Merger mania

Rampant mergers and acquisitions over the past year have put IT managers on the defensive. If 2005 is the “Year of the Merger,” it’s also the year that enterprise customers have had to brace themselves for the unwelcome prospect that one or more of their key vendors may get scooped up. The size and dollar amounts transacted in the recent frenzy prove that almost no entity is untouchable. But with a few important safeguards -- including close scrutiny of a potential technology supplier, intimate knowledge of its products, and, after the fact, open lines of communication with the acquiring company -- many customers can take these transactions in stride.

“I don’t know if you can ever predict whether a company will be acquired,” says Charles Emery, senior vice president and CIO at Horizon Blue Cross Blue Shield of New Jersey. “But, you can have high contract standards and take into consideration how the vendor will perform, and how broad your use of their product will be.”

The list of vendors leading the recent M&A surge features a host of marquee names: Adobe, Cisco, EMC, Oracle, and Symantec, have been among the more ravenous, gobbling up competitors and vertical-market products at a rapid clip. Oracle has been downright insatiable, with high-profile takeovers of PeopleSoft (which itself had previously subsumed JD Edwards) and Siebel Systems. Other notable transactions include Adobe’s acquisition of Macromedia, Symantec’s merger with Veritas, as well as Cisco’s and EMC’s prolific activities in enterprise networking and storage. SSA Global Technologies, a company built on the acquisition of bankrupt ERP vendor Baan, has also been busy recently, acquiring CRM software vendor E.piphany and Boniva, a provider of HR management software.

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“The industry is consolidating in a huge way. In enterprise applications, you have a mature market. Customers have bought the applications already. Vendors can’t get new customers anymore, and a lot of activity is about expanding their customer bases. New deals now only account for 25 percent of software licenses, so you’re usually only selling into your existing customer base.” says Paul Hamerman, vice president, enterprise applications at Forrester Research.

Just how hungry have acquiring companies been? According to an April 2005 IDC report, “Between January 1, 2004 and March 31, 2005, the enterprise applications market saw at least 191 reported buyout deals worth more than $30 billion among 2,500 enterprise applications vendors.”

“Any vendor, except the very largest -- the IBMs and Microsofts -- is ripe for acquisition,” says Hamerman. “Even SAP was on its way to being acquired when it had a serious development underway with Microsoft, before it fell through. It has a lot to do with product maturity. The customer base is saturated, and there’s not much innovation.”

Protection plans
Given the risk of disruption when a vendor gets acquired, what can you do to protect yourself? For starters, say IT managers, you need to take a hard look at a prospective vendor’s financial health before you get involved in the first place -- and you need to evaluate the long-term prospects for any particular product.