Huge deals rock telecom, software landscapes; more expected.
Three giant mergers and a spate of smaller deals last week reshaped the software and telecom industries, and could portend a period of consolidation and further change in the coming year.
The deals included PeopleSoft giving in to Oracle’s prolonged hostile takeover bid in a deal worth $10.3 billion; Sprint and Nextel Communications in a $35 billion merger; and Symantec spending $13.5 billion for Veritas Software.
While it was one of the all time biggest weeks for technology mergers – with more than $59 billion trading hands – analysts say more could be on the way. Merger news heightens other companies’ awareness of threats and opportunities, says Bruce Richardson, senior vice president of research at AMR Research.
“Whenever these big mega-mergers happen, the phones start ringing off the hook,” he says. “CEOs are deluged by investment bankers and [mergers and acquisitions] boutiques saying ‘Hey, this is why this makes sense to you.’ Company boards start meeting and saying, ‘How do we react to this?’ It becomes a herd mentality.”
The industry is ready for pruning.
“Consolidation in the IT industry has been threatened for a long time and is finally happening because overall market forces, cash reserves and the threat of rising valuation have come together – there is a lot of cash laying around which companies accumulated during really tough times,” says Rich Ptak, a principal at Ptak, Noel & Associates.
For example, HP has $14.3 billion in cash and short-term investments. “Stockholders will tolerate all that cash generating interest, but not stock value or dividends, for only so long,” Ptak says.
Vendors are trying to beef up their portfolios while bargains remain, he says.
“From the buyers’ perspective, the fundamentals have been shoring up,” says Jeff Fagnan, a partner at venture capital firm Atlas Venture. “Businesses have more cash, stock prices have been going up. That might be driving companies to try to lock in some gains by using shares and cash to buy companies.”
Companies consider selling now because they are healthier and can command a better price, Fagnan says. “Sellers have been seeing their businesses improve. Now is a much better time to sell than a year or a year and a half ago,” he says.
Symantec is a good example of a vendor with strong customer and channel relationships taking an opportunity to expand its business. “Symantec has the relationships with customers; customers trust them, they’re already in there selling, why not add one more thing?” Fagnan says.
Symantec’s plans to acquire storage vendor Veritas for $13.5 billion would make it the largest supplier of back-up, recovery and archiving software.
Symantec, whose consumer anti-virus sales have funded its push into the corporate market for some time, “is re-inventing itself into a major enterprise security management vendor with acquisitions and a new marketing theme, but they have some gaps,” says Steve Hunt, research director for security at Forrester Research.
“Veritas is a successful back-up and archiving vendor looking for a way to penetrate the security market, which has growing needs for such software,” Hunt says.
Many other IT vendors sealed smaller deals last week. 3Com announced plans to acquire TippingPoint Technologies, a maker of intrusion-prevention systems, for about $430 million in stock.
Meanwhile, Microsoft acquired anti-spyware vendor Giant Company Software, Avaya picked up WAN monitoring vendor RouteScience Technologies, Concord Communications snared Vitel Software, and mainframe integration vendor Neon Systems grabbed rival ClientSoft.
One possibility for the sudden confluence of technology mergers is companies were waiting for the results of the presidential election before showing their hand, Fagnan says.
In addition, slow growth prospects – AMR is forecasting 6% growth in the enterprise applications market through 2008 – are driving some deals, AMR’s Richardson says. Oracle’s bid for PeopleSoft is one example. “What these guys are doing is buying each other’s customers and trying to live off the maintenance revenue, with some cross-selling and up-selling,” he says.
Increasing threats from abroad are another issue, Richardson says. “Next year for the first time the amount of money paid to the Indian offshoring firms will exceed license revenues,” he says. Oracle and PeopleSoft face a lot more competition from custom software and services being developed by overseas firms such as Wipro, Tata and Infosys, he says.
With PeopleSoft’s business on its side, Oracle stands to become the second-largest supplier of business applications, after SAP. It still needs to bulk up if it wants to stay competitive with Microsoft and IBM in the larger infrastructure market. Expect more buys from Oracle – which has said BEA Systems is on its radar, Fagnan says.
Competition is a driver for the Symantec/Veritas deal, says Stephanie Balaouras, a senior analyst with The Yankee Group. “Veritas is under increasing competition from EMC and some of its traditional partners like Oracle or Microsoft, who are now becoming their competitors,” she says. Symantec has software that can go after the low end of back-up and server management market. The acquisition and combined technologies will let Symantec hit a couple of different market segments, she says.
Sprint and Nextel’s pending union is largely about brawn. The parties are calling the deal a “merger of equals,” wherein shareholders from each company will own about 50% of the new entity, which will be called Sprint Nextel.
The merger will create a more powerful No. 3 wireless service provider in the U.S., with Sprint/Nextel holding about 38.5 million subscribers. Individually Sprint is the third-largest wireless service provider, with 23.3 million customers. Nextel is fifth, with 15.3 million mobile customers.
Sprint needed to bulk up to stay competitive. “Cingular and Verizon are just so huge. Sprint probably felt like it had to do something,” Fagnan says, adding that concerns that Verizon Wireless was interested in Nextel also might have pushed Sprint to make a move.
As part of the proposed deal, Sprint will spin off its independent local telephone business. That’s its heritage: Sprint began in 1899 as Brown Telephone, a local service provider, before launching its interexchange carrier (IXC) business in the 1980s and its wireless business in 1995.
This represents a shift of sorts in telecom, says Keith Waryas, a research manager at IDC. When the two companies merge, it will be the first time that a wireless service provider owns an IXC, Waryas says. In the past, landline service providers – with the majority of their revenues coming from voice and data services – owned wireless service providers.
Users have mixed feelings about the spate of acquisitions. On one hand, vendor consolidation can support users’ efforts to consolidate suppliers and limit complexity.
“I’m always in favor of ‘partnerships’ that give me single-source solutions,” says Jim Miskovsky, director of IT for Fisher & Phillips, a law firm in Atlanta. “I suspect we’ll see other similar mergers in 2005 as companies try to better align and leverage their strengths to gain market share.”
But deals such as the Symantec/Veritas merger raise questions as well.
“We have some questions about support and licensing that Veritas has not addressed,” says David Bucciero, director of systems services at Dartmouth College in Hanover, N.H.
“While we have some time to work out those issues, we do want to know how that comes together – are they really going to centralize support, because that is very important to us,” says Bucciero, who has Symantec anti-virus software and Veritas’ NetBackup products. “From a budgetary point of view, how is the company going to operate and how is their licensing going to change?” he adds.
It will take a while for all the questions to be answered. In the meantime, analysts expect consolidation to continue.
Fagnan is interested to see the response from all these companies’ competitors – some of which might be enticed into acquisitions of their own early next year.
Along with BEA, software vendors such as Siebel Systems, Lawson Software and Hyperion are among possible targets, analysts say.
“This has to be sort of a golden age for all of the M&A boutiques,” Richardson says. “It must be a bit like Sotheby’s, with everyone racing around putting price tags on everything, seeing if they can get some stuff into auction, seeing who they can get to bid. Or maybe more like a tag sale.”
