deal architect

Going Private

One of my 2006 predictions was private equity firms would target a number of services firms like CSC.

But as this BusinessWeek cover story describes private equity is targeting a number of industries in a huge way around the world and attracting heavyweights like Jack Welch, ex GE and Lou Gerstner, ex IBM. In an interview, Lou explains two drivers for private equity- too much capacity in every industry and the need to restructure. And the fact that technology is fundamentally changing every industry. Which may explain why Lou and Vivek Paul, ex Wipro are being recruited by private equity firms.

In the US, Sarbanes Oxley is actually encouraging more companies to consider going private. Talk about unintended consequences.

Talking about private money - in technology, venture capitalists have traditionally played a role in early stages. Bill Burnham argues that hedge funds may be moving in to the VC space. One reason - fewer public companies to invest in! Another unintended consequence...

Update: Forbes weighs in with a cautionary article on private equity.

Bite sized M&A

Tom Peters has never liked big M&A and comments on Oracle's multiple deals here and performance impact.

I have written before I am also a fan of small deals - dim sum v/s the 72 ounce steak meal.

Update: Paul Kedrosky points to a rumor about Oracle's plan for an Open Source roll -up. While individually small, that would be a lot of dim sum

Web, Schweb - Enterprise Predictions for 2006

Over the last couple of weeks it has been good to see so many bloggers make their forecasts about 2006.  But - most  are about Web 2.0 - Google this, Flickr that. Of course, with Apple and amazon.com enjoying a bumper holiday season, the focus on consumer technologies is only accented.

Much as I love Google, it cannot process BOMs for the average manufacturing company. Much as my daughter loves her iPod, it will not process insurance claims. Whoever does whatever with AOL will not improve supply chain logistics at UPS.

As we did in the last Internet Bubble, we risk making the Web and consumer technologies the center of the technology world. It’s the Gates/Plattner scenario again I wrote about earlier. As I wrote in Florence during the Renaissance, innovation is happening in a number of other areas which CIOs are actually much more excited about - especially at amazing new price points. Also as I have said over and over again this year, many elements of enterprise technology spend are grossly overpriced.

So, here’s my forecast for next year - good and bad - with more of an enterprise focus:

1) SAP, Oracle and Microsoft (around enterprise software) will have poor years as pricing pressure intensifies on core products and particularly on maintenance revenue streams. SAP will de-emphasize its web services talk and go back to focusing on applications and business payback. Oracle will go the other way and talk more about architectures as it masks the enormity of rationalizing its various application acquisitions. CIOs will increasingly question if all they are doing is subsidizing Microsoft's focus on Google.

2) We will see version 2.0 definitions of  CRM,  SCM,  HRM etc emerge which will a) redefine process coverage (e.g. CRM is more than SFA and call centers) that the market leaders have chosen to define the categories as and b) utilize appropriate, newer technology building blocks  - GPS,  RFID, RSS in the category re-definition process.

3) CIOs in many non-manufacturing verticals will tire of waiting for robust software solutions for their major engines (claims processing, trading systems) and more aggressively look at BPO options to support these processes. These CIOs, especially in financial services verticals, will pioneer attempts to leverage web 2.0 driven discovery and social networking tools with their enterprise applications.

4) An infrastructure vendor - likely Dell or Sun (as it tries to redefine itself) - will introduce infrastructure outsourcing at aggressive, "utility" price points to cover a wide range of network, database, desktop and other services. In its hype cycle for outsourcing Gartner defines infrastructure outsourcing as one of the most mature. As systems management automation and offsite, shared labor models mature, an efficient services "supply chain" becomes much more viable.

5) A generation of “appligators” will emerge - small systems integrators which specialize in innovation areas like web services or telemetry and willing to work with clients in small, intense teams. We will not be able to tell till 2007 if they are of a more modest breed than their predecessors, the Scients, Viants around the ebiz boom in late 90s.

