the years.
Case in point: the open APIs. Microsoft will give its competitors free access to the application programming interfaces and protocols it uses to ensure interoperability between its own products, a very significant change in business practices.
"The change of strategy indicates Microsoft now believes an open approach is a better way of fostering a development ecosystem -- and that it has accepted that, in a world of Web services and software as a service (not to mention antitrust laws), it can no longer have things all its own way," commented Matt Aslett, an analyst with the 451 Group.
The move was obviously a response to pressure from the European Commission, which in the absence of an aggressive U.S. Department of Justice, has become the software giant's most potent critic.
But the Europeans weren't overly impressed with the gesture, saying, "The Commission notes that today's announcement follows at least four similar statements by Microsoft in the past on the importance of interoperability." Less than a week later, the EC fined Microsoft that additional $1.3 billion.
It's worth noting, though, that Microsoft pledged not to sue open source developers for development or noncommercial distribution of implementations of the server and communications protocols -- a huge move for any Linux or open source developers who may have feared Microsoft's big legal stick.
And for a company that literally wouldn't use the term "open source" on its Web site until fairly recently, that is quite a change.
Sharing the road is just the beginning
Playing nice, even if Microsoft convinces regulators that it means it, with other technologies along its route is just a beginning.
Microsoft remains tied to the desktop, the source of the vast majority of its revenue and profits. It's not that Microsoft doesn't know this. You can go as far back as the Gates "we missed the Internet" memo for evidence, but the company still can't make a real break with the past.
Sure, Microsoft makes huge amounts of money, but from Wall Street's perspective, it's like a utility or phone company stock your parents might have owned in the 1960s: safe, but really, really boring. That's why the share price has been relatively flat for years.
Ballmer wants to change that, and the obvious place to start is with the company's ailing Web business. Give the man his due. By willing to pony up more than $40 billion for Yahoo, he's admitted that Microsoft on its own will never be able to compete with Google. But many on Wall Street believe (just check the stock charts) that Yahoo is too sick to play doctor to Microsoft's patient.
It's not at all clear how the Yahoo game will end or what the combined companies would look like. But nearly every month produces evidence that (and I hate this phrase) the paradigm is shifting.
Just a few years ago, the idea of building something like Adobe's new AIR platform would have made no sense at all. But now that high bandwidth is common (if not ubiquitous) and advances in hardware and programming languages make for powerful yet tiny applications running on tiny handhelds, Scott McNealy's old boast that "the network is the computer" is closer than ever.
Opening the APIs and opening up the wallet -- if not for Yahoo, then for another major player -- are smart moves. But the road to change is full of potholes -- and other drivers and the highway patrol. Hang on tight.
I welcome your comments, tips, and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on February 28, 2008 03:00 AM
February 15, 2008
Novell's open source collaboration play
Now that Novell has stopped bleeding and has put away some cash (nearly $1.9 billion), the company is looking to acquisitions as a growth strategy. Earlier this week it purchased SiteScape, an open source team collaboration outfit. Novell did not divulge the price, but given that analysts at The 451 Group estimate that SiteScape was on a run rate of about $10 million, it couldn’t have been very much.
Novell has had an OEM agreement since last year with SiteScape for its open source ICEcore team collaboration and Web conferencing software. The Novell Teaming + Conferencing product, which is based on ICEcore, is part of Novell's GroupWise line.
The Teaming product has only been shipping since October so there hasn't been a ton of time to work up much of a customer base. But the company apparently found enough interest from its GroupWise customers, to which it offered some pre-release purchase discounts, to merit an outright acquisition of the company, the analysts said in a published note.
Microsoft and IBM are Novell’s much larger competitors in the collaboration market. Zimbra offers collaboration products based on Linux, though as the analysts note, it faces an uncertain future if parent Yahoo combines with Microsoft.
Here’s what Novell’s CEO Ron Hovsepian said about the deal. "The acquisition of SiteScape fits squarely into the corporate strategy we have laid out," he said in a press release. "It extends our leadership in promoting open source in the enterprise market and is a key technology addition in an area where we see great growth potential. Most importantly, it allows us to move aggressively to give customers a new, open option for collaboration, helping them escape vendor lock-in and offering easy integration across platforms, whether Linux or Windows."
Well, I’ve been bearish on Novell for some time. But Hovsepian seems to be bringing some stability and fresh energy to the company. Could it be an acquisition target? Certainly. At $6.63 a share, it has a market value of $2.33 billion but the big horde of cash on hand makes the real cost considerably cheaper. By the way, a quick way to estimate the value of a company is to take the market cap (number of shares x share price) plus debt minus cash and equivalents. That’s called the enterprise value.
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com
Posted by Bill Snyder on February 15, 2008 01:35 PM
February 14, 2008
Buying Danger won't make Microsoft competitive with Apple and RIM in the phone zone
By the standards of its $45 billion offer for Yahoo, Microsoft could have found the $500 million it is rumored to have paid Danger in Steve Ballmer's couch.
