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.

August 2, 2009

IBM girds itself against Cisco.

A few months back I wrote about Cisco’s game changing play and in the process declaring war on IBM and HP. I also indicated that an imminent realignment of alliances is likely. I have been following the subsequent developments with a lot of interest and here’s an update.

I have not seen HP do much in terms of launching an offensive to Cisco’s play. Either they do not believe in Cisco’s ability to build a carrier class digital IT infrastructure or they are tied up with other myriad issues.

IBM on the other hand has upped the ante with a series of moves. It entered into a fairly strong relationship with Juniper Networks. While IBM did mention that it was also bolstering its relationship with Cisco, for the discerning eye it was just PRspeak.

Brocade’s Fibre Channel over Ethernet (FCoE) will be offered as the IBM Converged Switch B32 and 10Gb Converged. This will strengthen the OEM agreement Brocade with IBM earlier this year to resell Brocade’s Foundry switches.

The battle for data centers will invariably shift to the cloud. And the shift may even be quicker than one can envisage. And the first vendor that are able to demonstrate that data can be moved from one cloud to another without a hitch, has a significant advantage. With the agreements with Juniper and Brocade, IBM seems to have a strong advantage over Cisco.

It looks like an interesting battle ahead between IBM and Cisco. To me, it looks like HP is still being hesitant.

April 20, 2009

Oracle acquires Sun — Unexpected and interesting

Oracle announced that it is going to acquire Sun for $9.50 in cash valuing Sun at about $7.5 billion or $5.6 billion net of Sun’s cash and debt.

The deal comes after talks between IBM and Sun failed. I had analyzed why the IBM may not really need Sun here and here. IBM had offered $9.40 per share. Oracle’s offer is a 40% premium over Sun’s closing price.

However this acquisition by Oracle is both unexpected and very interesting. Sun’s software assets could become better strategic assets to Oracle than Sun’s server or storage business. After Sun acquired MySQL , the relationship between Oracle and Sun had soured. Oracle had acquired Innobase to neutralize MySQL but it hadn’t made much headway. Of course Java could become the pivot of Oracle’s middleware strategy.

The open source database angle becomes interesting. Having MySQL in its stable gives Oracle access to its huge developer base and web applications market. Will Oracle kill MySQL to protect the Oracle 11g cloud margins or milk it for whatever it is worth before allowing it to die in neglect will be interesting to watch.

Sun has a large installed base and becomes an immediate target market for Oracle to target with its applications.

Since Sun’s manufacturing is already outsourced, there’s nothing much left for Oracle to do. It can sell whatever is left in the hardware business — the storage, server and any other chip business to either HP or Dell.

Oracle now fine tunes the database performance on Solaris and sells a combo. HP and others will feel the impact.

Oracle gets the scale and muscle to attack IBM.

On the overall, there seems to be a better strategic fit between Oracle and Sun, than Oracle and IBM. Both companies also have a strong feisty culture and hyper competitive spirits so integrating them could be easier.

What is also interesting is that Sun’s board approved the deal quickly and unanimously after just scoffing IBM’s deal which was just 10 cents less per share.

April 6, 2009

IBM — Sun deal fails?

Filed under: Business,Competition,Model — Subbaraman Iyer @ 11:35 am
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IBM withdrew its $7 billion offer for Sun reports the NY Times which reports that Sun believed the offer was too low and the offer was rejected by the Sun Board. The Wall Street however is not so categorical about the rejection and believes the deal will go through.

I wrote earlier that IBM doesn’t need Sun. It is Sun that needs IBM. Sun has been in the market for a long time courting probable suitors.

The failure of the deal will hurt Sun more than anyone. Customers will be wary of purchasing Sun gear. Moreover the management will be questioned about their commitment to a go-it-alone strategy. Hence Sun may accept the lower price offered by IBM. Sun doesn’t have much choices left.

My assessment is that Sun’s problems may actually worsen after the failure of the talks. IBM comes out unscathed.