6) Large US and European outsourcers (EDS, Accenture and by extension IBM, HP etc) will find themselves squeezed between a) private equity firms who want to take their valuations from 1 or 2X revenues to close to 10X many of the Indian vendors enjoy and b) CIOs who want price points much closer to what Indian vendors can quote. This will force these outsourcers to finally get serious about becoming much more efficient with automation, global delivery models etc. They will find Indian vendors expanding into horizontal process consulting and BPO (finance, HR) beyond their traditional IT competencies.

7) China will look beyond hardware and start to flex its muscle around software and services.  Chinese firms in these categories will start to raise significant capital and make small acquisitions in the US and Europe to acquire customer channels.

8) SaaS models will come under increased scrutiny from buyers about stringent SLAs and business continuity plans. In 2001, after the India/Pakistan nuclear war threat, Indian vendors  went through a similar spike in scrutiny. After last week's well publicized outage at salesforce.com, this will become a required due diligence step in evaluating SaaS options. The scrutiny helped Indian vendors mature - it will similarly increase corporate confidence in SaaS.

9) CIOs will do serious "spend management" around storage (due to proliferation of volume demand) and telecommunications (due to proliferation of mobile, broadband and other products) investments.

10) CEOs will start lobbying Congress to back off on the compliance burden and pressure their CFOs to significantly streamline and justify compliance spend. The SOX gravy train for software vendors and auditors will slow down.

This plus 6 quarters may buy you a cup of coffee at Starbucks! A version customized by Zodiac signs is planned soon...

Author Note: Sandhill.com carries a slightly modified and expanded version of my 2006 Enterprise IT projections here.

TAPS: Technology Assisted Products/Services

If Oracle or SAP or IBM had made this acquisition tech analysts, media and blogs would be abuzz with commentary and screaming "consolidation"  - but because GE Healthcare is acquiring IDX, it has not seen much play in the tech world. To me this is another example of industry "tiering" rather than consolidation - as I wrote in my blog Technology Keirutsu. Citibank is in to a number of software and BPO initiatives. UPS and Fedex offer a number of logistics products. Innovative Fortune 500 companies are learning that their brand and domain expertise often allows them to provide technology products, content or services much better than technology vendors can.

Consumers want solutions - if technology is embedded rather than procured separately, even better. And to many GE or UPS has far more credibility and performance record as a supplier than do many tech vendors. May mean tech vendors learn to swallow their pride and in  many markets become Tier 1 or 2 suppliers to the GEs rather than go to market themselves.

Oracle - Point and Eat

In Cantonese, dim means "point" and sum is "heart"--point to what appeals to your heart ... and taste buds.  Dim Sum, along with Japanese sushi,  Spanish tapas, Italian antipasto, Middle Eastern meze are meals of assorted, bite-sized snacks. And then you have the 72 ounce steak dinner at The  Big Texan in Amarillo, TX.

Even though I went to school in Texas, I must admit I like the first kind of varied food better. Which is why I really like Oracle's recent acquisitions - ProfitLogic and Retek.  They are in a vertical market that Oracle did not have  key transaction or analytical capabilities in.  Even its acquisition of  TimesTen  for real-time  data management extends rather than duplicates its  analytical functionality. And they are bite-sized transactions.

Wish they had not ordered the PeopleSoft meal.  They have never done a deal that big - ever.  Hopefully they will not  get greedy for Siebel or BEA.  As Groucho would say those targets resemble the animal he found in his pyjamas.  Makes The Big Texan look bite sized. 

PeopleSoft merger: premature celebration?

Oracle had a very good earnings call this week.  Steve Hamm at BusinessWeek Online concludes:  "That means Oracle pulled off quite a smooth merger (PeopleSoft/JDE) in short order."  Others are similarly declaring victory on the merger.  Sorry, guys - to base this on one quarter - typically Oracle's strongest fourth quarter -  is way pre-mature.

First, let's give Oracle credit. The employee transition in the merger has gone much better than I would have expected. Oracle would have encountered what outsourcers call a "hostile transition".  This often happens when they are asked to try to capture knowledge, document processes etc at a data center or application area they are taking over and where incumbent employees are being laid off.   Oracle says it retained 80%+ of PeopleSoft R&D staff and made most of the cuts in the SG&A areas.   PeopleSoft employees who stayed appear to be pretty happy.  One caution - in the outsourcing world it is common to "re-badge" select client employees for their unique operational knowledge, but typically only with a 12 month employment guarantee. In that time frame, the knowledge is transitioned to other team members.   Hopefully, Oracle has longer-term plans for the PeopleSoft employees.