With no disrespect to the smart folks at the innovative Danger, a decade-old developer of a Java-based "hiptop" operating environment used in the T-Mobile Sidekick and other devices, Microsoft's return on the investment will probably be commensurate with what it spent: not much.
By that, I mean Danger isn't likely to help Microsoft gain much traction in the mobile phone market against the likes of Apple and Research in Motion. "What they are doing, what the advantage is, is just not obvious," Ken Dulaney, vice president of mobile computing at Gartner, told me.
In the enterprise software world, big players such as Oracle acquire companies that have a large installed base and a fast-flowing stream of revenue. In this world, intellectual property is everything, and to a large extent, that means the developers and other brainy folks. Given that everyone expected Danger to go public, those employees had lots of reason to stick around. Now they don't.
Dulaney wonders how many key employees will stay with the new owner. He notes the Danger culture is one of opposition to Microsoft. Some of its developers have roots at the old General Magic, a mid-1990s Apple spin-off that lived to fight the Redmond giant. At this point, why not join Danger co-founder Andy Rubin at Google?
Whether or not the employees jump ship -- or especially if they do -- it's not clear what Microsoft is actually buying from Danger.
What would Microsoft do with the Danger OS?
Maybe Microsoft wants to use the Danger OS as part of the next iteration of the not-so-great Windows Mobile. Given that the Danger OS is Java-based, it doesn't seem likely that Microsoft would take the huge leap required to make it a foundation for a new Windows Mobile.
Perhaps Microsoft would want to move some of the good features of the OS (such as parts of the UI) to the next version of Windows Mobile, which Dulaney thinks is due in 2009. Given the wide differences in the environments, it would not happen quickly or easily. "It might have been cheaper just to hire the developers," he said.
Microsoft is "not going to throw away" Danger's UI expertise, Microsoft Mobile group product manager John Starkweather said during a press conference. But he wasn't more specific than that.
Does Microsoft see something we don't?
His boss Robbie Bach made some references to Danger as a "services" company. "When you actually dig into what they [Danger] do, the vast majority is actually about the social networking and communications services they provide on top of those devices. That's where we'll expand what they do," Bach said.
I have no idea what Bach means. I thought Danger was in the business of developing software for mobile phones and the like. That's what it's done to date, after all.
Does Microsoft want to expand into phone hardware?
Or maybe Microsoft wants to sell the hardware in the same way it sells mice and keyboards. Bad idea, and Microsoft probably knows better than to compete with its Windows Mobile device partners.
I have trouble seeing the advantage here -- and so does Dulaney, who has been around the mobile world a long time.
Microsoft's incentive: Windows Mobile isn't doing well
Despite the lack of clarity on what Microsoft is hoping to get from Danger, it's obvious why Microsoft is looking for help with its mobile business. After six iterations, Windows Mobile is not at all a success.
Research firm Canalys reported last week that Apple took a 28 percent share of the U.S. converged-device market (smartphones and connected PDAs) in the last quarter of 2007. RIM was in first place with a 41 percent share. Adding up the share of all Windows Mobile device vendors gives Microsoft 21 percent, with Palm at 9 percent.
At first blush, that 21 percent sales figure sounds decent. But it turns out that those consumers who do buy a Microsoft-based smartphone are returning them in droves, never a good sign. David DeJean, who blogs at our sister site Computerworld.com, saw a press release from Opinion Research Corporation, which said (and I'll quote directly, because as DeJean points out, the wording is interesting),"Smartphones [excluding iPhone and RIM BlackBerry] were the most returned electronic technology products of the holiday season, with slightly more than one-fifth (21 percent) of smartphone buyers returning their purchase to the retailer." Right. We know who that leaves.
There you have it. Microsoft is way behind Apple and RIM, so it makes a not-too-expensive buy of an innovative company. But how do these players fit together? What value does Danger really add to Microsoft, since even retaining the programmers is not certain?
The more I think about it, the more it irks me, both as a commentator and a (very small) Microsoft shareholder. We all know that Microsoft is racing to catch up with a raft of nimbler competitors as the desktop becomes less significant to the computing world. It's probably not a lot of money, but it could be a distraction -- and even chump change should be spent well.
I welcome your comments, tips, and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on February 14, 2008 03:00 AM
February 11, 2008
Interesting rumor making the rounds this morning that Salesforce.com has approached Oracle and offered to sell itself for $75 a share. Wall Street is paying attention; shares of Salesforce.com have been trading as high as $10 a share above Monday’s opening price. If true the offer would be a huge premium over Friday’s closing price of $50.87 a share.
The rumor apparently started with a blog posting by Tom Foremski on his Silicon Valley Watcher Site. Foremski, a former reporter at the Financial Times and a reputable guy, attributes his scoop to a “reliable source.”
No way to know if Foremski’s source is accurate, but even if he or she is, I’d be surprised if Oracle is really interested. In a quick note this morning, Cowen analyst Peter Goldmacher, who has followed both companies closely for some time, says “While we would not be surprised if [Salesforce.com] made such an overture, we would be very surprised if Oracle didn’t laugh them out of the building.”
