FT : Hurd Saga Reveals IT Battle Lines

Thursday, September 9, 2010

The Mark Hurd soap opera is turning into more than just a diverting tale of a chief executive’s foibles and a board’s willingness to countenance a severe dent in the share price to protect its company’s ethical values.  A month on, the forced resignation of Hewlett-Packard’s former chief has taken a fresh twist.  It is one that speaks volumes about the new battle lines that are being drawn up across the IT landscape.  At the start of this week, Oracle, the biggest maker of the software used in large corporate IT systems, hired Mr Hurd for a senior role at the company.  Less than 24 hours later, Hewlett-Packard the biggest maker of computer hardware – sued to block the move.  Given that close alliances between companies like these have been the foundation on which the modern IT industry has been built, the row highlights a deeper fracture.  A nasty jibe from Oracle boss Larry Ellison, comparing HP’s directors to the “the idiots on the Apple board” who once fired its co-founder Steve Jobs, has rubbed salt into the wound.  Oracle is impatient to carve out new chunks of the tech market for itself.  Along with Cisco Systems, it has moved into the server and storage business against IBM and HP.  Defensively, HP is branching out into networking equipment and has been looking to beef up its software.  Mr Hurd’s arrival at Oracle is a clear sign that companies like these believe the greatest potential for future profitability lies in selling a wider package of software, hardware and services – a fact that Oracle has been only too eager to trumpet this week.  HP’s defensive legal manoeuvre shows that it recognises the threat.

It is not immediately obvious why anyone would want to get into computer hardware like this.  According to tech research firm IDC, worldwide server sales will creep up to $52.2bn by 2013 – but even then, the market will still be nearly 10% smaller than it was in the pre-crash year of 2008. The forces of technological progress all seem to be arrayed against companies in the hardware business.  From the inexorable march of Moore’s Law, which guarantees that computing power will cost less each year, to the spread of virtualisation, which makes it possible to process the same work on fewer machines, most of the value seems to accrue to the tech industry’s customers, not its suppliers.  Behind the pursuit of integration, however, lie two valid objectives. One is to protect the profit margins of a company’s core business.  With competition spreading, these are about to come under attack as never before. The IT industry’s traditional way of defending margins has been to lock its customers in with proprietary technologies.  But that game ended after the tech bust a decade ago, when the balance of power swung back towards the customer.  Since then, the spread of open standards has made it easier to shop around for products. Selling integrated bundles of technology is one response to this.  Even if the technology tie-in is weak, the single sales and support channel helps.  Having all the weapons in the IT arsenal at their disposal also gives suppliers more options in pricing their products. The second purpose of vertical integration is to compensate for slowing growth in core markets by moving into new fields.  In the jargon of the business, it’s all about winning a larger “share of wallet” from customers. The twin pursuits of market share and margin protection are not always compatible objectives – one reason why Wall Street feels in two minds about some of the diversification.  But even if margins are shaved, the increase in overall profit dollars should compensate.

The victims in this process are likely to be those companies that can’t protect their flanks from the all-out attack of expansion-minded rivals.  That helps to explain the extravagant bidding war over storage company 3Par that ended last week in a victory for HP.  The loser, Dell, may have been spared from over-paying, but at the cost of seeing its strategic options narrow.  Short of outright acquisition, tech companies are quickly coming to rely on fewer but closer alliances.  EMC, the largest maker of storage equipment, recently tried to make up for its lack of breadth through a joint venture with Cisco.  As the loose partnerships on which the industry used to rely harden into competing blocs, old friendships will get jettisoned – a fact of which Mr Ellison seems only too well aware.  The Oracle chief accused HP earlier this week of “making it virtually impossible” for the two companies “to continue to cooperate and work together in the IT marketplace”.  Given his own recent actions, it’s hard to believe that this wasn’t the conclusion he had in mind all along.

