Subba’s Serendipitous moments

September 23, 2009

Dell seeks growth in Perot Systems

Dell made a surprise announcement to acquire Perot systems for close to $4 billion. Perot Systems in a IT services firms, predominantly US centric with government and the health care verticals accounting for over 70% of its revenues. By acquiring Perot Systems, Dell is just trying to follow the footsteps of IBM and HP by being a player in the IT services organization.

In my view, this is not a great step for Dell and I am disappointed. Here are the pros and cons:

Vertical presence: Perot Systems may have a great presence in the U.S. government and healthcare but outside of these verticals and outside U.S. it is a very marginal player. The healthcare sector may see some headwind thanks to the impeding reforms but the healthcare sector has been slow to innovate and have less appetite for new IT technology and services.

Margins: First Perot Systems doesn’t have great margins; in fact its margins are lower than industry standards and the last 6 months the results have been disappointing. For the 6 months ending June 2009, Perot made $59 million on a sales of $1.3 billion, which translates to a net margin of just 4.5%. Last year Perot Systems earned $117 million on sales of $2.8 billion.

Synergy: It is likely that Dell’s plan is to use Perot Systems to undertake IT services within its enterprise customers. This looks tough, as both the organizations have a different sales/engagement model. There is no significant synergy, and no integration issues as well. Dell is a $60 billion business and the Perot IT services business is relatively insignificant.

Strategic fit: While the acquisition gives Dell a services outfit, it is unlikely to be a strong strategic fit. Dell’s competencies are in supply chain, direct marketing, agility to respond and being able to sell volume products. The services business is an entirely different kettle of fish and the verticals where Perot is strong — the government and the healthcare are not noted for being agile. How this acquisition could become the “anchor” acquisition for IT services is difficult for me to understand unless Dell is planning on a roll up strategy to acquire other IT services firms.

With this step Dell also seems to be going on a different path. All trends and figures indicate that Dell’s position is becoming difficult with new areas like cloud computing, SaaS and other developments. Dell needs to bolster its offerings in that space to contend with the likes of Cisco and IBM and the Oracle-Sun combination as all of them are beefing up their offerings on the server space.

A strong product focused organization with its unique DNA and specifically strong organization culture will have to contend with several hiccups to make sense of this acquisition. IBM, HP and other It services organizations are unlikely to be impacted.

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March 19, 2009

Does IBM need Sun?

Filed under: Business,Competition — Subbaraman Iyer @ 8:49 pm
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No sooner had I finished posting my blog post on Cisco’s Unified Computing strategy and its implications, I saw that IBM is in talks to acquire Sun for $6.5 billion.  Sun has over $2.5 billion in cash, so the entire Sun business is valued at $4 billion.

I had expected a spate of acquisitions to happen, but not so soon. Not IBM acquiring Sun. My take was that it would be either EMC or Dell or HP acquiring Sun.

Here’s my analysis assuming that the news is for real and that it is not one of those rumor balloons:

  1. IBM gets more share in a shrinking UNIX server market. IBM is already doing a good job with Linux (IBM’s overall market server market share is 31%) and doesn’t need the extra 10% market share coming from Sun. I have already said here that with Cisco entering the server space the already low margins could even get lower. So, IBM with a server margin (around 10%) buying Sun for just the servers doesn’t make compelling logic.

  2. Maybe IBM is eyeing Sun’s MySQL database! It makes sense, but IBM has its own DB2 and it also has Informix. So, adding MySQL to their product portfolio makes limited sense.

  3. Java may be the crown jewel in Sun’s assets, but it hasn’t made money for Sun. I wonder how IBM will make it sing.

  4. The rest of Sun’s products —  storage, SOA stack, professional services none of them are compelling enough.

  5. No compelling next generation chip architectures from Sun.

Clearly there’s little strategic fit from a technology standpoint or from a marketing standpoint for IBM to acquire Sun.

Maybe there are some new initiatives from Sun in the cloud computing space. But Sun has not been investing in any kind of cutting edge architecture for a long time.

One possible reason for this rumor balloon to gain credence is that this move could thwart other vendors like HP, Dell or  a Cisco to acquire Sun. It doesn’t make any sense, because they could enter the bidding fray themselves. My own thinking is that a Dell or a Cisco may have a better fit with Sun’s products, channels and even culture.