Goldmacher notes that the deal would start by knocking a full point off Oracle’s margins and would take Oracle way down market (that is, to smaller customers) an opportunity the company has repeatedly said it has no interest in. It’s also worth noting that most Oracle acquisitions have been very bottom-line-oriented. That’s because most of the targets have had large streams of recurring maintenance revenue, which helps margins and earnings. Salesforce.com’s software as a service model is completely different.
To be candid, I was wrong about Oracle and BEA Systems. So maybe I’m misreading this one as well. But for now, I’d remain very skeptical.
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com
Posted by Bill Snyder on February 11, 2008 11:25 AM
February 04, 2008
Microsoft Yahoo Deal Springs a Leak
In the arena of corporate combat, the well-placed leak is a venerable weapon. In the three days since Microsoft announced the blockbuster, $44.6 billion offer for Yahoo, there has been a spate of tasty tidbits leaked to the financial press.
The New York Times and the Wall Street Journal, great places to get attention when you want it, are running stories about Google’s efforts to undermine the deal.
I don’t actually know who’s doing the leaking, but my guess the calls are coming from inside Yahoo or investment bankers close to the action -- as well as Google. Both papers said that Google CEO Eric Schmidt on Friday (hours after the deal was unveiled) called Yahooer-in-chief Jerry Yang offering his “help” in keeping his troubled company out of the clutches of Ballmer & Co. Even more interesting, though, is this, and I’ll quote the Times story directly: http://www.nytimes.com/2008/02/04/technology/04yahoo.html?_r=1&oref=slogin
“People close to Yahoo said that the company received a flurry of inquires over the weekend from potential suitors. Some people inside Yahoo have even speculated about the prospect of breaking up the company. That could mean selling or outsourcing its search-related business to Google and spinning off or selling its operations that produce original content, these people said.”
Google doesn’t want this deal to happen. So anything it can do to muddy the waters with talk of possible anti-trust issues is on the table. Yahoo and its bankers have a vested interest in trying to push the $31 a share offer higher into the stratosphere. Google also has an interest in trying to make the deal even more expensive, just to weaken Microsoft, even if it can’t stop it.
It’s interesting that the co-author of the Times piece is Andrew Ross Sorkin, a terrific financial reporter who covers the world of deal makers and has great sources. It’s not hard to imagine an investment banker whispering in his ear.
I don’t think the deal is going to run afoul of the feds. Google has a huge share of the online advertising market, and would continue to do so if Microsoft and Yahoo combine. Conversely, a Google/Yahoo deal could easily be portrayed as anti-competitive.
That’s not to say that Microsoft’s offer won’t get scrutiny. The software giant has alienated a lot of people in Europe as well as here in the States, and the European Commission has been fairly hostile to Microsoft.
As to breaking up Yahoo, it’s hard to believe that the sum of the parts would be worth more than $44.6 billion. I think that Yahoo would be, if not crazy, ill-advised, not to jump at the offer. The company has problems. As more than one observer has said, "Take the money and run Jerry."
Meanwhile, there's some feeling on Wall Street that the deal may not be great for Microsoft’s shareholders. But that’s another story.
Disclosure: I have a small position in Microsoft.
I welcome your comments, tips and suggestions. Reach me at bill_snyder@inforworld.com
Posted by Bill Snyder on February 4, 2008 12:36 PM
January 24, 2008
As open source goes mainstream, big commercial software companies reap as much revenue as scrappy independents
Has the open source software movement become a victim of its own success? A provocative new study by a longtime software analyst suggests that the giants of the commercial software world are cashing in on the popularity of open source and becoming the dominant force in what was once called the free software movement.
Perhaps the most startling statistic in the report is this: IBM's open source revenue in 2007 was equal to that of Red Hat, the largest and most influential open source company. Not only did IBM equal Red Hat's open source revenue, but the next largest revenue earners were Sun and Oracle, according to the study. What does that mean for the long run?
"The market will see a convergence of closed and open source software such that the terms will eventually become meaningless from a research perspective," says Dennis Byron, senior analyst for Research 2.0, who has followed the IT industry for more than 30 years. And that, says Byron, is just fine with IT buyers. "They just want good software that doesn't break often, but when it does, a substantial company is available to fix it."
The economics of attraction
Indeed, the interest in open source software has been so strong that instead of going public, open source startups are being snapped up by commercial vendors like Oreo cookies at a kindergarten snack break.
And that's not because the IPO market was weak, says Kevin Harvey, a general partner of venture capital firm Benchmark Capital and chairman of MySQL's board. "The large public software companies see even more value [in open source companies] than the public markets," he said during an interview.
Preceding Sun's buyout of MySQL were purchases of Zimbra by Yahoo and of Xensource by Citrix. None of the takeovers was particularly cheap; in fact, there was some feeling on Wall Street that Sun and Citrix overpaid.