Reference : The Financial Times, Sep. 9th 2010

Ever since SAP reported a 28% fall in annual software sales and dismissed chief executive Leo Apotheker earlier this year, it has been clear that the German software company was in need of a transformational change.  However, investors and industry observers were yesterday debating whether the $5.8bn acquisition of US peer Sybase was the right deal to achieve this.  The transaction – which comes just three months after Jim Hagemann Snabe and Bill McDermott took over as co-chief executives of SAP – is undoubtedly expensive.  It represents a 44 per cent premium, or $65 a share for a stock that has not been above $50 since the mid-1990s.  It is the second-largest deal SAP has done since buying Business Objects for $6.1bn in 2007.  That deal was criticised as overpriced, and this time it has paid an even higher multiple of expected sales.  In contrast, Oracle, SAP’s far more acquisitive rival, paid just a 30% premium when it bought Phase Forward, a healthcare software company, last month…..Some analysts see Sybase as a “dusty” and “broken” company, a distant fourth in the database market behind Oracle, IBM and Microsoft.  “SAP has made no secret of wanting to do a meaningful deal, but not many would have guessed it would be Sybase.  They need to strengthen their middle-ware offering, but instead they have bought a database vendor that competes in a market dominated by Oracle,” said Paul Guely, managing partner at Arma Partners, the technology advisory company.

SAP is thought to have considered a number of targets , including Tibco, the Nasdaq-listed company that provides “middleware,” or technology that connects applications.  Some analysts say this might have been a better deal.  SAP argues, however, that the Sybase acquisition gives it access to cutting edge technologies, particularly for mobile phones.  Sybase is a market leader in software for putting business applications onto mobile devices.  Its software operates 1.5bn messages daily, according to John Chen, chief executive.  “The immediate benefit is the mobile capability.  They will be able to take SAP applications and make them accessible on handsets.  Not many software companies have that capability and it will give SAP an incredible boost,” said Yvonne Genovese, analyst at Gartner.  “This deal will extend our applications and analytics to millions of mobile users,” said Mr McDermott, pointing to the fact that there are seven to eight times as many mobile devices as broadband connections globally.  Mobile access could be particularly important in emerging markets such as China, where Sybase has a strong position.  The deal will also help SAP to push forward its “in memory” technology, where data is stored on the memory chip instead of the hard drive, a system that allows much faster computing.  SAP says in-memory systems can cut the time it takes to analyse a database from hours to seconds.  It is considered the next big leap in computer technology.  Developing in-memory computing has been a pet project for Hasso Plattner, SAP’s chairman and cofounder, but the company is coming under pressure to turn the technology into marketable products.  Putting SAP’s in-memory technology in Sybase’s databases would help sell the concept, said Ms Genovese.  Sybase is focused on clients from the financial and trading world, where SAP believes the in-memory technology’s strength will play out best because of the size of data and the speed needed by the industry.  Going into the database business will increase the competition between Oracle and SAP, however.  Up to now, SAP has partnered with Oracle, IBM and Microsoft, using their databases as part of its enterprise systems.  However, the temptation will now be to offer the Sybase solutions instead, as part of a complete, in-house “stack” of software.  “The stack wars will start to happen, with Oracle, SAP, Microsoft and IBM all competing in this area,” Ms Genovese said.

Reference : The Financial Times, May 14th 2010.

HP Snaps Up Palm

Thursday, April 29, 2010

After months of speculation, smartphone maker Palm has finally found a buyer.  HP has said it will buy Palm for approximately $1.2 billion.  The move will give HP a foothold in the fast-growing smartphone business, at a time when HP rival Dell has its own smartphone available on AT&T.  Palm’s chairman and CEO, Jon Rubinstein, a former Apple executive, will remain with the company, says HP.  Over the last two years, Palm has tried to reinvent itself by introducing a new smartphone operating system called webOS and new phones such as the Palm Pre and the Pixi.  The phones have been well-received, with positive reviews, especially for the latest versions, the Palm Pre Plus and Pixi Plus.  But Palm has been stymied by lack of a big marketing budget, particularly when compared to its rivals such as Apple, Motorola and HTC.  Palm has been steadily losing money and market share.  And acquisition rumors have been rampant with companies such as HTC and Lenovo reportedly interested in Palm.

