deal architect

Burning Platform: Wall Street and Enterprise Software

Brian Sommer and I have recorded 12 episodes in this series - see index here.  For the next few episodes, I will be joined by guest analysts and industry observers.

Rob Kugel, SVP & Research Director of Office of Finance and Business Research at Ventana Research is the first guest and he talks to me about the wild ride on Wall Street during the pandemic. Nice to get his perspective which reflects his earlier career at Morgan Stanley and other Wall Street firms and his CFA certification.

We talk about whether the market is in synch with the state of the economy and how much attention enterprise buyers should be paying to Wall Street impressions of vendors in their tech spend analysis. We discuss how Wall Street innovations like SPACs and the increasing level of M&A activity will influence the tech economy and why Wall Street has been tough recently on certain vendors. We also talk about the pandemic's effect on financial and planning software he now tracks

Look forward to more guests who will similarly bring nuanced perspectives on enterprise tech.

Corporations as the new VCs

I remember a corporate IT exec telling me after he agreed to a meeting in 2000 with the company I had co-founded

“I am not supposed to be seen with you. Startups are too risky and a waste of time for us”.

That was then – revenues in the form of licenses and services was validation you had a decent value proposition. Indeed I heard from another entrepreneur:“Customer revenue is mother’s milk; VC money is sugared water”. So you banged your head trying to license your technology to grudging, cynical corporate buyers.

Things are changing. Customer revenue is still validation. But increasingly corporations are not willing to just sign one license, they want to acquire startups, especially those that are strategic to their industry.

I have blogged a couple of times about Climate Corp, which has mined detailed weather data to provide farmers supplemental crop insurance. Monsanto, big in agro-business, has announced plans to acquire it for a cool billion. ABB, which does plenty of work with water utilities, has an investment in TaKaDu which mines data to help detect water leaks. GE acquired Naverus founded by 2 ex Alaska Airlines employees for their technology around Required Navigation Performance. Venky Harinarayan sold his startup, Junglee to Amazon in the 90s and then another one, Kosmix to Walmart a decade later.

There are many such examples. The common thread is their unique vertical focus and distinctive IP. Ironically, that is the type  of investment many VCs are loath to invest in because are too niche, difficult to spread risk across. So, in that sense corporate buyers are becoming the new VCs.

Things sure have changed in the last decade.

The maturing of industry M&A

It is so predictable. The media flurry around an M&A announcement, the celebratory mood at the acquired company, the speculation around the acquirer’s quarter, the giddy talk about conquering the world, the rumors around “who-next” and “roll-ups”, the debates around valuations. All good fun, but so predictable.

We have come a long way since 2004 when Oracle bid for PeopleSoft. (disclosure: I was an expert witness in one of the litigations that transaction spawned). It is impressive to see how effortlessly Oracle can integrate multiple acquisitions a year – especially for an entity which in the 90s was largely an organic technology company. Not just Oracle – Google, IBM, Cisco, Microsoft and others have shown similar competence.

Even more impressive is how many vendors have managed to calm customers about their traditional doubts about M&A.

Let’s face it – most CIOs are still ambivalent about technology M&A. As most will honestly say, we gave Oracle (or IBM or whoever) a chance to competitively win our business a few years ago and they did not. They are backing into our business with acquisitions. But so long as they don’t disrupt the acquired operations too much and don’t jack up charges too much, it’s not the end of the world. In fact, many see it as an opportunity to negotiate volume discounts. Many also see it as a way to deemphasize older, organic technology from many of these vendors.

This is so different from the mindset in 2004, and certainly the 90s when CA was on the prowl where CIOs would actively seek change in control exit clauses in contracts. They still ask for them, but there is a ho-hum feel to it.

Which is why it is funny to see analysts and bloggers work up a froth over every M&A transaction.  

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!