The result, of course, means less of an "open" open source market, while the prospect of a big payday with none of the risks of an IPO could well push more open source entrepreneurs into the hands of "the enemy."
Open source by the numbers
The sea change in open source from pure-play provider to traditional vendor is not a symptom of discontent with the software itself. Far from it, as the numbers show.
Worldwide revenue from stand-alone open source software reached $1.8 billion in 2006, according to IDC, and will increase to $5.8 billion in 2011, representing an annual growth rate of 26 percent from 2006 to 2011. That's roughly three times the growth rate of commercial software. (To be fair, the volume of commercial software dollars dwarfs open source dollars by at least an order of magnitude.)
Research 2.0's Byron figures that the open source market probably grew by 40 percent to $2.5 billion in 2007, a not unreasonable figure for the first year of the five-year growth spurt.
According to its own financial reports, Red Hat's open source revenue for the 12 months ending on November 30 was $425 million. That's a big number, but it's no bigger than IBM's open source revenue -- including WebSphere Community Edition, Linux support revenue, and the value of Apache within WebSphere -- which was also $425 million.
In the second full year of converting much of its software to open source, Sun posted $200 million in software revenue, while Oracle's open source revenue reached $100 million, Byron said. That gives the major commercial vendors a market share of nearly 30 percent. That share will likely be higher this year, when Sun's purchase of MySQL, which probably had revenue of about $75 million in 2007, is factored in.
The freewheeling days are numbered
All of this is evidence that the days of the freewheeling open source movement are numbered.
Is this bad news for open source? Not at all. Open source software is more than good enough to stand on its own merits, no matter who owns it. And it's about time that the hardworking visionaries of the open source movement were rewarded with good jobs and high returns on their money and sweat.
I welcome your comments, tips, and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on January 24, 2008 03:00 AM
January 16, 2008
Not too late to make small profit on BEA sale
Yeah, you (and I) missed the big money on Oracle’s takeover of BEA Systems. BUT, if you have some spare cash handy and low trading costs you can make a guaranteed 4% to 5% on the deal if you move fast. That’s because the stock is trading at a small discount to the offer price of $19.375 a share.
No, that’s not a lot of money unless you have a fairly good chunk of cash to put in, but given the state of the market it’s like buying a CD only better because you’ll only pay taxes on the gain. The deal will close later this year and Oracle will circulate the tender offer to shareholders.
I welcome your comments, tips and suggestions. Reach at me at Bill_Snyder@infoworld.com
Posted by Bill Snyder on January 16, 2008 10:58 AM
January 08, 2008
Microsoft tries an end run around Google
Credit where credit is due: Paul Kedrosky, an investor, columnist and educator who writes an informative blog called Infectious Greed, did a great job this morning connecting the dots between Microsoft’s just announced $1.2 billion purchase of Fast Search and Traffic and Google’s still rising share of Web searches.
He writes: “The purchase of the Norwegian company, known for its enterprise and unstructured search technology, is an attempt by Microsoft to end-run Google, taking a stronger position alongside the one that Google dominates.”
Dominates indeed. Despite all of Microsoft’s efforts, the most recent tally of search market share by Hitwise, shows Google gaining share at Microsoft’s expense. Here are the numbers. Google’s share in December was 65.98%, up from 65.10% the previous month; while Microsoft’s share (including MSN search and Live.com) dropped to 7.04% from 7.09%.
More telling is the year-over comparison. In December 2006, Google’s share was 63.15% versus Microsoft’s 9.8%. It doesn’t take an MBA to see that Redmond has to try something different if it wants to make gains in search and the closely related online advertising market.
Underlining Microsoft’s seriousness is the rich price: 5.9x 2008 sales is richer than prior deals and represents 5.5% of Microsoft's cash balance, Kedrosky points out. This is serious money.
451 Group analysts Kathleen Reidy and Brenon Daly note that of late, FAST’s (as the company is sometimes called) primary focus has been on selling search technology to companies that generate revenue from search, like companies in media, retail, travel and similar lines.
It will take Microsoft a while to figure out what it has in Fast Search and to bring it to bear in the sectors of the market where it will play, they said in a research note. “But assuming there are no major missteps on Microsoft's part, this move should have a fairly dramatic impact on the search market.”
(Disclosure: I have a small position in Microsoft.)
I welcome your comments, tips and suggestions. Reach me at bill_snyder@infoworld.com.
Posted by Bill Snyder on January 8, 2008 11:26 AM
January 03, 2008
Technology and communications companies spent nearly $500 billion buying each other in 2007. The new year will be much the same, with software and storage leading the charge.
A report by The 451 Group, a technology research firm, highlights the takeover frenzy that made 2007 a great year for the investment bankers, and a very insecure one for employees of companies that appeared on the M&A (mergers and acquisitions) radar screen.
Microsoft, Dell, IBM, SAP, and Nokia each made the largest acquisitions in their history last year, while Oracle continued its three-year acquisition spree. Interestingly, nearly all of the biggest deals of the year were cash only, explaining while Wall Street, which doesn't like stock deals (causes dilution), was generally pretty happy with them.