Now that HP has bagged Palm, it could mean a new direction for the latter.  Access to HP’s distribution channel and coffers could help turn the tide for Palm.  That’s especially true for the enterprise channel — computers and smartphones for business users — where both Palm and HP have historically been strong.  This might ensure Palm a healthy future as the corporate sidearm of choice, even if it fails to gain significant consumer traction.  “HP’s longstanding culture of innovation, scale and global operating resources make it the perfect partner to rapidly accelerate the growth of webOS,” said Jon Rubinstein, chairman and chief executive officer of Palm in a statement.  HP and Palm are expected to close the transaction in the third quarter.

Reference : http://www.wired.com/gadgetlab/2010/04/hp-buys-palm-for-12-billion/

Thomson Reuters will today unveil the biggest overhaul of its markets division since the merger that formed the financial and professional information group was completed two years ago this week.  A series of product launches starting next week and culminating in the autumn will bring together products from the former Reuters and the old Thomson Financial for the first time into two simplified platforms, one aimed at enterprises such as large banks and another aimed at individual users, such as small hedge funds.  The new web-based platforms, which replace traditional terminal commands with online search, are part of a drive to cater to “the 23-year-old at Goldman Sachs who grew up with Google”, said Devin Wenig, chief executive of Thomson Reuters Markets.

They are also aimed at distinguishing Thomson Reuters from Bloomberg, its arch-rival, which invested heavily through the financial crisis but has remained committed to its one-size-fits-all terminals.  Thomson Reuters now had to “radically slim the company down”, Mr Wenig said.  This would not be by cutting jobs – it plans to increase headcount “quite a lot” this year – but by reorganising its sales and support staff so that “everybody in the company is going to be working on one of these two platforms”.  Since the financial crisis began, big banks have consolidated, mid-sized customers have struggled, but a “long tail” of smaller customers has grown, Mr Wenig said.  To cater to smaller clients cost-effectively, it will introduce online training and customer support.  The enterprise platform, called Elektron, will launch next week and claims to offer faster delivery of data to clients, many of whom will be able to locate Thomson Reuters servers alongside their own to cut time delays, as Bloomberg does.  Mr Wenig said it would not change its pricing, but enterprise clients would find the platform “cheaper to run”.

Reference : FT, Apr 14th 2010.

Cisco In VM Security Play

Friday, February 26, 2010

Cisco and several other investors have given $10.5 million to HyTrust, a start-up that is tackling some of the thornier security problems posed by the growing popularity of VMware’s virtualization platform.  HyTrust won “Best of Show” at last year’s VMworld, the major virtualization conference hosted by VMware, and was named of Network World’s 10 start-ups to watch in 2010.  When HyTrust launched its first product last April it already had $5.5 million in venture capital from Trident Capital and Epic Ventures.  Now the company has added a second round of financing with the existing investors as well as Cisco and Granite Ventures.

HyTrust sells a hardware- or software-based appliance that gives administrators a central point from which to control access, policy management, security configuration and compliance in virtual environments.  Analysts have praised HyTrust’s technology for solving authentication problems in VMware’s hypervisor with more granular auditing and security controls, and for letting administrators set policies that won’t be overridden by other tools.  In an announcement Wednesday HyTrust said the new funding will aid in development, sales and marketing.  Cisco’s investment is indicative of the network vendor’s increasing focus on virtualization. Cisco has developed software switches for virtualization deployments and its Unified Computing System uses VMware to create large pools of virtual resources.  Cisco also recently teamed with NetApp and VMware on a security project designed to isolate applications sharing the same physical resources.  Even before receiving investment from Cisco, HyTrust had integrated its own products with Cisco’s Unified Computing System and the Nexus 1000v virtual switch.  The funding announcement did not say how much of the $10.5 million was contributed by Cisco.

