We’ve all heard why the recent surge in M&A activity is bullish, here’s why it may be bearish. I’m glad to see that I’m not the only one who’s skeptical of the ramp in the tech sector.
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We’ve all heard why the recent surge in M&A activity is bullish, here’s why it may be bearish. I’m glad to see that I’m not the only one who’s skeptical of the ramp in the tech sector.
I don’t know why more folks don’t know their history, why you seem to be among the few who do. Tech companies seldom merge, and the mergers almost never work. This is because technology usually changes so fast that market shares are destroyed before the acquisition is integrated.
The exception is when the acquiree is tiny and their technology can be expressed across the acquirer’s entire product line. Or when the acquiree is autonomous, ready to grow with capital, in which case the acquirer is acting as a VC.
That’s not true in these deals. Oracle expects the world to stop while it destroys Peoplesoft and grabs their customers. EMC expects the world to wait for it to integrate Legato, and doesn’t think it will pay a penalty.
All this points to a slowing pace of change. The last time this happened, in the late 1980s, the Japanese ate our lunch. Now we have China and India to contend with.
Dana,
Reading your article reminded me of all the reports I’d read years ago about failed mergers. I see no reason why most of these recent ones won’t fail as well. I wonder if anyone’s reported on how all of those Cisco acquisitions of the bubble days turned out. hmmm…
I am not so concerned with the tech mergers. Tech is so speculative regardless. I am more cognizant and watchful of the mergers outside of tech. The fact that YELL would pay a 50% premium for a boring old trucking company is simply incredible. The more these kinds of deals go down, the more bullish I think these mergers really are. The main bearish tack I would accept is that instead of a sign of cheapness in the acquirees, you could claim this is a sign of how expensive shares have become in the acquirers. You could also claim that cheap money is really sloshing these deals forward and once the Fed turns off the spigot, down a-tumblin’ we go again.
Consolidation is also one of the best ways to get rid of the over-capacity in the economy. These mergers between companies in the exact same industry will accomplish such reduction in un-needed capacity and will be better for the economy in the long-run and finally get us to a point where we can emerge from the excesses of the recent past.
And one the main excesses is humans! No doubt there will be a lot of lay-offs from these mergers. From a Darwinian poit of view that may not be a bad thing. But it sure won’t help the employment picture in the short-term.
The classic catch-22 of the economy. Can you consolidate just enough to firm up pricing and profit margins yet not lay off so many people that your products lose even MORE demand! Frankly, I don’t know quite how we pull that one off this time around, but I know Greenie must be sweating bullets! I mean talk about running out of ideas!
Why not look at these deals in their own specific contexts. I would say that both of them are completely defensive and are unlikely to produce a good return for either Oracle or EMC. I think the issue is that for both companies their sales forces are just not tuned to selling this type of stuff, even if they would claim to the contrary. They both tested the waters and both realized they were not cutting it. So they want to bring in real/new products from that area. The issue I see is that sales force/partner conflict. EMC is not going to throw out all of its salespeople in favour of Legato, but if they could sell these type of products they would not need to acquire anyway. Ditto for Oracle. I think EMCs case is especially wierd since Legato is not particularly a front-runner, and while a nice stand-alone company it is just getting creamed by Veritas. Strategically, EMC has begun encroaching on Veritas’s space with the release of their new products, and perhaps they just figured that relationship was not going to last. In either case, I am prepared to see a lot of EMC sales people suddenly have to explain to customers how the VEritas software they have been co-selling for years is 2nd best to the “new” EMC one. Good luck.
In not so many words — I do not think we can really say much about M&A or IPO (with a good IPO day yesterday) yet. Media will speculate, but as far as making broad assesments I think it is far too early to say one way or another.
I would still encourage taking a look at what’s going on in non-tech. If the non-tech world pulls off a successful consolidation that forms the basis of good, future growth, part of the capacity problem in tech will be solved by higher demand. It is hard for tech-heads to get much attention for their wares if their customers are only trying to figure out how to cut costs ever deeper – as opposed to growing revenues… Just my 0.10 Euros…