Drivers included deals to reach new customers, such as Google's $625 million buy of on-demand e-mail security vendor Postini; moves to next-generation technology, such as the $500 million purchase of XenSource by Citrix; a push into new markets, such as Dell's landmark purchase of storage vendor EqualLogic; and a move to new business models, illustrated by EMC's takeover of on-demand vendor Berkeley Data Systems.
Despite the constant stream of takeovers in the enterprise software sector, there is still plenty of cash available -- and plenty of tempting targets. Some of the picks made by analysts for The 451 Group include: BMC Software, Citrix Systems, CA, Informatica, Lawson, Novell, Open Text, Progress Software, Quest Software, Symantec, and Tibco Software. "We are not saying these companies will be targets in 2008, just that there are still plenty of large deals that could potentially be done," the group wrote.
I have trouble picturing either Symantec (too unwieldy unless the Veritas business were spun off) or CA (still too troubled and unfocused) being purchased, but some of the others, particularly Tibco, are intriguing possibilities.
Turning to data protection, the analysts say that potential targets include Diligent Technologies, Sepaton, FalconStor, and even potentially Quantum in the enterprise space; in the midrange market, ExaGrid Systems and Data Domain (though the latter is now richly valued, which is likely impacting the valuations of all the others); and down into the SME/distributed arena, Asigra.
As to online backup, "it's increasingly clear that any data protection vendor worth its salt needs to have an online component to cater for future demand from existing and emerging customer categories. The consumer market is potentially the most significant of these, as it dawns on the masses that it would be a good idea to have a spare copy of the vast amount of treasured memories and collections they are now accumulating and storing in digital form." Potential targets include Asigra and Carbonite.
Compliance, driven by Sarbanes-Oxley and HIPPA, is another area that looks ripe for M&A this year. Some of my colleagues at InfoWorld believe that enforcement actions have been rare, but execs that I know take those laws very seriously. (If you've had the unfortunate experience of having an adult child or friend in the hospital, you know just how hard it is to get relevant information without a signed release.)
"The concept that the government can tell a business what is important to it is laughable, but forward-thinking enterprises understand that they should use government dictates about protecting information as a reason to reexamine (or examine for the first time) how business gets done and how it can be done more efficiently. This gives rise to an increased reliance on objective enterprise metrics. We believe that companies able to provide those -- folks like Agiliance, ClearPoint Metrics, eIQnetworks, ExaProtect, Intellitactics and ArcSight spring to mind -- are better suited for acquisition in 2008 than they have been to date," the analysts wrote.
It's a long list. Not all, or even the majority, of those companies, are likely to be taken over. But some surely will go down that road, creating opportunities for investors and angst for employees. Happy New Year.
I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on January 3, 2008 03:00 AM
December 03, 2007
Reuters carried a short item out of London today, reporting speculation that Microsoft has revived its effort to buy SAP. Wow, that would be a story.
However, it doesn’t look like Wall Street gives the rumor much credence. Shares of SAP closed up a bit Monday, gaining just 60 cents, or 1.2%. That ain’t much. Another good indicator of investor interest was flat as well. Volume, that is the number of shares traded, wasn’t much above normal, and after a flurry of trading in the first hours of the session, it dropped way off.
I was sitting in Federal Court back in 2004 when Oracle was duking it out with the feds over its planned acquisition of PeopleSoft. With little warning, Microsoft introduced evidence that it had been talking merger with SAP. I know its an over-used phrase, but most of the reporters and lawyers who were listening practically fell out of their seats, it was so surprising.
As you know, the talks failed. Remember, Microsoft said one issue was the complexity of integrating two very large -- and culturally dissimilar -- organizations.
As Eric Savitz pointed out in Barron’s earlier today, that hasn’t changed. It would still be very hard to weld a slow-moving, ERP-rooted German giant, and an American giant with roots on the desktop.
It would also be incredibly expensive. SAP’s market cap is $62 billion. Even discounting cash on hand that’s a huge buy even for Microsoft.
Is it impossible? I guess not. Some people may be thinking that since IBM is moving into apps (witness the purchase of Cognos), and since Microsoft’s enterprise applications are still small potatoes in this league, the takeover would make strategic sense. But I wouldn’t buy stock in SAP on the assumption it will sell at a premium.
I welcome your comments, tips and suggestions; reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on December 3, 2007 04:32 PM
November 18, 2007
The Legion of the Disappeared or Where Has All the Software Gone?
I was updating some files recently and I came across a list of the companies that made up the Goldman Sachs Software index just two years ago. Of the 46 large and mid-cap companies on the list, ten no longer exist or have been merged into a larger organization. Most of us are well aware of the wave of consolidation that has swept the industry, but it’s striking to see how many important companies have been taken out.
