There are four reasons I can think of why a company wants to buy another:
- To take a position in a market you didn’t expect to be in but has suddenly become important to you (e.g. EMC buying VMware)
- To take a position in a market you did expect to be in, but the internal projects to get you where you wanted have failed (e.g. HP buying 3PAR)
- To gain mass in a market in which you already play successfully (e.g. Oracle buying JDE and PeopleSoft)
- To prevent your competitor gaining an asset that they could use to attack your market (e.g. Oracle buying Sun/MySQL)
Reason 2. can happen to anyone, but the frequency with which companies buy under reason 2. should tell us something about the company’s ability to plan, fund and execute strategic development.
And there are two ways to buy:
- By stealth before success has drawn widespread attention to the target (e.g. IBM buying XIV, Diligent, Filenet, Trellisoft; Dell buying EqualLogic & Nexsan; HP buying Ibrix)
- In a high profile bidding war (e.g. HP buying 3PAR; EMC buying Data Domain; Oracle buying Sun )
The frequency with which companies buy under scenario 2. should tell us something about the company’s ability to plan and cost-effectively execute strategic acquisitions.
There are some famous M&A examples:
- Burroughs and Sperry merged, and the anecdote at the time went that two $2B companies merged to form one $2B company (Unisys).
- Compaq swallowed DEC, using it’s low-end muscle to break into the enterprise. I remember the day their share price subsequently halved in one day from $50 to $25 and never recovered. Compaq was of course eventually bought by HP.
- EMC purchased Data General for its CLARiiON, and I would think they’ve had a pretty good return on that $1B acquisition investment over the last 11 years, although maybe not quite as good as IBM’s purchase of Tivoli in 1996.
- It would take more work than I have time on hand to provide an intelligent opinion as to whether HP’s acquisition of EDS, or IBM’s acquisition of PWCC turned out to be value for money, but they were undoubtedly better value than would have been HP’s original hugely price-inflated attempt to buy PWCC.
- Large cash-rich companies can however sometimes get away with disproportionate spending on acquisitions to put themselves into a strategic long-term position – the price Oracle paid for Sun would seem to be an example of that.
Companies have to learn to balance the three pillars of development, acquisitions and OEM partnerships.
Dell and EMC must be a fraught situation since EqualLogic came on board and then Dell tried for 3PAR… and just imagine how Hitachi is feeling right now with first Sun and now HP looking like jumping ship. We also see EMC and Cisco playing nicely together, like two aggressive children sharing a sandpit and finding a moment of communion. If this doesn’t result in a merger then IMHO there will be tears when Cisco is no longer able to contain it’s alpha male-ness and decides to take the next step, perhaps by buying Netapp if Oracle doesn’t beat them to it. Netapp might not be good value until something triggers a share price drop though. Better stock experts than I might be able to comment on whether there is too much future value built into their current price. But, hey, I can’t see that stopping an ambitious cash-rich competitively-driven buyer… some folks just live for the moment when they can say… All your base are belong to us!