Reference : http://www.cio.com/article/555614/Cisco_Invests_
in_Virtualization_Security_Start_Up

FT : Skype Was No Blunder For eBay

Wednesday, September 2, 2009

It is commonly called one of the dumber deals to come out of techland – which has given birth to quite a few dud transactions in its time.  Online auction house Ebay bought Skype in 2005 for $2.6bn.  Two years later, it took a $1.4bn writedown after fewer Ebay users than expected were tempted by software that makes calls over the internet.  But on Tuesday Ebay announced it had sold a 65% stake in Skype for an implied valuation of about the same that it originally paid, after adjusting for the earn-out payments to the company’s founders.

Far from being chastised, therefore, former chief executive Meg Whitman deserves credit for orchestrating one of the better performing investments over the past five years.  While the value of Skype has remained flat, the Bloomberg world equity index has fallen 6% while the S&P 500 has dropped by a fifth.  Including their latest rally, even US tech stocks are down by a 10th over the same period.  And that is before Ebay makes a writeback.  Ebay should also be applauded for getting almost five times sales – far more than the market was expecting (less than $2bn for the lot).  Why have a smart bunch of private equity investors and venture capitalists, not to mention a big Canadian pension plan, ponied up?  One reason is that Skype is growing its top line by about 25% year-on-year and added more than 100m registered users last year.  So-called “SkypeOut minutes”, the time users are paying to be connected to fixed-line and mobile phones, jumped by a half.  Another reason may be that out of $550m of sales last year, $290m was accounted for by cost-of-goods-sold, mostly the expense of buying telecoms network capacity.  Given Skype had an operating margin of 23% last year, this means that other expenses must be under control.  Ebay bagged a rich price, but Skype now appears very scalable indeed.

Reference : http://www.ft.com/cms/s/3/
8c0e5aa4-96fe-11de-9c24-00144feabdc0.html

Oracle Gets Sun

Tuesday, April 21, 2009

Swooping in before dawn broke over Silicon Valley on Monday, software maker Oracle announced an agreed offer to buy Sun Microsystems.  The transaction at $9.50 per share in cash – the price that rival IBM had been expected to pay before negotiations collapsed two weeks ago – launches Oracle into direct competition with IBM and Hewlett Packard.  Does this make sense for the software maker, though?  On consensus forecasts, the $5.6bn enterprise value Oracle is paying for Sun equates to eight times expected earnings before interest, tax, depreciation and amortisation of $673m.  But that does not factor in considerable scope for cost-cutting.  Sun has successively failed to wring out savings over 10 successive restructuring plans.  Oracle – typically bullish, without detailing plans and hardly any numbers – believes Sun will add $1.5bn to operating profits in its first year, and $2bn thereafter.  Lawrence J. Ellison, Oracle’s chief executive, said in a conference call Monday morning that Sun’s Java programming language and its Solaris operating system were the main attractions.  He said Java, the language used in most computer science schools and a technology used daily by millions of software developers, was “the single most important software asset we have ever acquired.”

Slashing costs is not the main rationale for this deal, however.  Unless Oracle has developed a sudden desire to manufacture servers, Sun’s struggling hardware business will probably be sold on. (Cisco could be a potential buyer.)  Rather, the draw is Sun’s software assets.  Its key products, Java and Solaris, do not make much money.  But they are industry standards, and much of Oracle’s own database software relies on them.  Even if the group is unable to extract higher licence revenues from such intellectual property, it removes the risk of a competitor such as IBM stealing a march on Oracle.  Indeed, the deal fits into Oracle’s overall strategy of building a software empire by acquisition, providing it with the ability to offer an “industry in a box” solution to businesses.  Whether it will integrate the pieces into a coherent whole remains to be seen – although, as Oracle’s share price has handsomely outperformed its peers since it began its spending spree, investors should give Oracle the benefit of the doubt.

References :
http://www.ft.com/cms/s/2/aeaa52e4-2db2-11de-9eba-00144feabdc0.html
http://www.nytimes.com/2009/04/21/technology/companies/21sun.html