Those gone from the GSTI (short hand for the index) are Aspect Telecommunications, Cognos (as soon as the purchase by IBM closes), Filenet, Hyperion, Internet Security Systems, McAfee, Mercury Interactive, Siebel Systems, THQ. And remember that was just a list that the Goldman team deemed representative of the sector. There are plenty of other major software companies that have gone away, including most recently Business Objects, Retek, PeopleSoft, Oracle’s first major conquest, and Veritas, which developed storage-related software and is now part of Symantec.
Heck, Oracle alone has swallowed more than 30 companies in the last three years or so, IBM software is a frequent buyer, and now SAP is getting into the act.
I’ve complained about the collateral damage
caused by the wave of software M&A -- loss of jobs, less competition and less innovation -- in these electronic pages before so I won’t repeat myself. But it’s becoming clearer and clearer that the market will pretty much support only large-cap, integrated software companies, and nimble little niche players. The great unwashed of the mid-range are disappearing rapidly and won’t be back.
Although, some of those companies, Mercury Interactive comes to mind, shot themselves in the foot via bad management practices, many of the disappeared had solid businesses and decent (sometimes excellent) management. This is altogether different from the dynamic that reduced the major players in the PC industry to a handful. In that case, the PC became a commodity and it made no economic sense to build them without huge economies of scale. A similar dynamic radically thinned the ranks of hard drive makers.
I think Marc Benioff of Salesforce.com overstates when he talks about the end of software, but we are most certainly going to see the end of more mid-sized software companies in the next few years.
Posted by Bill Snyder on November 18, 2007 12:42 PM
November 07, 2007
Michael Dell has never been a big fan of acquisitions or radical shifts in direction. But since returning as CEO, itself a radical move, he and his company have looked outside itself for new strength. And none of the acquisitions has been more important than this week's purchase of EqualLogic for $1.4 billion in cash, Dell's biggest ever takeover and its fourth this year.
It's a smart move. And Wall Street likes it, although you couldn't tell from a superficial check of Dell's stock this week. Forking over that much cash invariably leads to a small cut in share prices, especially in a week that has had so much ugly macro news.
Interestingly, the acquisition (actually, the intent to buy; it won't close till next year) has dinged both EMC and its daughter company, VMware, as well as Network Appliance. The NTAP hit makes sense, since EqualLogic is strong in iSCSI technology, the meat of NTAP's business. But the hit to VMware and EMC makes less sense -- more about that in a bit.
First though, consider Dell's modus operandi, or MO, as the cops like to say. It doesn't invent much, other than a once-great business model. Its storage business, in particular, is based on reselling EMC's Clarion. Dell adds a bit of value, but not a lot. And despite the bumps of the last few years, Dell still generates a ton of cash. It had nearly $13.8 billion in the bank as of last August.
The core of Dell's business, of course, is the PC, not exactly a hot growth area, although there's still plenty of money to be made pushing boxes and selling services to the enterprise.
EqualLogic, though, is very different. Its hardware is optimized for storage virtualization, a rapidly growing technology, and it has good penetration in the SMB marketplace. It also has a strong presence in the channel, another area where Dell does not shine.
Dell plans to add to EqualLogic's channel-partner programs with more EqualLogic-branded products, and it plans to incorporate EqualLogic technology into future generations of its Dell PowerVault storage line, the company said.
Here's the real value of EqualLogic to Dell: EqualLogic, which started out as an iSCSI vendor, figured out that iSCSI and virtualization are a great match, says Brad Nisbet, a storage analyst with IDC. That's because virtualization complicates mapping, and the best way to resolve that problem is via the Internet and iSCSI, which automatically finds the location of the virtualized storage.
EqualLogic has a strong relationship with VMware, and I don't think that's going to change. Not to sound snarky, but the investors who pushed down shares of the high-flying VMware this week may have been drinking marketing Kool-Aid. Virtualization is so hot that everybody who has a possible link to it uses the word in marketing materials. Yeah, EqualLogic is in the virtualization ecosystem, but it is a hardware vendor and will hardly challenge VMware. Indeed, the two are complementary.
There is probably some potential overlap between Dell/EqualLogic and EMC, but not that much. Dell's real importance to EMC is the Clarion business, and that's not at all affected by EqualLogic. Is there some potential for friction in the partnership now? Sure. But what the industry calls "coopetition" (ugly word, that) is an old story and an everyday part of the technology business.
Nisbet notes that EMC has not done much, if anything, to link iSCSI and virtualization, so any business lost in this area is a loss of potential business that it may or may not have fought for. Still, it's a negative.
Morgan Stanley analyst Kathryn Huberty put it this way in a note to clients following Dell's announcement: "Our industry checks suggest EqualLogic competes well against NTAP and others at the low end of the storage market (small, medium-sized businesses), which could slow NTAP's channel growth next year." Huberty doesn't foresee much of a problem for EMC, though it's worth noting that she is an EMC bull.
She also notes that "iSCSI storage is expected to grow approximately 400 percent over the next three years, and we believe storage sales through the channel (will) expand 9 percent."
Incidentally, there is some feeling around the industry and on Wall Street that Dell may have paid too much for EqualLogic. It's possible that another company (maybe HP) was in the running and that may have driven up the price.
