I swear there is a patron saint that CIOs pray to. A common prayer is to shield some of their favorite small tech vendors from being gobbled up by larger vendors. Another prayer is to shield them from the chaos when larger vendors merge. Usually results in years of inward focus and salesforces with bulging bags of new products they cannot even pronounce. Followed in a few years by the vendor compliance groups making “offers they cannot refuse” if customers dare pass on the acquired products.
Vendors themselves know they will struggle with acquisitions. Meg Whitman of HP had some choice words about the announced Dell-EMC mega deal. She should know. The HP-Compaq merger yielded some supply chain efficiencies but the rationalization took years and plenty of rocket science as I described in The New Technology Elite. The Dell-EMC hardware rationalization will be similarly complex. The HP-EDS deal should have led to labor efficiencies – but at significant morale cost. It certainly did not help HP prepare for the world of cloud infrastructures. HP-Autonomy – a near immediate write off. With open source competition growing to VMware, Dell may find itself with a similar scenario.
Ditto with Oracle. Its streak of acquisitions complicated its Fusion effort, as the RD could not keep up with the pace of its bankers. Same with SAP. A company which had massive success in the 90s reducing enterprise sprawl, now with its 50+ acquisitions has itself become a poster child for enterprise sprawl.
This does not even account for the morale issues on internal RD when a company spends a decent chunk of money buying functionality. As Meg says “That’s $2.5 billion that (Dell annually) will allocate away from RD and other business critical activities, which will keep them from better serving their customers.”
So, why do we keep chasing acquisitions? The investors in the acquired companies get a one time pop, but time and time again we have seen well run tech companies generate far more shareholder value through revenue growth that comes from innovative product development and complimentary partnerships and ecosystems.
The bankers, of course, do well. And us analysts get something to gossip about. There that’s it – keep doing those deals folks. At least a few of us benefit from them.
(Cross-posted @ Deal Architect)