Some analysts seem to believe that after acquiring Sun, IBM may sell the hardware and license the Solaris business to Fujitsu. This seems too far fetched to me.

Most importantly, Sun doesn’t offer any great networking product or technology — something that IBM needs to counter Cisco’s Unified Computing proposition.

So, I will be surprised if this deal goes through. But in the world of M&A, value perception is entirely different and a lot lies in the eyes of the beholder.

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March 18, 2009

Cisco declares war on IBM and HP

Filed under: Business,Competition — Subbaraman Iyer @ 4:26 pm
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Early this week, Cisco announced a major initiative which has the potential to shake up the overall server, storage markets completely.

Cisco announced a blade server ( Unified Computing system) that combines computing, storage and networking into a single layer all being managed by a specialized software being offered by BMC. It is increasingly becoming clear that virtualization is the primary driver.

This is a game changing play.

First, it puts Cisco directly in competition with their established partners like IBM and HP who have a lot of stake in the server and storage segments. Till now IBM and HP (especially with the EDS acquisition)  held the keys to the data center and now they will face a frontal attack from Cisco. My own view is that Dell may be least affected as they cater to the low end of the server segments. So, Cisco is up against their own partners and this partnership with IBM and HP is at risk.

Clearly Cisco which has not had a legacy in the data centre equipment of services business has created a new value proposition of building an “intelligent and carrier class digital” IT infrastructure. It would be difficult to ignore this value proposition as new data centers emerge.

There is an entirely new market opening up for mega data centers — the ones owned by Google, Amazon, Facebook etc. This market is poised to grow at over 30% over the next 3-5 years as digital data grows and as many companies go through the M&A process. My own estimate is  that one of every 5 servers (medium to high end) sold finds itself in a data center. So, Cisco is clearly addressing a potentially huge market.

But will this new customers accept Cisco’s proposition? Clearly Cisco is trying to own everything in the data center and many data center managers would resist lock in.

Apart from the fact that Cisco would treading into an unknown territory, the dynamics of competition makes the play interesting:

Cisco’s gross margins in the routing/switching market is around 62% while the typical server markets fetch close to 22%. Assuming the bundling (computing, storage and networking) finds acceptance, Cisco’s margins for this business may be around 40%. Hence this may lower the overall profitability. How Cisco manages their margins in this business would be interesting to watch.

HP emboldened by the success of ProCurve is likely to take a more aggressive stance. IBM will have to figure out how to fill the gaps in their product line up.

Both IBM and HP are likely to make a slew of acquisitions and companies like Juniper and Brocade make interesting candidates. Should any of these occur, Cisco might end up acquiring VMWare completely (currently it owns 2%) or might even attempt to acquire EMC to bolster its position.

Now, everyone is waiting for IBM and HP to come up with competing announcements. The battle for the data center is beginning and promises to be long drawn. Cisco would also need to make a lot of investments in getting their partner network ready and some of the Cisco partners also have relationships with IBM and HP.

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May 13, 2008

HP acquiring EDS — Mark’s new challenges

Filed under: Business,Competition,Model,Strategy — Subbaraman Iyer @ 2:19 pm
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Just saw the news that Hewlett Packard is in talks to acquire EDS. The announcement is here.

This may be Mark Hurd’s biggest and risky bet to carve out a bigger space in the IT services market. As anyone can see, Mark will face 2 key challenges with this acquisition. Unlike the earlier acquisitions, this one is a big move and hence there is the imminent integration challenge between these 2 companies with different cultures. Given that EDS has a higher market share and also been in the IT services business longer than HP, they are unlikely to submit to the HP model easily. Till date HP has shown distinct conservatism in the services market, by just managing the infrastructure around its own product platforms where as EDS has been more of a risk taker given its background and history. It also has done more higher-end work like complex application design. So, who would call the shots — HP as the acquirer or as EDS with a big client list and a track record of delivering higher value services? We just have to see how this unfolds.

Second, Mark has to transition the combined entity to the right cost structure by shifting significant resources to a low cost countries like India. At least in India both EDS and HP have operations and their merger may not create much problems.

I believe the only way to amount the challenge to IBM would be to set this up as an independent business operation and go after the high margin business. It is only then that the acquisition makes sense. Whether IBM gets affected or not, I can see this impacting Accenture, Cap Gemini and a few others feeling the pressure.

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