Merger mania

Mergers and acquisitions throw a monkey wrench into carefully wrought IT strategies. Can you minimize the disruption?

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.

“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.

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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.

“I want my team to look at the reliability of the organization. I’m interested in the financial stability of my vendor,” says Steve Cooper, CIO at The American National Red Cross. “We make checklists where we look at the company’s financials for three-year periods of time and ask, ‘Will this entity be viable in three years?’” says Cooper. “We have our own financial analysts, and if it’s a public company, we look at their annual reports. If it’s a private company, we talk to the CFO and do more to get customer references, particularly for smaller companies. The other checklist is for the viability of the code line. What’s inside the product? Is it a combination of technology ingredients? Is it sitting on obsolete technology? Is it Web-enabled? If both of those checklists are positive, then we feel pretty confident about the company and product.”

Rob Verratti, senior vice president at WestStar Bank, in Avon, Colo., adds that a knowledgeable buyer is one who can handle the aftermath of an acquisition that leads to a falling off of attention to -- or elimination of -- a critical product.

“Ultimately, you can never protect yourself entirely. You can be proactive when you’re making an investment in technology and get as much information about the company at the time. In the implementation phase -- and as you continue with upgrades -- get as much documented information as possible in hand. Then, when the acquisition occurs, the better you can handle it,” he says.

Close communication between an acquiring company and users of the acquired product is also important, according to users.

“In the case of Siebel, Oracle already had its own CRM packages, along with the PeopleSoft and JD Edwards packages. Now, Oracle has three products in the same space. Do I care? Not really. I’m 99 percent confident that Oracle will maintain its CRM lines,” says Cooper.

Cooper adds, “What we care about is, and what we expect is, that you’ll tell us what will happen to the [acquired] systems. Will they merge product lines? Will one of the products be eliminated? And, give us some lead time. Don’t tell me six months ahead of time. In twenty-four months, that’s fair; I can migrate to whatever is available.”

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Bigger vendors, bigger worries

For IT managers trying to plan for the future, the volatile market can throw a monkey wrench into the most carefully wrought plans. The fate of a user’s core product might be up in the air, leaving them uncertain about a technology in which they are heavily invested. For example, months passed between Adobe’s announcement that it would acquire Macromedia and shareholder approval and completion of the deal in August. That left a lot of users hanging, says Forrester’s Hamerman.

“Even the most prepared users can be left guessing what will happen after an acquisition. Now that Adobe’s acquisition of Macromedia has been approved by shareholders, users hope they can move out of the holding pattern they have been in while they wait for indications of what the company will do with its software,” Hamerman says.

Steve Nelson, CIO and director of information technologies at the Arizona Hospital and Healthcare Association, counts himself as one user who is still in the dark about Adobe’s plans for the Macromedia product line.

“We’ve tried to figure out Adobe’s goal. We don’t think they really bring anything to the table other than allowing ColdFusion to turn Acrobat into a plug-in on the fly. What is Adobe trying to do? We’re a little concerned. Macromedia has been quiet. We don’t see them meshing. ... It would really ruin my day [if Adobe discontinued Cold Fusion],” Nelson says.

Redundancies in two companies’ product lines, as is the case with portions of Adobe’s and Macromedia’s offerings, can be cause for user concern, says Anne Thomas Manes, vice president and research director at the Burton Group.

“Dreamweaver [has] been the number one professional Web development tool, and it has a larger installed base than GoLive, so acquiring it is the right thing to do from Adobe’s perspective. But there’s a sense of uneasiness because there’s significant overlap between the product lines. What will Adobe continue to invest in?” Manes asks.

In light of the frenzied buying and selling affecting products across the enterprise IT infrastructure, software decision makers are asking a new set of questions as they try to plan ahead.

“There’s been a tremendous amount of consolidation, and it’s still going on. It’s inevitable that these things will happen,” says WestStar’s Verratti. “But what happens to a company, even a big company like Siebel, when it gets acquired? How will it impact us when they absorb these businesses? How will Oracle manage things going forward? How will they maintain the product? Will they split it up into a separate business unit?”

Cost goes up, quality goes down?

After the fact, one major concern among users is that a large acquiring company’s focus can be spread too thin after a sudden increase in product lines and customers. As a result, they can’t give the acquired software the R&D investment and marketing attention it once had. In the case of Oracle and PeopleSoft, that move was well-documented, says Albert Pang, research director, enterprise applications, at IDC.