But happy employees is not why Oracle spent $ 10+ billion.  They did it for customer base and revenue stream.  And by that lens it is too early to say the acquisition has succeeded.

There are 3 ways the investment pays off:

a) New license revenue from existing PeopleSoft products
b) Maintenance revenue from PeopleSoft customers
c) New license and other revenues from Oracle/Fusion products from PeopleSoft customers

a)  In the last 60 days of the quarter ending Feb 05, the first after acquisition that Oracle could show as its revenues, the PeopleSoft products generated just $ 31 m. Larry Ellison complained then that previous management had "bled the pipeline dry". For the quarter ending May 05,  Oracle has decided not to break out comparable information saying the sales forces had been integrated. But the products have not been. In any case, total new application licenses this quarter were $ 350 m. If PeopleSoft were even half of that, it is a long way from justifying the $ 10 b price tag.

b) The  major reason for acquiring PeopleSoft, of course, was its maintenance stream. In its last independent 10Q filing with the SEC PeopleSoft reported $ 919 m in maintenance revenue for the 9 months ended Sep 04.  That revenue tends to be very high margin - often 90% plus. It is also normally predictable - high rates of  renewal. While Oracle is unlikely to grow that much if product license sales do not grow (see a), if it can keep it somewhat stable, it helps better justify its acquisition price.   The next 6-8 quarters are extremely critical for this customer base to decide if Oracle is indeed using the maintenance revenue to invest in their future or to just fatten overall margins. If Fusion version 1.0 appears weak, if  Fusion delivery slips or if PeopleSoft customers do not see  solid, low cost migration paths to Fusion, they will move to the alternatives or significantly negotiate down maintenance rates.  While Larry keeps talking about industry consolidation (see my post  - Larry Ellison and the "Living Dead"), the reality is PeopleSoft customers have a growing number of alternatives (see my post PeopleSoft and JD Edwards Customers: In the Driver's seat).

c) This is where the acquisition may actually pay off. A number of PeopleSoft customers used its HR functionality, but SAP and others for financial and other functionality. Oracle may be able to convert some such customers to its own application functionality. It may also  increase its database/apps server product penetration in the PeopleSoft customer base.  The biggest payback, of course, comes if Fusion adoption is high. That could be another 10+ years of maintenance, services and other lock-in revenue.

But Fusion Applications will not be ready till 2007 - likely later. Lots of work to do between now and then. Put away the champagne for now.

The China Price: Sell Low, Buy High

Business Week did a story on "The China Price"  late last year. They meant the prices Chinese companies compete at:  "They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers"

Now they come bidding high prices for acquisitions like IBM's PC division,  Unocal and Maytag.

Congress is fretting about the national security implications of the latter, but as consumers and investors should we care?  I would rather pressure Chinese politicians to open up their own consumer and capital markets. Let Chinese kids travel to Disneyland and let GE and others buy Chinese assets.   Since many of them are owned by the PLA (People's Liberation Army) the latter can be somewhat complicated but they have been doing joint ventures with a number of western firms for a while now.

Marx must be turning in his grave...the communists have turned capitalist!

Technology keirutsu

Sun acquires StorageTek, Lawson merges with Intentia …the M&A binge continues. I believe, underneath these transactions, the industry has been moving towards the way the Japanese manufacturing ecosystem is structured. GM, Ford in autos and Boeing, Airbus in aviation are similarly structured. Original Equipment Manufacturer – the OEM – with Tier 1 suppliers that supply major “systems” like nose gear assemblies, and Tier 2 and 3s which supply various parts and materials.

That is in the manufactured, product world. “Business process OEMs” like Citibank and GE and UPS are emerging and will increasingly compete with IBM and EDS and SAP to provide mortgage and health care and plant maintenance and countless other processes.

