Subba’s Serendipitous moments

October 2, 2009

Cisco’s brilliant acquisition of Tandberg

Recent acquisitions by Dell and Xerox have something in common. Both acquired companies which are far away from their core competencies in an effort to find stable growth. They acquired predominantly U.S. centric IT services firms. I explained my disappointment with Dell’s acquisition of Perot Systems here. Xerox recent acquisition of ACS also evoked a similar thinking in me. It is very difficult for a pure play product / technology organization to blend well with a pure play services organization. The organizational DNA are too different, growth trajectories are quite different, organizational processes lend itself to little synergy. In short, I am not very high on such acquisition moves.

Cisco is different.

Cisco announced an all- cash offer to acquire Tandberg for $ 3 billion. Tandberg — a Norwegian company sells smaller and less priced video conferencing systems. This is a perfect fit for Cisco’s more expensive TelePresence systems which has been a great success. I think this is a brilliant acquisition since Tandberg’s gross margins is 66% and has clients in US and Europe. This acquisition would enable Cisco to sell the Tandberg products to companies which cannot afford the TelePresence. With this acquisition, Cisco would dominate the video conferencing systems for some time. More importantly the acquisition came in quite cheap since Cisco just paid 11% premium over Tandberg’s closing price.

Cisco has always acquired companies that in some way or the other generated more Internet traffic creating in turn demand for its core business — the networking hardware business. The way it is going to unleash its Unified Computing strategy will of course be interesting and one has to wait and see how it provides the synergy to the networking hardware business. Cisco’s ability to shake off entrenched players in fairly established market segments will also be evident in a couple of years.

Over the last 5 years Cisco has acquired 40 companies — both big and small and they have helped Cisco plug the gaps in the technology and product roadmaps admirably well. They also have had little problems integrating them into the Cisco model.

Cisco has $35 billion in cash which means further acquisitions are on the way. I only hope they don’t go with the flavor of the month and acquire another U.S. based IT services firms !

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.

September 1, 2009

Microsoft Windows under siege.

Operating systems wars have been skirmishes. They haven’t produced any major upsets. Microsoft dominates the OS completely and despite the Linux aficionados, Microsoft’s strong hold remained unchallenged especially at the low to medium end servers and in desktops. It is a different story in the mobile space though.

But things are slowly changing and my sense is that in the next couple of years, Microsoft will face more heat compared to anything that it has ever faced on the server front.

Microsoft will have to increasingly contend with VMWare which has bolstered its arsenal with its acquisition of Springsource – maker of open-source software development tools which can analyze and optimize the application performance. This could allow VMWare to undermine the Windows operating system.

Despite all the talk about the huge growth of virtualization, the untapped market is still large. Currently virtualization has been done mostly at the data centers (which is where the complexity is and where the cost savings are) and even there the current estimate is that less than 25% of the servers are virtualized. This creates a big opportunity. It is no surprise that Cisco wants a piece of this market and it is targeting them with its Unified Computing system.

Well, there’s a desktop market and a notebook market and it will require a different approach to tackle this market. Currently the focus seems to be on the servers.

Microsoft cannot afford to ignore this market. In fact it announced Hyper V Virtual machine as part of its Windows Server 2008 and it is likely that it will offer several enhancements in time to come. Moreover, Microsoft can afford to give its Hyper V free. With other contenders like Citrix Xen, Virtual Iron remaining in the fringes, it is going to be a battle between Microsoft and VMWare. And again, this battle is not just one of functionality or product features, but increasingly fought on a business model.

In some way, it could very well resemble the browser wars of the nineties.

But from Microsoft’s standpoint the battle for the OS has another contender. Google with its web based software for office and productivity applications is also undermining the Windows operating system.

The early impact on Microsoft is here to see. However it is too early to announce the demise of Windows.

So, the skirmishes are over and the battle is being fought on many fronts.

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.

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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