“There are still complaints and concerns by former PeopleSoft customers because Oracle has dropped the ball on education,” Pang says. “PeopleSoft had 180 products, and it’s impossible to suggest that Oracle can take care of all of these. Oracle also laid off some very experienced people in the product line. The question for users is, if you standardize on one vendor, will the software be supported, will the quality be top-notch? Does this tent have an infinite capacity to support all these products? The answer is no.”

Forrester’s Hamerman continues: “The other aspect of this is that the acquired products will not receive as much development resources for functional enhancements as the bulk of the R&D spending goes to the next-generation products.” Moreover, he concludes, customers that are content with current products and have no desire to follow the upgrade path will see fewer enhancements and reduced levels of support over time. “They are not being forced to upgrade, but the vendor hopes they will see the light to do so.”

Not only can lack of attention to an acquired software product short-change quality, it can also get more expensive, Hamerman adds.

“The downside is cost to the user. Rising maintenance cost is a risk for acquired apps’ customers,” Hamerman  says. “PeopleSoft actually raised maintenance prices for JD Edwards customers only a few months after the acquisition. Oracle prices its maintenance at 22 percent of license fees for the E-Business Suite, which is higher than the PeopleSoft maintenance pricing of 20 percent, and also higher than standard support for Siebel. I expect that the acquired customers of Oracle, including PeopleSoft and Siebel customers, will see maintenance price increases as Oracle brings the maintenance pricing in line with its own. Software maintenance accounts for about 50 percent of Oracle’s business. It’s been very profitable for them.”

This hasn’t gone unnoticed by IT managers, who, although they’ve come to expect that mergers and acquisitions are a fact of life, have to plan for higher costs after a vendor gets acquired.

“In our experience, the acquired vendor gets more expensive after the acquisition,” says Emery, at Horizon Blue Cross Blue Shield. “It’s really supply and demand. If there are fewer suppliers, the remaining vendor can raise prices until a new vendor enters the market. The vendor’s excuse is usually that they are supporting multiple legacy systems from the acquired vendor, and maybe that’s true and raises their cost, but ultimately, they acquired another vendor for synergies. It’s tough to have both.”

On the other hand, when a large vendor that’s flush with cash absorbs a small technology provider, it can refresh a product’s allocation of R&D expenditures and alleviate the pressure to keep its revenue in the black, says Cooper, at The American National Red Cross.

“In some cases, I really don’t care if one of my vendors gets acquired. The acquiring company will often sustain financial stability because they can take their focus off Wall Street and earnings report pressures. We’re better off as a customer when the company focuses on sustaining its relationship with us,” Cooper says.

Not all bad

Despite the potential downside, in some cases an acquisition may have the opposite effect -- and improve both support and pricing. At CareGroup Healthcare System, users had to weather a series of acquisitions, most recently the merger between Veritas and Symantec. This occurred after Veritas had already acquired Precise Software Solutions for its i3 application performance management product, as well as e-mail archiving firm Kvault Software (KVS) -- moves that left users of those products dissatisfied, says Robert Messier, director of technology management at CareGroup.

“The Veritas/i3/KVS/Symantec saga has been interesting. The i3 folks and KVS folks were not happy with the Veritas acquisition of their companies. Nonetheless, we have found those acquisitions to work in our favor. We have been better able to leverage our Veritas relationship for more favorable pricing and more specific attention to support special, critical projects,” says Messier. “Symantec’s acquisition of Veritas, so far, seems positive. I sense that Symantec senior management is more focused on growth and quality versus Veritas’s recent focus on cost reduction.”

Elsewhere, shrinking vendor relationships simplify IT planning. With $30 million worth of Oracle software, including databases and applications, and another $10 million invested in Siebel products for 3,500 users, Barry Libenson, chief information officer at Ingersoll-Rand, says there are some upsides to the acquisition.

“There’s a whole benefit for us in that Oracle will take on some work that I had to do. The smaller I can keep my vendor list, the better. This is one less vendor that I have to deal with. The more that gets consolidated down, contracts for everything from procurement to maintenance are easier,” Libenson says.

It might pay to hang on to that glass-half-full view. Consolidation, particularly in enterprise software, seems sure to continue. And in most cases, enterprise customers are just going to have to roll with it.

Copyright © 2005 IDG Communications, Inc.

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