They will encourage vendor tiering as product OEMs have done. And since their business process OEM supply chain is more digital, this will hugely affect the IT/BPO industry. Major vendors (HP, Microsoft) will become Tier 1 vendors just as Delphi and Federal-Mogul are to autos. Specialist IT vendors will increasingly subcontract to them – as Tier 2 or 3 suppliers.

Here are some implications:

a) Tier 1 candidates include hardware/infrastructure heritage vendors (IBM, HP, Sun, Cisco), some from telecommunications (Verizon, BT), some from software (SAP, Microsoft, Oracle), others from IT services (EDS, Accenture, TCS/Infosys), with possibly some wild cards from content and BPO worlds. OEMs will expect more stringent quality, collaborative design, timeliness, security and other service levels of these providers (than have traditionally been expected or delivered by most IT vendors). The plumbing/infrastructure investments and the performance guarantees the OEMs will expect will limit the number of viable Tier 1s to no more than 50 around the world. Tier 1s will have to learn to not try to own or build everything themselves, but to leverage the best Tier 2 and 3s.
b) As we see in Detroit, Tier 2 providers are at times more profitable than the Tier 1s or the OEMs. Others that end up undifferentiated, though suffer through price pressure via reverse auctions. Tier 2 and 3’s will learn to align with Tier 1 vendors rather than try to break their necks and bank accounts selling direct to the OEMs. For all of Larry Ellison’s talk, he cannot buy up everything. For most offerings, he will need to partner with a bunch of Tier 2 and 3 contributors.
c) The OEM CIO becomes huge in this world. He/she will decide how much to buy v/s build, who to buy from, understand their economics (yes, even tier 2 and 3 economics) intimately, drive performance scorecards, collaborate more with vendors - and yes, at times “be like Jose Lopez at GM” - tear up vendor contracts and dictate what you will pay and ask for price reductions across your Tier 1,2 and 3 suppliers. In some cases, they will “encourage” Tier 1s do business with specific Tier 2s.
d) The Business Development function in vendors will become much more important as alliances, some long term, some tactical are formed and unwound.

Silicon Valley – digest your consolidations. Then start learning from Detroit about the realities of industry tiering.

The Minnesota Vikings: Lawson + Intentia

Lawson and Intentia are merging.

Lots of synergies - Lawson is stronger in services oriented verticals; Intentia of Sweden - in manufacturing niches like beverages, apparel. Lawson was never that strong outside the US.

Every major market - ERP is certainly one - can support 3 to 5 vendors and the combination makes a much stronger number 3 in the market. They are bringing in Harry Debes as CEO (Jay Coughlin is leaving) , with significant field ops experience at J.D. Edwards, Geac and other software companies. The Intentia CEO , Bertrand Sciard, becomes COO of the combination. So good solid operational experience needed to improve profitability which has been missing from both companies.

They will also need a lot more marketing to keep up with the noise SAP and Oracle are making in the market. The two co-chairmen - Richard Lawson and Romesh Wadhwani - can certainly help there. Richard has continued to focus on Lawson but has been in background the last few years; Romesh has so many different other interests with his fund, Symphony Technology Group - so that may be too much to expect.

But together they could now be another viable option for mid-sized Peoplesoft and J.D. Edwards customers...their choices as I had indicated in my blog a month ago, just keep expanding

IBM PwC 3 years later

I am hearing of at least a few ex-PwC consultants exiting IBM as the 3 year earnout period comes to an end. Services firms are being valued at 1 to 1.5X again, much higher than when PwC sold at the bottom of the services "nuclear freeze". Of course, well run firms like Cognizant are valued today at 10 times their revenues. It would not be surprising if a few PwC folks try to build firms which they could sell at these much higher valuations.

Is this bad for IBM? I am not so sure. A number of PwC partners did well in the 90s - especially around ERP and business process focused practices. They thrived on relationship selling and they taught several IBM salespeople the art of solution selling to a blue chip client base they brought. Not sure, however, many transitioned well to the price sensitive world we live in. In a young BPO market their process skills (especially in the finance and accounting areas) are still very useful but as offshore competition grows there also, IBM will need to go back to its hardware roots to re-think and re-position its services price/performance story.