Even so, this is a smart choice for Dell, and it shows that the PC maker is moving in a much better direction since its founder came back. Go Michael.
(Full disclosure: I own a small number of shares in EMC.)
I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on November 7, 2007 12:28 PM
October 25, 2007
Interesting day on Wall Street. BEA Systems said it would sell itself to Oracle or anyone else willing to pony up $21 a share, or about $8.2 billion. For the moment, investors are not taking the new asking price very seriously. Indeed, shares of BEAS actually lost a few cents of value following the early morning announcement.
The Street’s logic is easy to follow. Before Oracle’s offer to buy the company, BEAS was trading at $13.62 a share. Oracle offered $17 a share, a premium of nearly 25%. At $21, the premium jumps to 54%. Yikes! (Okay, the premium is a bit less when you factor in the $1 billion or so in cash BEAS has on hand, but it’s still might hefty.)
Now, I can’t read Larry Ellison’s mind, and there are those, including analyst Trip Chowdhry of Global Equities Research, who thinks he’ll buy at the higher price. (Trip, by the way, has made some good calls on Oracle in the past.) Even so, if you were to buy shares at Thursday’s closing price of $17.53 and the stock goes to $21 a share, you make a rough profit of $3.47 a share. But if the deal falls through the stock will head south like a falling manhole cover, probably winding up at around $13. So you’d lose $4.53 a share.
Some people might like those odds, but I don’t. And neither did many investors. Which is why BEAS end the day with a 2-cent loss instead of a big gain. There could well be a lot of back-stage maneuvering in the next few days, and anytime something leaks out the stock will react.
Another point: I’m not sure BEA is serious. It could well be that the board of directors figured they could be opening themselves to a shareholder (as in Carl Ichan) lawsuit if they simply stonewalled Ellison’s bid. By throwing out a counter offer, their butts are well covered if Oracle walks. And if he goes for it, they make a ton of money. Talk about win win.
The more significant story of the day, though, was the pair of strong quarterly reports issued by Microsoft and EMC, which helped calm tech investor nerves after Wednesday’s carnage on the NASDAQ. More about this later.
I welcome your comments, tips and suggestions. Contact me at bill.snyder@sbcglobal.net
Posted by Bill Snyder on October 25, 2007 04:42 PM
October 17, 2007
John Wookey’s surprising departure could be a sign that Oracle’s middleware push could be foundering.
Betting against Larry Ellison’s acquisition strategy is always on the dangerous side. When he wanted to take plucky little Peoplesoft away from its kind-hearted management team (That’s a joke. Once Dave Duffield moved upstairs, the company was neither small, nor very friendly) everyone said he’d never win. They were wrong. And when the U.S. Department of Justice tried to squash the takeover, Oracle beat the odds, giving the Feds an embarrassing bloody nose.
Now Ellison is after BEA Systems, and there’s speculation that H-P or IBM (SAP says it won’t play) could start a bidding war and run up the price. I suspect that won’t happen, but I’m not placing any bets. Meanwhile, this week’s announcement that John Wookey is leaving the company poses yet another interesting question: Is Fusion, Oracle’s grand scheme to unify middleware it has acquired or developed over the last few years, in serious trouble?
I don’t know, and probably none of us will find out for sure until we head for OracleWorld in San Francisco next month. But something’s not right here.
First of all, the acquisition of BEA is surprising. The Fusion project is difficult enough. Why add yet another layer of complexity -- and a very thick one at that -- by adding WebLogic to the middleware mix? And I’m not altogether sure the deal would pass muster with the Feds.
So much for my opinion; Oracle thinks it can do it. And up until Tuesday, John Wookey, senior vice president in charge of apps development, was in charge. Neither Wookey nor Oracle are talking, but there’s speculation that Fusion is running late, and someone has to take the fall.
I hate saying I don’t know, but I don’t know. However, the Wookey-as-fall-guy routine rings true. Unlike PeopleSoft, Oracle’s management has never pretended to be anything but hard ball. If Fusion is in trouble, someone whose name isn’t Larry Ellison or Charles Phillips, is going to get spanked. Hard.
Fusion is due in 2008, and I wonder if it will meet the deadline. And if it does, will it really be a unified platform, or will it be a placeholder of glued-together applications?
The bottom line: Wall Street doesn’t like uncertainty. I’m usually rather bullish on Oracle, but I’d expect the market to take a wait and see attitude. And so will customers.
I welcome your comments, tips and suggestions. Write me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on October 17, 2007 05:19 PM
October 12, 2007
Oracle Offer Could Spark Bidding War for BEA Systems
It didn’t take long for yet another M&A shoe to drop. While the software world was still digesting SAP’s $6.7 billion friendly offer to buy Business Objects, Oracle this morning put up $6.66 billion to buy BEA Systems.
Oracle has flirted with the idea of taking over BEA for years, but the smaller company has never shown much interest in the marriage. It’s not at all clear that BEA management will accept the offer. But with billionaire financier and corporate activist Carl Icahn now holding 13% or so the company’s outstanding shares, there’s suddenly an enormous amount of pressure to capitulate. (note: shortly after I posted, BEA rejected the offer saying, it "significantly undervalues"
the company.)