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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February 18, 2009

Microsoft, hurry up!

Filed under: Business,Competition,Model — Subbaraman Iyer @ 11:00 pm
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The cloud computing battle is being fought on multiple fronts including creating some confusion in everyone’s minds. It is no longer being considered a niche and the next 12-18 months will see it become mainstream.

IBM has increasingly become aggressive and has teamed up with Amazon Web services to deliver its software.

While Amazon had deals with players like Salesforce.com, OpenSolaris, MySQL, RedHat, this deal with IBM is significant because it gives Amazon the clout and respectability for the enterprise.

The interesting question is what happens to Microsoft? Microsoft announced Azure which I referred to here, but didn’t put in any aggressive plans to pursue this with a backward cloud model. Perhaps Microsoft will offer a Cloud OS sometime in the future.

With this deal, Microsoft would be left with no choice but to adopt the cloud model quickly and aggressively across all its software product range. The other key decision that Microsoft would have to make is if the Microsoft cloud can connect to the rest of the clouds be it Google, Salesforce.com or Amazon or other private cloud.

IBM will also have a significant advantage as it can drive more cloud economics — hardware, storage, infrastructure software and other applications and can build completely new pricing models to gain market leadership.

Microsoft cannot afford to lose any more time. Microsoft has to rally with its developers and close the gap.

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May 12, 2008

Eric Schmidt unveils an exciting future.

Eric Schmidt in a very short speech at the recent IBM Partners leadership conference shows to all of us what the future could be in a very interesting compelling way.

Some of the facts:

  1. Currently the Internet has 1.3 billion users, with 200 million getting added each year.

  2. In Japan, 3 of the most popular books were delivered first on the mobile readers and subsequently done on print.

  3. There were just 400 servers in 1983, and now there are more than 500 million servers worldwide.

  4. There are 70 million blogs, with over 120,000 blogs being created every day

  5. 7 million photos are uploaded to Picasa (Google’s photo sharing site) each day

  6. 10 hours of video uploaded on YouTube each minute.

  7. 500 million Wifi chip sets will be sold next year.

His most provocative statement of the future: By 2019, there could be a device that could sit on the belt or kept in the wallet that could have 85 years of video on it. You will be dead before you can see all of it. One of the ultimate frustrations in life.

But what he said about Convergence was interesting. Convergence is not everything (services) going into one device. It is entering (all the services) into one server or services in the cloud and hence even if the devices are different, the content in all that will remain the same.

His quote on Breakthroughs was equally profound: Great breakthroughs are closer to what happens in a flood pane. It is not one idea. A dozen tributaries converge and the rising waters lift the genius high enough so that he or she can see the conceptual obstruction of the age.

His entire address and the subsequent panel discussion can be viewed here. Each time I hear Eric speak, I come back with more knowledge and insight. An earlier interview of Eric is also available on my blog here.

As you see this, maybe you should also see some of the other great CEO interviews and discussions. A few are listed here

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June 4, 2007

IBM’s cost cutting strategy to counter margin pressure.

Filed under: Business,Competition,India,Model — Subbaraman Iyer @ 12:39 am
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It is interesting to see that though IBM invented the IT services industry struggling to maintain their margins and that they have embarked on a massive offshoring strategy to improve their margins.

IBM Global services ($48 billion revenues) seems to have hit a rough patch with its low margins. Its operating margin is just 7.8% (2006 numbers) compared to margins of 30% enjoyed by TCS, Infosys and Wipro. Moreover the Indian headquartered offshore vendors have been taking more complex contracts, multiple service offers and have also gone into consulting, something which was clearly IBM’s strength.

IBM has clearly gone into a cost cutting mode. Over the last few years, it has eliminated over 20,000 jobs in the US and increased their hiring in India, which currently stands at 50,000. Moreover IBM plans to double their India headcount in the next 5 years, which implies further lay offs in their US work force.

Would this be a successful model? While workforce distribution to low cost countries would give them some advantage, IBM clearly needs to reinvent the service organization.

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