It’s a rich offer. Oracle's said it will pay $17 a share, a 25% premium to BEA’s closing price Thursday of $13.62. Investors quickly bid the stock up well past the offering price, apparently thinking the offer could trigger a bidding for BEA, a leading seller of middleware.
Indeed, Oracle stole Retek out from under SAP’s nose in 2005, winning a bidding war. Wall Street is speculating that SAP might attempt to turn the tables, or perhaps, Hewlett-Packard, which has significantly beefed up its software division, could go for it. Cowen analyst Peter Goldmacher summed it up nicely, headlining his quick note to investors “The Game is Afoot.” He then wrote: Oracle doesn’t need BEA, but it’s better if SAP doesn’t have it.”
Well, that’s a lot of money for bragging rights, but in this league, you can’t rule it out.
In any case, Icahn will clean up. Depending on the price he paid for shares, he could make a profit of well over $100 million. This could be tough on BEA employees (as could the takeover of Business Objects) but as far as Wall Street is concerned, “Greed is Good.”
Posted by Bill Snyder on October 12, 2007 09:38 AM
October 11, 2007
Why SAP's purchase of Business Objects will be bad for employees, buyers, and innovation
Shareholders of Business Objects are making out like bandits. But if the acquisition by SAP runs true to form, expect to see job losses, less competition in the business intelligence market, and fewer choices for buyers. And we're not done yet; more business software companies are likely headed for the auction block.
First the numbers: SAP will pay $6.8 billion, or $59.37 a share, for the Paris-based vendor. That's a premium of 18 percent over the stock's $50.27-closing price before the deal was announced on Sunday. Not a bad payday. There's been some speculation that another buyer might appear and attempt to outbid SAP, but that's not likely. The weak dollar makes BOBJ, as Wall Street calls it, about 30 percent more expensive for a U.S.-based bidder.
The buy is a major departure for SAP, a company that tends to grow its own software rather than make splashy, Oracle-style acquisitions. In April 2006, CEO Henning Kagermann said this: "We are not growing organically because we had no other choice. We think it is a better strategy." Kagermann's remarks were seconded by board member Leo Apotheker, who said at a San Francisco press conference that organic growth results "in a higher return to shareholders."
Hello? What's changed? Although they'll deny it, SAP has been hit hard by competition from Oracle, which has spent about $25 billion in the last three years in a series of major acquisitions largely aimed at strengthening its position in the business applications market.
Hyperion, snapped up by Oracle earlier in the year, was a major BI provider, and Microsoft has significantly beefed up its business intelligence capabilities through improvements to SQL Server. Despite some slowing, at approximately $6.4 billion (according to AMR Research), the BI market is a prize worth pursuing.
Kagermann has committed his company to more than doubling its customer base to 100,000 by 2010. BOBJ boasts more than 44,000 customers worldwide, although there’s obviously a certain amount of overlap.
SAP says it will run Business Objects as a stand-alone company, with John Schwartz holding on to the CEO’s chair. This is somewhat different than the way Oracle usually works; its acquired companies are generally merged into one business group or another, with heavy job losses.
When Oracle bought PeopleSoft in early 2005, it cut a total of 5000 jobs, or 10 percent of the combined workforce. (Many of the pink slips went to Oracle employees, by the way.) SAP won’t be quite that heavy handed, in part because those crazy French have labor laws that don’t allow wholesale firings. Indeed, BusinessWeek reported that those laws were one reason Oracle decided not to buy BOBJ.
Even so, jobs will go. They have to, or the acquisition won't work. It makes no sense to duplicate functions, especially when the purchase price is so high. And like every other executive of a public company, Kagermann has to show bottom-line growth. And sadly, reducing head count, as firings are euphemistically called, is a very easy way to do that.
The consequences don't stop there. With Hyperion and now Business Objects grist for the merger mill, Cognos and MicroStrategy are the last of the major BI players standing. But for how long? News of the acquisition gave shares of Cognos an immediate boost as investors figured that it was next in line to be taken out. MicroStrategy could be a target as well, but I suspect that CEO Michael Saylor, who is also a major stockholder, is unlikely to sell. Privately held SAS Institute would be an expensive, but tasty morsel for the likes of IBM, Hewlett Packard, or (less likely) Microsoft.
I'm not saying the sky will fall on software buyers; the big players will still compete aggressively with each other. However, the history of the industry shows us that an enormous amount of innovation flows from smaller, highly motivated players. That's disappearing along with some pressure to keep prices in line.
I don't begrudge BOBJ's shareholders their profits. After all, being rewarded for risks taken is what business is all about. But it's sad that those profits will come at the expensive of so many others.
I welcome your comments, tips and suggestions. Write me at bill.snyder@sbcglobal.net.
Posted by Bill Snyder on October 11, 2007 03:00 AM
